Morgan Stanley Reiterates Overweight Rating on Shares of PepsiCo

On Wednesday, analysts at Morgan Stanley reiterated their Overweight rating on PepsiCo (PEP) after the beverage company released strong Q3 results.

The analysts indicated that PepsiCo’s stock has underperformed defensive peers because it’s not a true COVID-beneficiary given the weakness in on-premise beverages (think bars and restaurants). Additionally, it’s not a full cyclical post-recovery story given that more than two-thirds of its profit comes from the snacks/food business. Given that, investors played a barbell approach to COVID with exposure to both COVID-beneficiaries and COVID-recovery names and PEP falling in the middle, i.e, flying under the radar given the intense barbell focus.

Analyst view this level of underperformance as too severe for two reasons: “(1) [They] believe PEP organic topline growth outperformance vs. US centric food peers will re-emerge in 2021, supported by (2) PEP’s US scanner data in the last 12 weeks holding up better sequentially than US centric food peers (as well as US HPC peers), highlighting how topline momentum at PEP is more sustainable.”

Another positive sign that resulted in Morgan Stanley reiterating their Overweight rating on PepsiCo is the successful recovery of their beverage sales. Organic sales growth in 2Q2020 was -7%, whereas 3Q2020 experienced growth of +3%. Future expectations for Pepsi’s sales remain at +3.5% for 4Q2020 and +4.5% for the 2021 fiscal year, allowing analysts to view Pepsi’s future as bright.

Over the past couple of years, PepsiCo’s business model has shifted to more heavily weight success based on the sale of its snacks. In the past few quarters alone, Pepsi’s snacks have experienced strong results due to heavy investments in this division of the business and the pandemic stay-at-home orders. Given that the snack business accounts for two-thirds of Pepsi’s overall revenue, recent success in this division resulted in Morgan Stanley having an optimistic view of the company’s future.

Despite the overwhelmingly positive future outlook for Pepsi, analysts note that a second wave of COVID-19 could stall growth as with sales lowering to 1-2% but still remain bullish on the future.

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Disclosure: At the time of publication, we have no positions in any of the securities mentioned in this article. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.

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