Analyst upgrades PepsiCo, Pepsi Bottling

MILWAUKEE (AP) — An analyst on Monday upgraded shares of soft drink and snack maker PepsiCo Inc. and its largest bottler, Pepsi Bottling Group Inc., saying both are poised to grow even if PepsiCo fails in its bid to take over its two biggest bottlers.

Stifel Nicolaus&Co. analyst Mark Swartzberg upgraded shares of PepsiCo and Pepsi Bottling to "buy" from "hold" and offered initial 12-month target share prices for the companies. He told clients in a note Monday he set a 12-month target for shares of Purchase, N.Y.-based PepsiCo of $64, while he expects Pepsi Bottling's shares to reach $37.

PepsiCo, maker of drinks like Gatorade and Pepsi colas, has been trying to buy Pepsi Bottling Group and another bottler, PepsiAmericas Inc., saying owning its bottlers would help it cut costs and operate more efficiently. The company first offered $6 billion for the two in April, but both bottling companies rejected the deal, saying it undervalued them. Analysts have speculated that PepsiCo, which also owns the Frito-Lay snacks business, must raise its offer to get the deal through.

Swartzberg told clients that his upgrade of PepsiCo is made whether or not the deal goes through, since he believes there's attractive risk and reward to the company.

But he also said: "We also believe the risk/reward is moreattractive if the bottler transactions are completed and consider this most likely."

In either case, he said, he expects earnings for PepsiCo to grow due to improving volume growth in the Frito-Lay business, PepsiCo's largest, dropping commodity costs and other improving trends. He said earnings acceleration would be greater, though, with the bottlers than without.

For Pepsi Bottling Group, Swartzberg said the Somers, N.Y.-based company's current share price does not reflect fair value. He also believes, that "PepsiCo lacks the leverage, in spite of their PR, to insist on something at or below PBG's current market price."

He said he believes Pepsi Bottling's board will keep waiting for a higher offer from PepsiCo. Its initial offer was valued at about $29.50 a share, and he notes shares are trading higher than that now since the market expects an increased bid.

Pepsi Bottling has been expanding its presence and has announced several buyouts of bottlers since PepsiCo's offer in April.

Shares of PepsiCo rose 21 cents to $54.91 in midday trading Monday, while shares of Pepsi Bottling rose 5 cents to $33.67.