Pepsi price target maintained at $71

The company's diverse portfolio and strategic deals in emerging markets are advantageous for the company.

By Trefis Jan 26, 2012 11:04AM
PepsiCo's (PEP) diverse portfolio ranging from sodas to snacks and juices, combined with its ability to innovate and launch products suited to the requirements of the localized markets, will go a long way in the growth of the company. At the same time, key acquisitions in developing markets over the last few years will give the company an opportunity to be a part of these fast-growing economies.

We believe the company is in a transitional phase, which makes the market undervalue the stock. PepsiCo competes with leading food & beverage companies around the world including Kraft Food (KFT), Coca Cola Co (KO) and Dr Pepper Snapple (DPS).

See our complete analysis of PepsiCo


Hegemony in certain divisions


The most obvious name associated with the snacks industry is Frito-Lay. No other company in the snacks industry in the world can match the stature or the portfolio of Frito-Lay. This gives the company the ability to launch new products in various countries around the world as the brand enjoys high recognition. Furthermore, the company ensures it innovates and introduces products aimed to satisfy the taste buds of local population.


The international snacks market is expected to grow from $38 billion currently to $42 billion by the end of our forecast period, fueled mostly by increased consumption in the developing markets.


PepsiCo Frito-Lay International Market Share

Similarly, when talking about sports drinks, the first name that comes to the mind is Gatorade. The iconic drink dominates the $7 billion U.S. sports drink industry. PepsiCo is now hoping to leverage the Gatorade brand name to introduce a whole new range of products to grab a market share of the $20 billion U.S. sports nutrition industry. The sports nutrition industry consists of sports drinks, protein bars and supplements, among other products.


Growing presence in emerging markets


PepsiCo has made a string of acquisitions in emerging markets in the last couple of years. Back in 2010, it acquired a 66% stake in Russia's Wimm-Bill-Dann, a leading juice and dairy company in the region. The move gives the company a strong presence not only in Russia but also in East Europe and Central Asia. Similarly, PepsiCo acquired Grupo Mabel, the second largest maker of cookies in Latin America, in a deal valued at $520 million. The company has now set its sights on acquiring Marilan Alimentos, another Brazilian cookie maker in a deal close to $400 million, as well as investing close to $100 million in India to build a plant to manufacture corn-based products, which will help expand its range of Frito-Lay products in the country.


Due to huge income disparity in some of the emerging markets, we often find clusters of population that have different taste requirements. Since countries like China, India and Brazil have huge populations, each of these clusters represents a sizable opportunity.


This is where the diverse portfolio will be advantageous for the company, i.e. diverse not only in terms of the options but also in terms of pricing. PepsiCo can market different products aimed at different audiences. Furthermore, the company's excellent distribution and supply chain networks ensures it can target the more price sensitive audiences as well.


We maintain a price estimate of $71, which is about 10% above the current market price.

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