On Thursday, Jefferies has adjusted its outlook on Pepsico (NASDAQ:PEP) shares, increasing the price target to $211 from the previous $209 while maintaining a Buy rating on the stock.
The firm notes that after the acquisition of its US bottlers, PepsiCo's North America Beverages (PBNA) segment margins stood at 18%, but have since decreased to 11%.
The report from Jefferies points to several factors that could lead to an improvement in PBNA's margins. These include a revamped product portfolio, a larger asset base, and a decrease in capital expenditure spending. Additionally, stable input costs are expected to contribute to the margin improvement.
The firm anticipates that with the new management's focus on margin prioritization, PBNA margins could begin to see a positive turn. According to Jefferies, there is an expectation for PBNA margins to reach 14% by the year 2028, which would mean an average increase of about 65 basis points per year.
This projected improvement in margins is also expected to have a favorable impact on PepsiCo's earnings per share (EPS) in the coming years. Jefferies forecasts that this margin expansion could add between 9 to 12 cents to the company's out-year EPS estimates.
The update comes as PepsiCo continues to navigate the competitive beverage industry, with the firm's analysis suggesting a potential for increased profitability in the near future.
InvestingPro Insights
Jefferies' optimistic view on PepsiCo's margin improvement and EPS growth is echoed by several metrics from InvestingPro. With a market capitalization of $246.72 billion, PepsiCo is a significant player in the beverages industry, which is reflected in its impressive gross profit margins of 54.15% over the last twelve months as of Q1 2023. This strong profitability underscores the company's ability to manage its operations efficiently, even as it competes in a challenging market.
InvestingPro Tips highlight the company's long-standing commitment to shareholders, as evidenced by its track record of raising dividends for 54 consecutive years, a testament to its financial stability and consistent performance. Moreover, the company's low price volatility makes it an attractive option for investors seeking stability in their portfolio. In terms of valuation, while PepsiCo is trading at a high Price / Book multiple of 12.95, its PEG ratio of 0.68 suggests that the stock may be reasonably priced relative to its earnings growth potential.
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