An update has just come out on PepsiCo, Inc. (PEP), in which senior soft beverages analyst Steven Rakston, CFA is restating his Hold rating on the company. We excerpted the following details:
'Strong international growth, productivity improvements, an aggressive share repurchase program and a strong new product pipeline are driving low double-digit earnings growth for PepsiCo. Nevertheless, a sluggish domestic carbonated beverage environment, only modest low-single digit volume growth at Frito-Lay (3% in 2006 and 2.5% in the first nine months of 2007), and pressure from higher energy and raw material costs are concerns.
'Raw material prices and energy costs are pressuring profitability. Rising energy prices, along with higher corn oil and orange costs, are forcing both bottlers and retailers to pass along the higher costs to consumers. Higher pricing at retail suppresses demand and/or increases market share of private label alternatives.
'In addition, management intends to increase advertising expenditures in 2007 to support new product launches, which may further crimp profit growth. The challenging cost environment is expected to continue through 2008. Management remains cautious about future commodity price increases and the possibility of slower domestic economic growth.
'We do not expect PepsiCo stock to outperform until expectations for volume growth at Frito Lay North America accelerates to 5% or more. The target price of $82.50 is based on a 25 P/E on trailing 12-month earnings.'
Read the full analyst report on PEP.
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