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PepsiCo Should Split Up

It might be time to separate the snack foods from the soft drinks

   

Pepsi Soft Drink 300x199 PepsiCo Should Split UpPepsiCo (NYSE:PEP) CEO Indra Nooyi has tried for years to revamp the company’s brands, and even launched a $1.2 billion effort in 2008 that included thousands of layoffs. The payoff has not happened yet and the company’s stock price has languished. Breaking up PepsiCo might be the best way to revive its fortunes.

Shares of the Purchase, N.Y., company have dropped 4.87% during the past five years, while rival Coca-Cola’s (NYSE:KO) stock has soared almost 55%. Part of the problem is that people are drinking less soda, and those who partake in carbonated beverages seem to prefer Coke. Last year, Coke commanded 42% of the carbonated soft drink market while PepsiCo controlled 29.3%, according to Beverage Digest.

PepsiCo has counted on growth from its food businesses to pick up the slack resulting from the sluggish performance of its beverage division. With rising commodity prices, however, that’s proving increasingly difficult. Nonetheless, Nooyi remains a believer in the snack business, describing Frito-Lay in the company’s latest earnings conference call as “our star in the portfolio … I would say if it was a standalone company, Frito-Lay North America might well be the best consumer products company.”

Nooyi should follow through on that thought. Frito-Lay, which PepsiCo acquired in 1965, might make more sense as an independent company or as part of a larger food company such as ConAgra (NYSE:CAG) or Cargill. The same goes for the Quaker Oats food business, which PepsiCo acquired in 2000 to gain access to the Gatorade sports drink franchise. PepsiCo’s earnings justify such a move.

During the last quarter, PepsiCo Americas Foods business had operating profit of $1.29 billion, up 9% from $1.19 billion, fueled by double-digit growth in Latin America. During that same time, the PepsiCo Americas Beverages business rose 3%, to $983 billion. Pepsi-Cola North America, like many multinational divisions in the region, continues to struggle. Revenue at Frito-Lay North America, meanwhile, jumped 3%, although it was flat for the company’s Quaker Oats division in North America. The company’s food business in Latin America grew 18%, 52% in Europe and 17% in the Asia, Middle East & Africa market, helped by a strong performance in the snack business.

In the short term, PepsiCo has a tough road ahead. Nooyi is hoping that some of Frito-Lay’s success will rub off on the beverage business. Last week, she named Al Carey, a 30-year company veteran who was head of Frito-Lay North America, to run PepsiCo Americas Beverages. Whether Carey can turn the business around remains to be seen.

PepsiCo, which boasts 19 different product lines that generate more than $1 billion in annual retail sales each, is a cheap stock, trading at a price-to-earnings ratio of 15.8, its lowest level in five years. The S&P 500 average is 16.05, according to Reuters. The company’s dividend yield of 3.32% surpasses the S&P 500 average of 2.16%. Revenue in the current quarter is expected to rise 11.4 %. The company had $2.93 billion in cash and cash equivalents as of June 25. The average analyst price target is $78, ahead of the $60.06 where it recently traded.

Coke, though, might be a better bargain, trading at a multiple of 13.31 — near its lowest level in the past five years. Its dividend yield of 2.64% lags PepsiCo, though with more than $10 billion in cash and cash equivalents, Coca-Cola can easily afford a higher payout. Revenue at the Atlanta-based company is expected to increase 43.7% in the current quarter. It’s up about 7% this year and analysts expect it to reach $74, above the $70.30 where it recently traded.

For investors, Coke, not Pepsi, remains the real thing. It is for Warren Buffett, who has held Coca-Cola stock for years.

Jonathan Berr owns shares of Coca-Cola. Follow him on Twitter at @jdberr.


Article printed from InvestorPlace Media, http://investorplace.com/2011/09/pepsico-pepsi-pep-coca-cola-ko/.

©2014 InvestorPlace Media, LLC

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