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UBS Warburg Cuts Pepsi to 'Hold'


UBS Warburg cut Pepsi (PEP) to hold from buy.

Analyst Caroline Levy thinks the secular profit growth rate at Frito Lay North America (almost 50% of Pepsi's profits) will decline from 10% to 7%-8% due to Pepsi's reduced ability to raise prices in absolute terms or through innovation. Levy believes Wal-Mart is creating price ceilings on most food categories, and she thinks Frito-Lay North America's R&D efforts could run out of steam and require reinvigoration.

Levy sees a slowdown in volume growth at Pepsi-Cola North America due to tougher competition from Coke's strengthening system, and tougher comps against Code Red and Pepsi Twist launches.

She cut her $1.95 2002 earnings per share estimate to to $1.94, and cut the $2.15 estimate to $2.10. Levy also trimmed the $45 target to $41.


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