Morgan Stanley, BofA Remain PepsiCo Bulls After Q1 Report

Global beverage and snacking giant PepsiCo, Inc. PEP reported first-quarter results Tuesday that were highlighted by strong organic sales growth, but the company cautioned there's a "great deal of uncertainty" ahead. Here's how two bull analysts reacted to the print. 

The PepsiCo Analysts

Morgan Stanley analyst Dara Mohsenian maintains an Overweight rating on PepsiCo with a price target lifted from $145 to $150.

BofA Securities analyst Bryan Spillane maintains at Buy, unchanged $150 price target.

Morgan Stanley: Pepsi A 'Defensive Business'

PepsiCo reported 7.9% organic sales growth, which was "well above" consensus expectations of 3.4%, Mohsenian said in a note.

While the second-quarter organic topline was guided to be down by a low-single-digit, on a net basis, topline results for the first half of 2020 are trending 50 basis points above prior estimates, the analyst said. 

This reinforces the defensive nature of PepsiCo's business, as higher snacking at-home trends are offsetting the loss of sales from out-of-home channels, he said. 

Looking beyond the coronavirus pandemic, PepsiCo's lower exposure to the out-of-channel category serves a competitive advantage against its peers, Mohsenian said. 

This should allow the company to take advantage of its positioning to generate long-term share gains, the analyst said. 

Management also seemed to be "excited" about a long-term opportunity to gain market share in energy drinks from better distribution as part of the Rockstar and recently announced Bang agreements, he said.

Pepsi also reinforced its strong flexibility and balance sheet, which helped it reaffirm a commitment to return $5.5 billion in dividends on top of $2 billion worth of share repurchases, according to Morgan Stanley. 

BofA: Pepsi Strategy Update

PepsiCo's management detailed the four stages of the coronavirus pandemic, including: preparation, confinement, restricted recovery and a new normal, Spillane said in a note.

Pepsi believes development market consumers are at the "later stage of phase two" which resulted in a shift away from convenience channels and increasing breakfast and snacks at home, the analyst said. 

Management is taking advantage of the phase by adjusting promotions, as consumers are shopping less often but buying more at a time, he said. 

Finally, the company withdrew its fiscal 2020 outlook, but investors should expect the following for the second quarter, Spillane said: a deeper fall in operating profit and EPS than sales and a higher net interest expense versus prior guidance due to acquisitions and refinancing.

PEP Price Action

Pepsi shares were 2.17% higher at $133.36 at the close Wednesday. 

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