PepsiCo's Strong Q2 Performance Boosts Morgan Stanley's Target Price to $165

PepsiCo (PEP.US) has seen a positive shift in its financial outlook, prompting Morgan Stanley to raise its target price for the company to $165. This adjustment follows PepsiCo's strong second-quarter performance, which exceeded market expectations across various metrics, including total revenue, operating profit, gross profit, and earnings per share. The company's improved performance has led to an upward revision of its full-year earnings per share guidance for 2025, driven by favorable currency factors and enhanced production efficiency.

The second quarter marked a significant improvement for PepsiCo, contrasting with the first quarter's downward revision of its full-year performance guidance. The company's earnings per share guidance for the year has been raised, reflecting a clearer and more optimistic outlook. This improvement is attributed to a 70% increase in production efficiency in the second half of the year compared to the first half, as well as the implementation of the "One North America" three-year production efficiency and integration plan, which is set to be gradually rolled out from the second half of 2026 to 2028.

Despite the overall revenue performance remaining relatively stable, the challenges in the U.S. market have been offset by robust international business growth and higher production efficiency. Morgan Stanley has increased its earnings per share forecasts for 2025 and 2026 by 3-4%, acknowledging PepsiCo's efforts to enhance productivity and streamline operations. However, the firm maintains a "hold" rating on the stock, citing concerns about the company's total revenue situation in the United States, where organic sales growth has been modest. The second quarter saw a 0.5% decline in North American organic sales, while international business growth remained strong at 5.7%.

Morgan Stanley's target price increase is based on a 19.5 times multiple of the 2026 earnings per share, reflecting the firm's confidence in PepsiCo's ability to navigate current challenges and capitalize on its operational improvements. The company's focus on enhancing production efficiency and cost management is expected to support its earnings growth in the coming years, despite the ongoing economic uncertainties in the United States.