PepsiCo is more than a cola company
The company is well poised to increase its snacks market share as it expands into emerging economies.
The disappointing numbers helped feed news that CEO Indra Nooyi might step down, but the company has quashed all such rumors for now. Although Coca-Cola (KO) has been outperforming PepsiCo in terms of beverage volumes sold, it is important to understand that PepsiCo has evolved into more than just a beverage company over time. In fact, you could argue Pepsi is a snacks company with a beverage business on the side.
The company has a huge, diversified portfolio, and competitors include more than Coca-Cola and Dr Pepper Snapple (DPS). PepsiCo also competes with leading food-and-beverage companies around the world, including Kraft Foods (KFT) and Nestle.
What's in a name?
Since the company is named PepsiCo, investors have a natural tendency to think that the namesake drink Pepsi is the most important division within the company. And since Pepsi has been losing out to Coke or even Diet Coke, investors presume that the company, as a whole, is doing badly. The fact is that Pepsi is not the most important brand for PepsiCo; in fact it's not even in the top two brands.
Frito-Lay is the most important division for the company, and PepsiCo is well poised to increase its market share as it expands into emerging economies. Besides its own brands that enjoy strong recognition, the company regularly acquires local companies to grab a foothold into existing markets.
Local companies are aware of the market conditions unique to each country and have their distribution networks set up and manufacture products suited to the tastes of the local market. An increasing market size coupled with a rising market share will be a prime growth driver for the firm.
We estimate that the international snacks market will grow from $38 billion currently to $42 billion by the end of our forecast period, fueled mostly by increased consumption in the developing markets. And this is rather a conservative estimate. You can drag the trend line to arrive at your own price estimate.
In 2011, PepsiCo acquired Brazil's Grupo Mabel in a deal valued at $500 million, which will give it access to the world's second largest cookie and cracker producing-nation. In India, PepsiCo is building a $100 million manufacturing plant that will make corn-based snacks available in the country.
Besides snacks, PepsiCo has significantly stepped up presence in the dairy segment. In late 2010, the company acquired Wimm-Bill-Dann -- partly to gain access to dairy markets in Russia and East Europe. Last week, PepsiCo announced that it, in partnership with Germany's Theo Muller Gmbh, is investing $200 million to enter the U.S. dairy market.
These are significant investments that provide ample growth opportunities for the company. We also believe that the company's decision to step up marketing efforts on soft drinks in 2012 is a step in the right direction. Carbonated soft-drink sales have witnessed a strong correlation with the advertising spend in the past. It is also crucial that PepsiCo leverage its strong brand name to boost profits.
We think it is important for a company to strike a balance between its long-term goals and profitability and, with its latest decision, PepsiCo will hopefully be able to realize that.
We maintain a price estimate of $71, which is about 10% above the current market price.
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The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
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