And just like that, PepsiCo (PEP) has bounced back. One quarter after the food and beverage company saw its growth trends take a serious COVID-19-related hit, with the disruption starting in February, PEP announced that sales trends had made their way back to positive territory.
Organic sales gained 4% in the third quarter of 2020, versus the flat result witnessed in the previous quarter. What was behind the uptick? Solid volume growth in the Frito-Lay snack business and in the Quaker Foods division, which is grabbing market share even though more consumers are eating in.
That being said, PEP missed the mark when it came to gross margin. However, Deutsche Bank analyst Stephen Powers believes that this was primarily due to M&A not being fully and accurately reflected in estimates.
Also important, Powers points out that the company reinstated FY20 guidance, which has EPS coming in at $5.50, versus the Street’s $5.36 call, and organic growth of 4%-plus (versus 3.6% consensus estimate), in-line with pre-COVID guidance and reflecting continued strength in North America.
This is not to say that PEP is out of the woods just yet. “That said, implied Q4 guidance is modestly below Street (with PEP typically being less inclined to over deliver late in the year so as to reinvest/set-up better for the coming year), GM pressures are likely to at least partially/directionally persist (given ongoing M&A impacts over the next three quarters), and the company's reduced 2020 capex spending vs. earlier in the year ($4 billion now vs. $5 billion prior) may represent elevated spending needs in the year to come (alongside the puts and takes of lapping peak COVID-19 impacts),” Powers explained.
Going forward, Powers will be watching out for an update on PEP's developing demand expectations, how at-home strength is affecting PEP's investment priorities and its plans for energy (Bang, Rockstar, Mountain Dew and more). Possible M&A activity and PEP's ability to manage expenses as well as maximize cash, while at the same time investing in e-commerce and other long-term plans are also key points of interest for the analyst.
Based on all of the above, Powers stayed on the sidelines with a Hold rating. Going by the $140 price target, the analyst expects shares to remain range bound for the foreseeable future. (To watch Powers’ track record, click here)
Overall, Wall Street is torn when it comes to whether to sing this beverage giant's praises or assess with an apprehensive gaze. That said, based on 8 Buy ratings and 5 Holds the word on the Street is that PEP is a Moderate Buy. At $149.62, the average price target implies an 8% upside from current levels. (See PepsiCo stock analysis on TipRanks)
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