Pepsico (PEP) Management Meeting Highlights 5 Structural Improvements - Morgan Stanley

Morgan Stanley analyst Dara Mohsenian reiterated an Overweight rating and $158.00 price target on Pepsico (NASDAQ: PEP) after catching up with PepsiCo's CFO Hugh Johnston, who's the tone supported the view that PEP will emerge from COVID as a consistent MSD% organic topline grower, and with margin expansion opportunity in 2021 and beyond as COVID-related costs dissipate and PEP drives margin expansion in its Pepsi Beverages North America (PBNA) business. The analyst cited 5 key takeaways from the conversation:

1) Solid MSD% Topline Growth Outlook: The analyst sensed confidence from PEP regarding its topline outlook, while noting COVID case load volatility. PEP has posted solid ~4% organic sales growth in 2020TD (through Q3) despite a net negative COVID impact.

2) Management highlighted Pepsi Beverages North America (PBNA) margin expansion opportunity after the -200 bps of margin decline in 2020TD from the ~9.2% forecast level in 2020TD, to move closer to the mid-teens corporate level over the next few years.

3) On the advertising and marketing (A&M) front, PEP reiterated its goal of supporting its beverage and snacks business with solid levels of A&M reinvestment.

4) PEP has already made good progress in its capability, A&M, and CapEx investment plans under relatively new CEO Ramon Laguarta, and it does not believe it will need a reinvestment step-up post COVID.

5) Management highlighted an opportunity to improve its FCF conversion from the ~70-80% over the last few years back to the ~100% level driven by: (a) an improvement in corporate margins (particularly PBNA) as discussed above, (b) a moderation in CapEx going forward after the step-up in investment in the 2019-22e timeframe in new capacity (PEP did reiterate CapEx will remain elevated over the next two years).

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 $136.50 yesterday.

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