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Stock Analyst Update

What CEO Transition Means for Pepsi

The selection of current president Ramon Laguarta to succeed outgoing CEO Indra Nooyi is evidence of the wide-moat firm's deep bench.

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We're maintaining our Exemplary stewardship rating for wide-moat  PepsiCo (PEP) after the company announced that CEO Indra Nooyi, 62, will step down on Oct. 3 after 24 years with the company, including 12 years in its top spot. Nooyi will be succeeded by Ramon Laguarta, who has been president of the company since 2017 and has experience as the CEO of Pepsi’s Europe Sub-Saharan Africa business and president of its Eastern Europe region. We weren't surprised by Laguarta's appointment, given that each of the firm's previous five CEOs have been chosen from within the organization, which we view as evidence of its deep bench.

We don't foresee a material shift in Pepsi's strategy with Laguarta at the helm, given his 22-year tenure at the firm, extensive knowledge of its operations, and key role in setting its strategy as president. Under Nooyi's leadership, the company bolstered its portfolio of healthier offerings, which now contribute roughly half of sales compared with about 38% in 2006, and better aligned its portfolio with evolving consumer tastes (with above 5% compound sales growth over this period). As such, we posit that this bent toward more natural and wholesome fare will continue. We expect Pepsi will reinforce its brand-related investments, with combined expenditures on advertising and research and development approximating 7% of sales over the next 10 years, in line with historical rates. We contend that these investments will help the company develop and bring new products to market, ensuring that its competitive advantage remains unwavering. In this context, we're reiterating our $123 fair value estimate, which calls for 3% top-line growth and operating margin around 18% on average over our forecast period.

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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.