JPMorgan: PepsiCo, Inc. (PEP.US) North America business woes remain unresolved, rating downgraded to "Neutral," price target lowered to $138

Given the weak performance in the salty snacks division, coupled with transportation pressures and disappointing North American trends, JPMorgan's Andrea Teixiera expects PepsiCo, Inc. (PEP.US) to rely more heavily on production efficiency to achieve its full-year earnings per share guidance. However, this is likely insufficient to offset the weakness in the North American market. In her report, Teixiera downgraded PepsiCo, Inc. from "Overweight" to "Neutral" and lowered her price target by 19% to $138. She stated: "Earnings expectations will likely continue to be revised downward, and given the current multiple pressures, investors may wait for expectations to return to reasonable levels before turning optimistic again." Teixiera acknowledged that PepsiCo, Inc.'s international business has performed well this year, benefiting from favorable weather and the boost from the FIFA World Cup. However, excluding these non-recurring favorable factors, the actual performance of the North American business will likely still fall short of management's expectations, especially for Frito-Lay North America (FLNA): despite adjustments to ingredient and packaging formulations and price reduction strategies, sales growth has still not been effectively driven. Furthermore, any improvement in PepsiCo, Inc.'s Food North America business (PFNA) appears to depend largely on macroeconomic conditions rather than any internally driven catalyst. Teixiera stated: "After the first quarter, the business recovery momentum appears to have stalled." Accordingly, she lowered her FY2027 earnings per share estimate from $9.05 to $8.86 and her FY2028 earnings per share estimate from $9.57 to $9.33. On the positive side, the current valuation (15x P/E ratio) is roughly in line with industry peers, limiting further downside for the stock price. Teixiera noted: "We believe a valuation re-rating is possible if management can demonstrate more sustained improvement in FLNA volumessimilar to the first quarterand can sustainably achieve low-single-digit organic sales growth with a solid margin structure in the coming years." PepsiCo, Inc. will report third-quarter results before U.S. market open on October 8. Ahead of that, Teixiera has lowered her organic sales growth and CKH HOLDINGS earnings per share estimates from +3.2% and $2.31 to +2.8% and $2.29, respectively, to reflect weaker North American expectations, weaker-than-expected tracked channel data, and consumer headwinds, partially offset by growth in international markets.