PepsiCo (NYSE:PEP) Chief Executive Indra Nooyi is betting on the yogurt market as demand rises and milk prices are expected to continue falling. The strategy, though, isn’t impressing investors eager for the company to improve its lackluster results.
The maker of Pepsi soft drinks and Frito-Lay snacks has announced plans to begin selling yogurt in the Northeast and Mid-Atlantic states made by the closely held German dairy company Theo Muller. Earlier this year, the companies said they would build a $206 million yogurt plant in Batavia, N.Y., that will open in 2013.
This is the latest iteration of Nooyi’s strategy to push the Purchase, N.Y.-based company to make healthier foods that was announced several years ago By 2020, PepsiCo wants to generate $30 billion in revenue from its more nutritious offerings.
Wall Street is skeptical about Nooyi’s health kick. Shares of PepsiCo, which are up more than 5% this year, traded slightly lower after the news was announced and closed at $69.99, down 0.33%. The shares have also underperformed Coca-Cola (NYSE:KO), which has gained more than 11% this year. Analysts have an average 52-week price target on PEP of $72.23, about 4% higher than where it recently traded.
PepsiCo first entered the dairy business in 2009 through a joint venture with Almari, the Middle East’s largest dairy and juice company. A year later, Pepsi snapped up Wimm-Bill-Dann (WBD) for $5.4 billion, further cementing its position in the market.
Investors shouldn’t dismiss the move.
The yogurt business seems to have more upside than either soft drinks, where consumption has declined for years, or salty snacks, which consumers are avoiding in favor of healthier alternatives. Sales of yogurt and yogurt drinks have increased every year since 2006 from $4.7 billion to an estimated $6.4 billion in 2011. Market researcher Mintel expects the market to surge 49% over the next five years, reaching $9.5 billion in 2016.
A trade publication predicted that PepsiCo might be able to “breathe fresh life” into the U.S. market — now 60%-controlled by Danone and General Mills (NYSE:GIS) — because per-capita consumption of yogurt here trails that of countries in Europe. Demand for yogurt should remain robust since rising milk production has kept prices for the commodity fairly depressed. The U.S. Department of Agriculture in April slashed its 2012 forecast for milk prices to between $17.25 and $17.75 per hundredweight, versus an earlier estimate of $17.60 to $18.20. It cut its forecast again in June to $16.85 to $17.25 per hundredweight.
Even if the yogurt venture is a huge success, Wall Street will expect more from PepsiCo’s unhealthy businesses, which have produced lackluster results. Operating profit fell at the PepsiCo Americas Beverage business and at Quaker Foods North America during the most recent quarter. Frito-Lay North America managed to eek out a 2% profit gain.
Wall Street analysts are forecasting flat revenue growth for the next two quarters and for PepsiCo’s 2012 sales to register a gain of 1.9%. Coca-Cola isn’t going to set the world on fire either, but analysts expect its revenue to rise more than 2% over the next two quarters and 4.1% for the year.
Diversification is the right thing for the company to do. PepsiCo’s yogurt venture and its push into “healthier” foods are going to take time to show results, a luxury that Nooyi doesn’t have because investors have grown tired of waiting for her turnaround strategy to bear fruit. A little more patience might be in order.
Jonathan Berr is long Coca-Cola. Follow him on Twitter @jdberr.