Pepsi Downgraded Just Ahead Of Earnings

Analysts at Jefferies parted ways with their bullish stance on PepsiCo, Inc. (NYSE: PEP) ahead of the company's fiscal third-quarter earnings report Wednesday. The firm's Kevin Grundy downgrades PepsiCo's stock rating from Buy to Hold with a price target slashed from $133 to $108.

The overall non-alcoholic beverage market continues to deteriorate and PepsiCo's success in the segment, which accounts for 25 percent of its overall profits relies on its ability to introduce "greater innovation," Grundy commented in his downgrade note. In fact, PepsiCo is losing market share in approximately 85 percent of its beverage portfolio which also compromises a "key tenet" in holding a bullish stance.

Meanwhile, PepsiCo's once-strong food division also faces pressure from grocery store weakness trends, Amazon.com, Inc. (NASDAQ: AMZN)'s growing presence in the food sector, along with "less M&A froth" to support the valuation.

On top of that, a bullish stance on PepsiCo's stock was derived from management's productivity savings initiative through 2019 that would drive upside to Wall Street's estimates, the analyst added. But input cost inflation has returned which implies there is "less scope" for operating margin upside — especially at a time when the company needs to reinvest money in the North American market where it has a higher degree of exposure versus its peers.

Bottom line, while PepsiCo boasts a great portfolio of brands the fact is the industry has slowed down as of late and will remain extremely competitive moving forward. As such, a "less constructive" view on the stock is now warranted.

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