Analyst raises price target on PepsiCo to $175

Guggenheim has raised its PepsiCo price target to $175. Guggenheim Managing Director and Equity Analyst Laurent Grandet joins Yahoo Finance Live to discuss.

Video Transcript

- Welcome back to Yahoo! Finance Live, taking a look at shares of Pepsi trading pretty flat in this session, up about 1/10 of a percent. Our next guest, though, sees big upside for the stock raising its price target to $175 a share.

Let's bring in Lauret Grandet. He's Guggenheim managing director and equity analyst. Laurent, it's good to talk to you today. $175, when you look at where it's trading right now, certainly big upside. You've pointed specifically to the North America business that you think could be a big driver. Walk me through your thesis.

LAURENT GRANDET: Yeah, sure. I actually use the beverage North America. I mean, you know, in my view, is the way the PepsiCo stock could work. I mean, we know that Frito-Lay North America is doing well. [INAUDIBLE] international business is a bit too small to move the needle right now.

So, really, PepsiCo North America beverage, it's PBNA is really what matters. And really, we went to a low during COVID because of extra costs and a new [INAUDIBLE] not being as good as before.

But we are recovering. And I think Ramon Laguarta, the CEO of PepsiCo, by rebalancing investment between food or snacks and beverages, reshuffling the portfolio with the divestment of Tropicana over the summer, and acquisition of Energy last year.

Plus, I mean, you know, some focus, probably, more on execution is starting to pay off. And this is what we are seeing in the future. So that's basically the main thing in all of this PBNA, and really, divestiture, reshuffling the portfolio, rebalancing investment, and more focus on execution.

- Yeah, let's talk specifically about some of those energy brands that you mentioned. You're talking about Rockstar, Mountain Dew Rise, among them. What do you think is going to elevate to another level here? How is that growth going to be driven?

LAURENT GRANDET: So what is interesting, when PepsiCo bought Rockstar last year, is it did allow PepsiCo to invest, or to move, some of their core brands into Energy. But also to distribute them at bank in the US.

So the driver [INAUDIBLE] people here, you can have Rockstar, that is right now being kind of a revamped and relaunched. Velocity is growing. The distribution is yet to come. But, I mean, with higher [INAUDIBLE] we think that will will come up.

There is a launch of new innovation behind, I mean, Mountain Dew as a brand, with Mountain Dew Rise. But also, I mean, something that investors probably need to see is that the addition of bank in the DSD system, together with Rockstar volume they didn't have, we drive about a 120, 130 basis points off incremental margin, just for PBNA.

Simply because those two products together represent about 12% of the DSD system in the US for PepsiCo. And that is eating a lot of fixed costs. So that's what we see as incremental here.

- So we're talking $175 a share. What do you think is the biggest risk that could derail this growth story you've laid out?

LAURENT GRANDET: Yes, I mean, you know, right now, it's all about commodities inflation, and really, freight cost, labor cost, labor shortage. So it's kind of all the company we follow in the space. We believe that Pepsi got some pricing power with their brands. They can really ask for more premium price.

They can also do what they say is the back price strategy, where they can either reduce the size of the packaging, and it's the same price. So they can play around this. But that's clearly one of the risks.

How long would that last, the labor shortage? And therefore, drive the cost in the system, that's a question mark?

- Yeah it's been a big question mark for so many firms, not just Pepsi. But it's good to talk to you today, Laurent Grandet, Guggenheim managing director and equity analyst.