Why We're Sticking With Our Price Target for This Holding Amid Rebound
We see prospects for further margin improvement as this snack and beverage name enters its strongest season.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
PepsiCo PEP shares are moving higher following the company’s mixed September quarter earnings report that included a reduction for its 2024 organic sales volume forecast to low single digits from its prior +4% target, but a reiteration for at least 8% core EPS growth this year.
With year-to-date core EPS up 7%, that suggests the current quarter should once again be the highest EPS generator for PepsiCo. Normally, a sales revision like that would lead a company’s shares lower, but instead, we’re seeing them rebound after having moved lower over the last month. That decline to $167 on Monday night from the $177 level a month ago suggests the market was looking for the combination of a greater revenue shortfall and or outlook that was far softer than PepsiCo delivered.
In Monday's video, we shared that we would be focused on margins, and during the September quarter, PepsiCo delivered some nice gross and operating margin expansion led by PepsiCo North America, Latin America, Europe and its APAC regions. While better compared to the last two quarters, operating profits at Quaker are still recovering from product-related issues late in 2023. Further improvement is expected in the current quarter with that business being less of a drag on profit generation and the company’s bottom line. It’s also not lost on us that business will have very easy comparisons in 1H 2025, helping drive what should be favorable year-over-year EPS comparisons.
That leaves Frito-Lay North America, which is not only one of the strategic differentiators compared to Coca-Cola KO and other beverage companies, but it is also the company’s largest operating profit generator. During the September quarter, the segment’s organic revenue fell 1% while its volume improved, but its operating profit shrank 9%. We view this as PepsiCo utilizing promotional efforts to drive volume and pick up market share in the snacking category. With management sharing that it will continue to “invest responsibly to stimulate growth,” we’re likely to see further use of promotional efforts and advertising.
This is where the continued rebound in Quaker comes into play. When PepsiCo reported its June quarter, we shared that it had multiple levers to pull to position its business to meet the evolving consumer landscape and still deliver continued margin improvement. We saw that in the September quarter and the push-pull of the Frito-Lay and Quaker business should allow that to happen again in the current quarter.
For now, we’re sticking with PEP shares in the Portfolio for reasons that include prospects for further margin and EPS improvement during its seasonally-strongest quarters. Our price target remains $185 and our rating a Two. Should we see PEP shares buckle under other price targets and EPS revisions, we’re inclined to pick up PEP shares provided they hold their support near $169.
On the other hand, should other snacking companies like Utz UTZ and J&J Snack Foods JJSF signal a very aggressive use of promotions that could translate into either lower sales volume or margins for PepsiCo’s Frito-Lay business, we may have to revisit our price target and potentially our rating for PEP shares.
More Pro Portfolio
- We're Locking in Big Gains on These Two Holdings
- Monthly Roundup: After a Great September, We Await Opportunities in October
- Market’s P/E Is Stretched — And So Is Its Dividend Yield
At the time of publication, TheStreet Pro Portfolio was long PEP.
