Buy PepsiCo (PEP) on Fundamentals; Potential Spin-Off Could Add Modest Upside - BofA/Merrill Lynch

BofA/Merrill Lynch analyst Bryan Spillane reiterated a Buy rating and $98 price target on PepsiCo (NYSE: PEP) after conducting a post-split
analysis of the Kraft Inc. split into Kraft Foods Group (NASDAQ: KRFT) and Mondelez (NASDAQ: MDLZ), which suggests split or no split operating performance will be the most important driver from here.

Based on their analysis, Spillane said PepsiCo stock has at most a 5% valuation benefit from an activist put. Based on their analysis of the Kraft split based on the mid points of its post-split valuation ranges, there would be potentially an additional 5%. Spillane said, "as a result we do not see much downside risk to the stock if the activists exit." He added, "We also don’t see evidence that a split would create meaningful value without improvement to sales and profit growth projections."

The analyst also noted that the Kraft split boosted valuation not operating performance. The firm's observations from the split: 1) Combined share since the split was announced has underperformed the S&P 500 and out-performed the consumer staples; 2) Relative valuation is 3% higher than consumer staples since the split and has been as high as 15%; 3) Sales growth and profits have come in below original expectations despite significant cost cutting from both sides.

For an analyst ratings summary and ratings history on Pepsico click here. For more ratings news on Pepsico click here.

Shares of Pepsico closed at $91.60 yesterday.

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