Investing.com -- Jefferies downgraded PepsiCo (NASDAQ:PEP) Inc to 'Hold' from 'Buy' and set a price target of $170 given limited upside potential and ongoing struggles in its Frito-Lay snack division. Shares of PepsiCo were down more than 2% in early trading on Wednesday.
PepsiCo's shares have risen about 7% from their January lows, in line with the broader consumer staples sector, but Jefferies believes the stock now offers limited room for further gains.
"Frito is still in the normalization phase, and it seems it may be some quarters before we see a turnaround. It is taking longer than we expected," the brokerage said, adding that the U.S. business continues to lose market share in most categories.
While international operations remain strong, with margins exceeding corporate averages, Jefferies expects near-term performance to be overshadowed by challenges in the U.S.
PepsiCo's beverage segment also remains weak, with U.S. retail sales declining 0.5% in the last quarter and 1% in the past month. Although Gatorade has returned to year-over-year share gains, overall category growth remains negative, and Pepsi continues to lose share in soft drinks.
Jefferies lowered its first-quarter earnings estimate for PepsiCo, now expecting earnings per share of $1.53, down 3 cents from its prior forecast. For the full year, it estimates earnings of $8.29 per share, slightly lower than its previous estimate of $8.34.
Despite productivity efforts helping to fund reinvestment, Jefferies sees limited upside for the stock until Frito-Lay shows clear signs of recovery. "Though we believe the business will be fine in the long run, we don't have conviction as to when or how,” the firm said, adding that better opportunities exist in the beverage sector with companies like Coca-Cola (NYSE:KO) and Keurig Dr Pepper (NASDAQ:KDP).
