Morgan Stanley Downgrades PepsiCo Rating Following Q2 Performance: Why Topline Upside Is Now Limited

Morgan Stanley analyst Dara Mohsenian downgraded the PepsiCo, Inc. PEP rating to Equal-weight from Overweight, with a price target of $210.

PepsiCo reported second-quarter FY23 sales growth of 10.4% year-on-year to $22.32 billion, beating the analyst consensus of $21.73 billion. The company raised the FY23 organic revenue growth outlook to 10% (the previous outlook was 8%).

Post a strong Q2, Mohsenian thinks PEP's valuation is now priced in for these positives, and the stock upside is more limited.

PEP's relative valuation is now near a modern-day record relative high vs. its closest peers Coca-Cola Company KO and Keurig Dr Pepper Inc. KDP.

Also Read: PepsiCo's Segment Resilience Driving Financial Strength: Analyst Highlights Frito Lay Momentum

Pepsi's outperformance of nearly 3,000 bps vs. KO/KDP since the pre-COVID (beginning of 2020) has made PEP valuation much less compelling. 

For the year's second half, Pepsi's topline upside is now more limited than the analyst's consensus, Mohsenian notes, adding that it is a "big change" vs. 400 bps of H1 upside vs. consensus. 

A weak U.S. scanner data start in Q3 puts more pressure on the analyst's view that there is a lack of H2 topline upside. 

The analyst adds that Pepsi's market share trends have started to turn negative in scanner data, noting that the percentage of segments gaining/holding share in U.S.-tracked channels dropped to 9% in the most recent month. 

PEP raised OSG by a surprisingly robust magnitude of 200 bps for FY23 after a 290 bp OSG beat in Q2 (contributing only ~70 bps to the FY). 

The latest print is lower than the 490 bps upside in the prior eight quarters. 

The analyst thinks Y/Y OSG growth for Pepsi should slow in H2 to 7.8% vs. 13.5% in H1.

Based on the above, the analyst expects total revenue to grow 6.6% Y/Y in FY23 to $92.13 billion. The company is expectd to have EPS growth of 10.4% to $7.50.

Price Action: PEP shares are trading lower by 1.07% to $186.19 on the last check Monday.