PepsiCo Shares Gain on UBS Upgrade, Price Target Boost To $165

UBS analysts Sean King argues PepsiCo is "only at the mid-point of an investment cycle that will yield a sustainable improvement to top and bottom line growth."
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PepsiCo  (PEP) - Get Report shares moved higher Wednesday after analysts at UBS lifted their rating on the consumer brands group citing improving profit margins in beverages and snacks. 

UBS analyst Sean King raised his rating on Pepsi to 'buy' from 'neutral', while boosting his price target by $25 to $165 per share, following the group's stronger-than-expected first quarter earnings that included a topline of $4.3 billion from its Frito-Lay snacks division. 

King argues that snack division investments will boost growth and margins as consumption patterns change in international markets, while a focus on high-profit energy drinks will help its main beverages unit.  

"We believe PepsiCo is only at the mid- point of an investment cycle that will yield a sustainable improvement to top and bottom line growth," King said. "While absolute valuation stands near the upper- bound of its historical range, relative valuation remains below its 3-year average discount."

"We believe modest multiple expansion with consistent earnings upside and the opportunity for long-term algorithm improvement should offer 14% upside potential based on our 12-month price target," he added.

PepsiCo shares were marked 1.05% higher in early trading Wednesday to change hands at $147.25 each, a move that still leaves the stock in modest negative territory for the year. 

Last week, PepsiCo posted a 13% increase in first quarter profits, to a Street-beating $1.21 per share, on revenues of $14.8 billion. 

PepsiCo said revenues at its Frito-Lay division rose 4% from last year to $4.236 billion, while the topline at Quaker Foods jumped 2%. Beverages said were 4.9% higher at $5.074 billion.

The group's main rival, Coca-Cola Co.  (KO) - Get Report, also topped Street forecasts for its first quarter earnings with a bottom line of 55 cents per share on revenues of $9 billion.

Coca-Cola said the current financial year is "off to a good start", but reiterated its previous forecast of organic revenue growth in the "high single-digits" and comparable earnings growth of "high single to low double digits" versus 2021.