Elliott’s ‘Friendly’ Proposals for Pepsi Turnaround May Not Yield Much, This Analyst Says

Investors see Elliott’s overture at Pepsi as too “friendly” to spur change, one analyst says. (Spencer Platt/Getty Images)

PepsiCo stock has lost 4.3% since activist investor Elliott Investment Management announced a 2% stake in the company last Tuesday—along with suggestions to help the snack-and-beverage giant grow again.

In a Tuesday note, TD Cowen analyst Robert Moskow noted that there is a “high degree of skepticism” about Elliott’s proposals in the investment bank’s calls with 17 investors: Most viewed Elliott’s overture as too “friendly” to spur changes or unlikely to materialize, said the analyst.

The stock is up 0.88% to $142.95 in late morning Tuesday trading. Shares are down about 6% so far this year.

Starting in 2019, Frito-Lay— PepsiCo’s North American food division—invested aggressively in manufacturing capacity, expecting rising demand for snacks following the pandemic. But that didn’t happen due to inflation pressure, shifting health preferences, and the emergence of GLP-1 drugs.

Given the current weak volume environment, Elliott believes PepsiCo should dial back its capacity investment and focus on profit margin expansion. Many investors dismissed the view, wrote Moskow: “They argued that the company is working on these initiatives already, and many said they would rather see focus on restoring volume growth instead.”

Several investors even viewed Elliott’s proposal to cut spending while reaccelerating volume as inherently contradictory, he said. Still, Moskow believes the market needs to see the company’s commitment to margin expansion, which would provide more flexibility for reinvestment in longer-term volume growth.

Elliott also wants PepsiCo to outsource its low-margin, asset-heavy bottling operations to franchisers and focus more on brand building, marketing, and innovation. While investors generally agree with the vision in theory, many expressed concerns about how long it would take and how earnings would be diluted, said Moskow.

The plan also runs against PepsiCo’s recent efforts to better integrate its food and beverage businesses—both in the back office and the supply chain—to seek synergy savings. “PepsiCo management’s resistance to this strategic option makes it unlikely to get very far,” wrote Moskow.

More than a decade ago, Nelson Peltz’s activist firm Trian Partners pressed PepsiCo to either separate its snacks and beverage businesses or merge with Mondelez International. The campaign faced strong pushback from PepsiCo management and eventually failed.

So far, Elliott’s involvement hasn’t been hostile, demonstrating a desire to work collaboratively with PepsiCo management instead of pushing for a board seat. But many investors questioned whether this “friendly” approach would create enough pressure to spur change, said Moskow.

The analyst believes PepsiCo would take some of Elliott’s advice, since “investors are hungry for the management team to prove their willingness to make change.” PepsiCo says it will review Elliott’s proposals and maintain “an active and productive dialogue” with shareholders.

PepsiCo stock’s current valuation is compressed in comparison with its own history and rivals like Coca-Cola. Despite Elliott’s involvement, Moskow doesn’t see a “significant multiple expansion,” but believes the stock might regain some momentum if Wall Street’s earnings expectation starts improving again.

Write to Evie Liu at evie.liu@barrons.com