Coca-Cola stock received downgrades this week, and PepsiCo just got its second. Evercore ISI analyst Robert Ottenstein sees the macro turning against Pepsi.
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PepsiCo stock is falling early Wednesday, on the heels of a downgrade from Evercore ISI, which warns that shares, which gained 8.5% last year, will struggle for similar success this year.
Analyst Robert Ottenstein lowered his rating on PepsiCo (ticker: PEP) to In Line from Outperform, removing his $160 price target. He writes that while the company was his top beverage pick for lockdowns, the macro climate is turning against it. The headwind comes at the same time that Pepsi deals with execution risks stemming from its recent acquisition of Rockstar Energy.
It’s not all bad news: Ottenstein notes that Pepsi is entering 2021 “from a position of strength and considerable commercial momentum.” He expects the company will be able to meet its earnings targets, potentially coming in slightly ahead of the Street’s estimates, and gain shelf space for “its tried and true brands” that performed so well with consumers last year.
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However, while the company’s steady-eddy nature was just what the market wanted in 2020, “these resilient attributes provide little room for excitement in 2021 or 2022,” a period in which likely won’t favor blue-chip bond proxies. Of note, rival Coca-Cola (KO) also received analyst downgrades this week.
Ottenstein writes that the Pepsi’s March 2020 deal to buy Rockstar Energy, while still transformational, has been troubled by legal wrangling and Pepsi’s “success is far from guaranteed,” especially as Rockstar has been losing market share. He’s also concerned that the focus on the energy drink market could distract from the trademark Pepsi business, a key component that still accounts for as much as a quarter of the company’s North American business.
Then there’s the broader backdrop of a reopening economy: Ottenstein expects we’ll see a cyclical-driven earnings per share recovery this year, with U.S. dollar weakness, emerging market strength, and higher commodity prices. This is a less favorable setup for Pepsi, and leads him to instead prefer companies that can benefit from long-term changes in post-pandemic consumer behavior, such as Procter & Gamble (PG) and Colgate-Palmolive (CL), or those undergoing major shifts, such as Coca-Cola (KO)—a stock that’s fallen out of favor with other analysts recently.
Pepsi stock, which was hit with another downgrade earlier this week, is down 1.9% to $142 in recent trading.
Write to Teresa Rivas at [email protected]
