PepsiCo Inc (NASDAQ:PEP, ETR:PEP)'s financial outlook faces mounting pressures as the food and beverage industry continues to grapple with weak demand, according to a recent note from Bank of America.
The consumer goods giant may soon be forced to choose between stretching its profit and loss statement to meet earnings per share (EPS) targets or easing its pursuit of those targets to prevent deep cost-cutting measures, analysts wrote.
Bank of America has lowered its price objective for Pepsi from $210 to $190, reflecting a revised FY25 earnings multiple of 22x, down from 24x.
In the note, analysts highlighted a 6% growth rate for each year. The adjustment also includes a reduction in the 2Q and FY24 organic sales forecast from 4.5% to 3.7%.
The report highlighted that Pepsi's North American snacks and beverages divisions have shown volume declines. "If this continues, it could put PEP in a position of choosing between stretching to hit earnings targets or taking a breather to avoid exasperating the issues by cutting costs too far," the note warned.
Historical precedent suggests that Pepsi's management might opt to "step back to move forward."
Frito-Lay North America's (FLNA) marketing and merchandising efforts have yet to drive the expected volume lift, leaving the division at a crossroads. Meanwhile, Pepsi Beverages North America (PBNA) faces company-specific challenges, particularly in the carbonated soft drinks sector, where it lags behind competitors.
Despite these hurdles, Bank of America reiterates its ‘Buy’ rating for Pepsi, citing reasonably stable long-term earnings power and a market that could eventually stabilize.