Why Pepsi Is Morgan Stanley's Top Mega-Cap Pick

• PepsiCo, Inc. PEP shares have appreciated 3 percent since July 7, despite plummeting below the $90 mark in August.
• Morgan Stanley’s Dara Mohsenian maintained an Overweight rating for the company, with a price target of $110.
• Mohsenian expects the discount in PepsiCo’s valuation versus peers to be eliminated going ahead, in view of the company’s improved topline and EPS growth.

PepsiCo reported its Q3 adj. EPS at $1.35, significantly higher than the consensus expectation of $1.26 and the Morgan Stanley estimate of $1.29. The beat came despite a 2 cent impairment charge in AMENA.

Analyst Dara Mohsenian wrote, “Fundamentals continue to impress,” as the company generated organic sales growth of 7.4 percent, core gross margin expansion of +120 bps, and core constant currency EPS growth of 14 percent for the quarter.

PepsiCo raised its core constant currency EPS growth guidance for FY15 to 9 percent, from its prior projection of 8 percent. With the current impact continuing to be at 11 percent, the guidance reflects an EPS of $4.54, marginally higher than the consensus expectation of $4.52.

Mohsenian said that PepsiCo’s shares are currently the most attractive among all the Mega-Caps. The company’s robust snacks category growth, sustainable cost-cutting initiatives and lower commodities have resulted in higher organic sales and EPS growth as well as improved, and better EPS visibility.

PepsiCo’s shares have greater strategic potential compared to shares of The Coca-Cola Co KO, which are trading at a premium to PepsiCo.

The market seems to be assuming that the company’s strong fundamentals will begin to deteriorate 3 years after an earnings re-base. The analyst said, however, that investors “under-appreciate the strength of Pepsi’s global snacks business” which has higher growth than other CPG categories.