Over the past few years, large domestic companies have been struggling to escape American stagnation by expanding aggressively overseas into the highly valued emerging markets. Some companies, such as McDonald’s (MCD: Charts, News), Coca-Cola (KO: Charts, News) and Kraft (KFT: Charts, News) have been highly successful, and investors have been richly rewarded as a result of foreign revenue offsetting soft sales back at home. Recently, beverage giant PepsiCo (PEP: Charts, News), which has often played second fiddle to its larger rival, Coca-Cola, stoked investor interest with its recent moves to expand into emerging markets in Latin America, Eastern Europe and Asia. Investors should keep a close eye on the company’s new expansions, and whether or not it changes the company’s core competencies. More importantly, they should be aware that success in these emerging markets could spur growth and make shares of PepsiCo attractive once more to growth investors.
This week, PepsiCo announced that it was attempting to gain a controlling interest in Brazilian cookie manufacturer Marilan Alimentos for $320 to $426 million. Marilan has been a highly sought prize in the Latin American market, with industry peers Campbell Soup Company (CPB: Charts, News) and Bunge Group (BG: Charts, News) both making prior bids for the company, which were rejected by controlling Marilan shareholders. It’s worth noting, however, that neither Campbell nor Bunge can be considered direct competitors to PepsiCo – thus PepsiCo is the only pure beverage company making a bid to increase its market share of Latin American snack foods. PepsiCo’s Latin American interest doesn’t end with Marilan, however. The company also recently announced that it had acquired another Brazilian cookie manufacturer, Grupo Mabel, for an undisclosed amount rumored to be approximately $450 million.
If PepsiCo successfully acquires Marilan as well, these two new investments of nearly $1 billion would give the company a massive new market in snack foods in Latin America, putting it head-to-head with food giant Kraft Foods, the world’s leading manufacturer of biscuits, chocolate candy, gum and nuts. The acquisitions would also help PepsiCo escape the long shadow of Coca-Cola, which leads in global beverage market share by a wide margin. If completed, PepsiCo’s global snack food market share would trump Coca-Cola’s, and increase its global footprint significantly in grocery stores.
In addition to Latin America, PepsiCo has invested heavily in Eastern Europe and Asia, acquiring Russian diary and fruit drinks manufacturer Wimm Bill Dann for $5.4 billion a year ago. Analysts believe that PepsiCo’s recent moves will aid the company in the long-term, by shifting its focus on emerging markets in preparation for weak sales in North America and Western Europe. The company also plans to leave the acquired brands alone, expanding across local tastes with as little interruption to the brands as possible.
PepsiCo’s game plan for emerging markets is similar to the company’s domestic approach. In the United States, the majority of PepsiCo’s snack foods belong to its Frito-Lay subsidiary. However, some large shareholders have expressed a desire for the company to split the company into two companies, Pepsi and Frito-Lay, in order to preserve margins at its beverage business. PepsiCo has been reluctant to split the company, citing the co-dependence of the two business segments in marketing. Instead, the company announced that it would lay off 4,000 workers – or 1% of its total payroll – in order to cut costs at its domestic operations. The company is also considering eliminating its 401(k) match, which would immediately save $75 million. These are considered a direct attempt by CEO Indra Nooyi to appease shareholders, who have grown fickle with the stocks’ stagnant share price and weak margins. Shares of PepsiCo have gone nowhere for five years, and its net profit margins in 2010 were less than a third of Coca-Cola’s.
Yet at 14 times forward earnings and with a hefty 52 cent per share quarterly dividend, shares of PepsiCo are attractively valued for the conservative income investor, and if its strategy in Latin America pays off, it could very well evolve into a growth stock once again.
Other News About PEP
Pepsico Is Said to Plan Job Cuts as North American Beverage Sales Stagnate
Are job cuts the solution to Pepsi’s weak American sales?
Pepsi Takes Steps To Expand Its Latin American Footprint
Pepsi looks to expand overseas to offset weak domestic growth.
Other Stocks in the News
Lululemon Is A Sell And The Insiders Know It
Insiders express little confidence in Lululemon’s stock.
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Is Sears a value trap?
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