Investing.com -- Barclays downgraded PepsiCo (NASDAQ:PEP) to Equal Weight on Tuesday, citing concerns over its U.S. snacking business.
Analysts note that market sentiment is increasingly tied to the recovery of Frito-Lay North America (FLNA), which they believe will take a few more quarters to stabilize.
"Sentiment largely hinges on FLNA's volume recovery," Barclays (LON:BARC) wrote, adding that while the business is capable of achieving ~1.5% volume growth (~3% organic sales growth) in the long term, near-term challenges remain, particularly given an uncertain macroeconomic environment.
“We think there are a few more quarters still to go before trends stabilize, particularly in light of what feels like a more precarious macro backdrop,” stated Barclays.
Despite the downgrade, Barclays maintains a constructive long-term view, stating that the low end of PepsiCo’s +4-6% sales growth and +7-9% profit growth algorithm remains achievable.
The firm expects international momentum and productivity improvements to help offset some of the domestic challenges.
PepsiCo’s current valuation, trading at a high-teens earnings multiple, reflects a balance between near-term caution on FLNA and limited downside risk, according to the bank.
Analysts believe the company is unlikely to fall below ~4% sales growth and ~7% EPS growth over the long run.
While Barclays acknowledges the multi-quarter journey ahead for FLNA, they see PepsiCo’s global operations as a stabilizing factor.
However, without a clearer path to recovery in its U.S. snack division, the firm sees limited upside potential for the stock in the near term.
This content was originally published on Investing.com
