Pepsi's Slow Grind: Bank of America Downgrade Highlights Domestic Stagnation Amid Global Gains

Bank of America’s recent downgrade of PepsiCo (PEP) to “Neutral” from “Buy” underscores a critical inflection point for the snack and beverage giant. While its global operations hum, the company’s domestic struggles—particularly in its core Frito-Lay North America division—are now casting a long shadow over its growth trajectory.

Domestic Stagnation: The Frito-Lay Drag

The downgrade hinges on one stark reality: Frito-Lay North America, which accounts for roughly 40% of PepsiCo’s revenue, is losing momentum. Bank of America analyst Bryan Spillane noted that the division’s growth has slowed to below its long-term trend, with no signs of acceleration. Analysts attribute this to intensifying competition from private-label snacks, shifting consumer preferences toward healthier options, and supply chain headwinds that have yet to fully resolve.

The numbers tell the story: Frito-Lay’s revenue growth has dipped to 2% year-over-year, compared to a 5% average across Pepsi’s international divisions. Even as the company innovates with plant-based snacks and premium offerings, these efforts haven’t offset declines in legacy brands like Lay’s and Cheetos.

Global Gains, But Not Enough

Pepsi’s overseas operations are thriving. Beverage sales in Latin America and Asia-Pacific grew by 8% and 7%, respectively, driven by strong demand for Pepsi and Gatorade. However, these gains can’t compensate for the North American drag. As Spillane bluntly stated, “International growth is a nice story, but it’s not solving the core problem.”

The disconnect between Pepsi’s two-speed performance is reflected in its EPS outlook. Bank of America slashed its 2026 EPS estimate to $8.70 (from $8.85) and 2027 to $9.27 (from $9.45), signaling minimal growth of just 2-3% annually. This tepid trajectory contrasts sharply with the company’s historical 5-6% EPS growth rate.

Analyst Take: Why Neutral Now?

Bank of America’s decision to cut its price target to $155 from $185 (a 16.8% reduction) reflects skepticism about near-term upside. The stock’s 13% decline over the past year already partially prices in these concerns, but the downgrade suggests further downside risks if Frito-Lay’s stagnation persists.

The firm also contrasted PEP with artificial intelligence stocks, noting that AI-driven equities offer “higher return potential in shorter timeframes.” While this comparison highlights PEP’s unexciting growth profile, it’s worth noting that the analyst explicitly stated the downgrade was not a direct critique of Pepsi’s fundamentals but rather a reflection of its constrained upside in a market favoring high-growth sectors.

Schwab’s Role: Reporter, Not Rater

While the headline mentions Schwab, its involvement is limited to reporting Bank of America’s downgrade via its Schwab Network platform. There’s no evidence Schwab (as an analyst firm) downgraded PEP; instead, its Q4 2024 stake increase to $3.8 billion reflects institutional confidence in PEP’s long-term stability, not near-term growth.

The Bottom Line: A Dividend Play, Not a Growth Story

PepsiCo remains a stalwart in consumer staples, with a 3% dividend yield and a fortress balance sheet. However, Bank of America’s analysis makes it clear: investors seeking rapid growth should look elsewhere. The Neutral rating acknowledges that PEP’s defensive qualities—steady cash flows and global reach—make it a hold, not a buy, in a market chasing AI and biotech moonshots.

Final Verdict

PepsiCo’s stumble in North America is a wake-up call. Investors must weigh its stable dividend and global resilience against its domestic stagnation and uninspiring EPS outlook. With a price target cut and a 13% year-to-date decline, PEP now trades at 18x forward earnings—fairly valued for a defensive stock but offering little margin of safety for growth hunters. For now, Bank of America’s Neutral rating reflects a reality many investors may already suspect: PEP is a reliable income play, not a catalyst for explosive returns.

In a market fixated on speed, PEP’s slow grind may keep it in the middle of the pack—a solid choice for portfolios needing ballast, but not a rocket ship for those chasing the next big thing.