PepsiCo shares near 52-week lows as Citi downgrades amid North American sales weakness

PepsiCo shares are trading near their 52-week lows, presenting a stark contrast to rival Coca-Cola, which remains close to its highs. While the beverage and snack giant has increased its annual dividend by 4% to $5.92 per share, resulting in a yield of over 4.2%, the stock has declined 10% over the past five years. This underperformance has prompted Citi to downgrade the stock to "Neutral" from "Buy", lowering its price target from $170 to $145, below the consensus mean of $155.09.

The downgrade follows weak second-quarter organic sales in PepsiCo’s North America operations. PepsiCo Foods North America reported a 2% decline, while PepsiCo Beverages North America grew by only 1%, both figures trailing street estimates. Chief Executive Officer Ramon Laguarta attributed the tempered results to moderating category performance and tightening consumer budgets due to inflationary pressures, particularly in convenience and gas channels where higher fuel costs have reduced disposable income.

Chief Financial Officer Steve Schmitt acknowledged the softer-than-anticipated performance, stating that the company now expects a more gradual improvement in performance trends for the remainder of the year. The weakness in the region has persisted beyond the second quarter, contributing to the broader market scepticism that led to the analyst downgrade. Despite the headwinds, PepsiCo’s international business has remained resilient, offsetting some of the domestic challenges.

Activist investor Elliott Management, which holds a $4 billion stake, has been pushing for operational changes at the company. In response to pressure from the fund, PepsiCo has implemented price reductions to boost volumes, cut approximately one-fifth of its product portfolio, and accelerated the launch of new products alongside increased marketing investment. These measures aim to stabilise the North American segment and improve overall efficiency.

From a valuation perspective, PepsiCo trades at a forward price-to-earnings multiple of 16.3x, which is below its historical average and the S&P 500 mean. As a "Dividend King" with 54 consecutive years of dividend increases, the stock offers a high yield relative to the broader market. Analysts suggest that the current valuation provides a margin of safety, with much of the negative sentiment already priced in, though a sustained recovery will depend on the successful turnaround of its North American operations.