Key Takeaways
- Bank of America downgraded PepsiCo shares from “buy” to “neutral” and cut its target price for the beverage and snack giant by 16% on Tuesday.
- Pepsi’s snack business, Frito-Lay, is selling fewer snacks due, in part, to recent price increases, analysts said.
- Beverage sales have also been slow because the company’s drink portfolio is too narrow and hasn’t adapted to changing tastes, Bank of America said.
One of PepsiCo’s (PEP) bigger believers has “blinked,” downgrading the soda-and-snack maker’s shares.
Bank of America’s research team could no longer find reasons to support its “buy” rating, analysts wrote in a research note Tuesday. They slashed their price target from $185 to $155, citing market share losses in the company’s North American drink business and snack unit, Frito-Lay; the old target was one of the highest tracked by Visible Alpha.
“After having been asked repeatedly by investors since the beginning of the year ‘why are you still a buy on [Pepsi]?’ we have run out of answers and are downgrading to Neutral,” the note said. The team’s new price target is about 6% above where shares closed Monday, but 4% below the mean as tracked by VisibleAlpha.
Pepsi shares slipped 3.5% Tuesday to around $143, putting them down about 15% over the past 12 months.
Frito-Lay raised prices on products, which include Lay’s, Doritos and Cheetos, beyond wage growth, leading to fewer sales by volume, Bank of America said. Snack sales have slowed as working-class consumers cut back on spending at convenience stores and gas stations, the note said.
Pepsi’s drink list, which includes Pepsi, Mountain Dew and Gatorade, hasn’t adapted with changing tastes, the note said. The company hasn’t made a “serious entry” in the flavored carbonated soft drink and energy drink categories or gained traction in the low-sugar space, the analysts said. (Pepsi recently announced plans to buy the probiotic soda brand, Poppi, which has less sugar than traditional sodas.)
“These are large and powerful brand franchises which are ultimately ‘turnable’; doing so under current market conditions however will be a steep climb,” the note said.
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