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Why PepsiCo is Morgan Stanley’s Top Pick

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Analyzing PepsiCo’s Upgrade: A Top Pick at Morgan Stanley

Morgan Stanley recently upgraded PepsiCo from Equal-Weight to Overweight, designating it as a top pick in both the beverages sector and overall market. This shift in stance was underscored by a maintained price target of $190 per share, signaling confidence in PepsiCo’s growth trajectory despite previous valuation concerns.

Navigating Valuation and Guidance Concerns

Initially, the downgrade of PepsiCo stemmed from apprehensions surrounding its valuation and lofty guidance. However, Morgan Stanley now perceives these issues as having subsided, paving the way for a more favorable outlook. The firm anticipates a robust turnaround for PepsiCo in the second half of the year, following what they describe as a fundamental bottoming out in Q1.

Identifying Key Inflection Points

Highlighting specific catalysts for this anticipated turnaround, analysts point to several critical factors. These include a significant 170 basis points (bps) miss in organic sales growth (OSG) during Q4, marking PepsiCo’s first OSG miss in seven years. Additionally, a notable 980 bps deceleration in OSG from Q4 to Q1 in 2023, coupled with a downward guidance for FY24 OSG and a tepid start in Q1 of 2024, have contributed to a sense of pessimism.

Projecting a Positive Trajectory

Despite these challenges, analysts foresee PepsiCo’s OSG bottoming out at 2.3% in the first quarter before rebounding to surpass both peer and consensus OSG rates. This anticipated rebound is expected to materialize particularly in Q3 and Q4, with OSG projected to reach 5-6% in both quarters.

Conclusion: Optimism Amidst Challenges

Morgan Stanley’s upgraded stance on PepsiCo reflects a newfound optimism regarding the company’s growth prospects. While acknowledging recent setbacks and challenges in OSG performance, analysts remain bullish on PepsiCo’s ability to rebound strongly, positioning it as a top pick for investors seeking opportunities in the beverages sector and beyond.

Related: Pepsico Insider Trading Analysis

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