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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), biggest believers, has “blinked,” and downgraded its shares.
The Bank of America research team couldn’t find any more reasons to support their “buy” ratings, analysts wrote Tuesday in a note. They cut their price target, from $185 to $150, citing losses in market share for the company’s North American beverage business and snack unit Frito-Lay. The old target was among 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]?’ The note stated that the team had run out of options and downgraded to Neutral. The new price target for the team is about 6% higher than where the shares closed on Monday, but only 4% above the average as tracked by VisibleAlpha.
Pepsi shares fell 3.5% to $143, or about 15% in the last 12 months.
Bank of America reported that Frito-Lay increased prices on products such as Lay’s Doritos Cheetos beyond wage increases, resulting in fewer sales. The note stated that the snack sales have declined as working class consumers cut back their spending in convenience stores and gasoline stations.
The note said that Pepsi’s drink list, including Pepsi Mountain Dew and Gatorade hasn’t changed to suit changing tastes. Analysts claim that Pepsi has not “made a serious entry” into the flavored carbonated drinks and energy drinks categories, nor have they gained traction in low-sugar beverages. Pepsi has recently announced plans for the purchase of Poppi, a probiotic soda with 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.
