PepsiCo shares slip as U.B.S. cuts ratings

by FoodBusinessNews.net Staff
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LONDON — Shares of PepsiCo, the world’s second-largest soft drink maker, fell 1% on the New York Stock Exchange early this afternoon after investment bank U.B.S. cut its ratings on PepsiCo and Pepsi Bottling to "neutral" from "buy," noting diminished prospects for growth in earnings per share. The ratings service also said higher energy costs were likely to cap earnings potential at PepsiCo.

"While PepsiCo should continue to deliver some of the strongest e.p.s. growth rates within consumer staples, we believe upside from the current consensus e.p.s. estimates is limited," U.B.S. said.

U.B.S. lowered its 2005 estimate for earnings per share to $2.58 from $2.61 and cut its 2006 estimate to $2.87 from $2.92. U.B.S. also cut its price target on the stock to $61 from $66.50. PepsiCo shares closed June 30 trading at $53.93, down 50c.

"Our $66 price target was based on above-consensus earnings and a higher premium to the market ... we do not believe PepsiCo shares presently warrant a 40% premium to the SP&P500," U.B.S. said.

The research note pointed out that the recent spike in oil prices may impact PepsiCo’s Frito Lay North American operations, which makes potato chips. The other area of concern, U.B.S. said, is that the Coca-Cola Co. is spending an extra $125 million on its North American beverage operations.

"We believe (Coke) is becoming increasingly aggressive and beginning to show signs of improvement, and that (PepsiCo) may need to increase marketing spend and bottler funding in response," U.B.S. said.

Turning to Pepsi Bottling Group, U.B.S said a more aggressive Coca-Cola and Coca-Cola Enterprises partnership may require that Pepsi Bottling boosts its promotional activity and discounting to protect its market share.

"We believe second-quarter results will be solid, as much of the discounting began after the quarter ended," UBS said.

U.B.S. lowered its per-share earnings estimates for Pepsi Bottling Group, to $1.83 from $1.84 for this year, and to $1.99 from $2.04 for 2006. It also set a new price target of $33 per share. Shares closed June 30 at $28.61, down 20c.

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