Morgan Stanley upgrades PepsiCo stock, cites 'fundamental Inflection'

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Morgan Stanley upgrades PepsiCo stock, cites 'fundamental Inflection'
Credit: © Reuters.

On Monday, Morgan Stanley (NYSE: MS ) made a notable adjustment to its rating for PepsiCo (NASDAQ: PEP ), shifting from an Equalweight to an Overweight stance and setting a price target of $190.00 for the stock.

The move positions PepsiCo as the firm's top pick in both the beverage sector and overall, taking over from Constellation Brands (NYSE: STZ ) in beverages and Colgate (NS: COLG ) for the overall top spot. This change comes despite the firm's continued endorsement of both Colgate and Constellation Brands as key Overweight-rated stocks.

The rationale behind the upgrade is based on several key developments at PepsiCo. Following the second quarter of the fiscal year 2023 earnings, Morgan Stanley had downgraded PepsiCo to an Equalweight rating due to concerns over valuation and overly optimistic guidance on organic sales growth (OSG).

Since then, the issues that led to the downgrade have been addressed, prompting the firm to recommend buying PepsiCo shares ahead of an anticipated positive shift in the second half of the year after the company's fundamentals bottom out in the first quarter.

Morgan Stanley points to a series of events that signal an upcoming fundamental inflection for PepsiCo. These include a significant miss in organic sales growth in the fourth quarter, which was the first in seven years, a sharp deceleration in OSG from the fourth quarter of 2023 to the first quarter of 2024, a downward revision of the fiscal year 2024 OSG forecast, and a softer-than-expected start to the first quarter of 2024.

Despite these challenges, the firm expects PepsiCo's OSG to bottom out at 2.3% in the first quarter and to recover to slightly above peer and consensus OSG by the end of the year, potentially reaching 5-6% in both the third and fourth quarters.

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