PepsiCo Might Seem Boring To Some, But Continues To Execute Top And Bottom Line Growth

Deutsche Bank maintained its Buy and $120 price target on PepsiCo, Inc. (NYSE: PEP) as it still sees upside in PEP shares from positive EPS revisions despite "significant multiple expansion from here is unlikely."

The brokerage sees another year of mid-single digit organic sales growth and high single digit EPS growth in CY 2017, supporting its thesis that the company is a "protected, defensive name that is unlikely to veer off its proven course, vigilant in not repeating its and the category's mistakes of the past."

Despite "boring" to some, Deutsche Bank analyst Bill Schmitz noted that PepsiCo is delivering balanced top and bottom line growth and reinvesting excess upside in innovation. The company raised its full-year adjusted EPS guidance to $4.78 (from $4.71) and core organic EPS growth to +10 percent after reporting third quarter EPS of $1.40, $0.08 above the Street.

On the challenges in North American Beverage market, Schmitz said PepsiCo would benefit from its diversified portfolio and products like Gatorade, premium water, and flavored CSDs like Mountain Dew. PepsiCo noted that about 45 percent of revenue are coming from "guilt free" products.

While acknowledging the fact that the commodity water is a long-term threat to both Coke and Pepsi, the analyst said it is something that "seems to be well understood and managed accordingly, even if a compelling, long-term solution is elusive."

"While the shares would clearly be pressured in a rising rate environment, we continue to believe it is a relative winner in an increasingly rational competitive environment," Schmitz wrote in a note.

Schmitz raised his CY16 and CY17 EPS estimates to $4.80 and $5.17.

"Pragmatically, it is likely company will manage Street estimates closely with guidance and again beat, likely starting CY17 with the typical high single digit EPS growth guidance and leaving itself cushion to drive positive EPS revisions that should keep the stock moving in the right direction," Schmitz added.