UBS Warburg Cuts Pepsi to 'Hold'

Analyst Caroline Levy sees a decline in Frito Lay profit, and stronger competition from Coke

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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