PepsiCo, Inc.'s (PEP) strong international growth, productivity improvements, an aggressive share repurchase program, and a strong new product pipeline are driving its low double-digit earnings growth. Nevertheless, a sluggish domestic carbonated beverage environment and only modest low-single digit volume growth at Frito-Lay are concerns. The Hold recommendation is maintained.
Domestically, management is implementing multiple initiatives to counter the weak retail environment for carbonated soft drinks. But 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.
PepsiCo stock is currently selling at 19.0 times trailing 12-month EPS, reflecting the company's growth profile, primarily due to the significant exposure to the snack food category. We do not expect PepsiCo stock to outperform until expectations for volume growth at Frito-Lay North America accelerates to 5 percent or more. The target price of $72 is based on a 21 P/E on trailing 12 month earnings.
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