PepsiCo (PEP) manufactures and distributes beverages and snack foods around the world, under such brands as Pepsi, Mountain Dew, Aquafina, Tropicana, Gatorade, Quaker, Lays, Doritos, Ruffles, Tostitos, and others. The company has 22 separate brands, which generate over $1B in annual revenue.
Back in March, activist investor Nelson Peltz announced a $951.8M stake in PepsiCo (approximately 1%) while also amassing a stake in Mondelez (MDLZ). Peltz put pressure on PepsiCo to spin off their struggling beverage division, using the proceeds to acquire Mondelez, creating a monster snack foods company in the process. PepsiCo's CEO Indra Nooyi ultimately dismissed Peltz's idea, choosing to stay the course.
I thought it might be interesting to see what PepsiCo might look like separated into two companies. For simplicity, let's look at the company in four divisions, with 2012's revenue and operating profit included. Information is slightly different so far in 2013, but isn't substantially so.
All information taken from PepsiCo's 2012 annual report.
|Division||Revenue||Op. Profit*||Op. Margin*|
|Rest of World||$6.65B||$925M||13.91%|
*Both operating profits and operating margins exclude one time items.
A few additional details on each division:
Americas Food - Includes Frito Lay (including the fast growing snack division in Latin America) and Quaker.
Americas Beverage - Includes all Pepsi, Sierra Mist, Gatorade, Aquafina, etc. Revenues of this division are slowly declining.
Europe - Includes all beverage and snack sales. PepsiCo doesn't separate them outside of North America.
Rest of World - Includes all beverage and snack sales in Asia, Middle East, and Africa.
There are two logical paths if management did choose to split the company in two. They could either just spin off the Americas Beverage division, or the Americas Food Division, grouping the European and Rest of World divisions with the remaining division.
Scenario A - Spin off Americas beverage business
2012 saw the beverage business weaker than 2011, due to consumers continuing to make healthier choices, competition from Coca-Cola (KO), and increased spending on advertising. Revenue fell 4.5% from 2011, but 2011 was up 10% compared to 2010. Overall revenue rose from $20.4B in 2010 to $21.4B in 2012.
How do the beverage operating profits compare to some competitors? Let's take a look at operating margins, using everyone's fiscal 2012 as a comparison.
Pepsi - 14.21%
Coca-Cola - 22.45%
Dr. Pepper Snapple (DPS) - 18.22%
Coca-Cola Enterprises (CCE) 11.51%
Monster Beverages (MNST) 26.75%
The closest comparisons are probably Dr. Pepper Snapple or Coca-Cola Enterprises, the European bottler. Both Monster Beverages and Coke are growing revenues at a higher pace than the other two on the list.
Right now, Coca-Cola Enterprises trades at 11.5x their 2012 operating income, while Dr. Pepper Snapple trades at 8.8x their 2012 operating income. Based on those two competitors, let's say PepsiCo's beverage division is worth 10x operating income, or $30.4B.
Scenario B - Spin Off Americas Food Division
2012 saw strength in the food part of the company, as Frito Lay grew 2% in North America and 9% in Latin America. Quaker Foods was slightly weaker, falling 1% over the period.
As a reminder, the division posted an operating margin of 23.77% during 2012. How does that compare to some of their competitors?
Mondelez - 8.65%
Hershey (HSY) - 16.72%
General Mills (GIS) - 16.04%
Kellogg (K) - 11.00%
Kraft (KRFT) - 14.56%
Admittedly, these are imperfect matches, since they're all diversified food companies who don't have the snack food exposure that the PepsiCo food division has. Still, they're the best we've got.
None of these companies have operating margins that would compare to the operating margins from the Frito Lay and Quaker divisions. Hershey has the highest of the peer group by some 30%. It's clear from this analysis that these divisions are the jewel in PepsiCo's crown.
The group, on average, trades at 15.25x operating profits. Since Frito Lay and Quaker are producing margins at 30% higher than the best of their competitors, let's give them that premium and assign them a price of 20x 2012's operating profits, (which were $5.5B) or $110B.
PepsiCo has a current market cap of $131B. Rough calculations show the North American food division being worth $110B as a standalone company, with the North American beverage company being worth an additional $30.4B. At this point, investors are getting the European and rest of the world operations for free, and those two divisions generated some $2B in operational profits in 2012.
Conglomerates are known for trading at a discount, and PepsiCo is no exception. They should follow the lead of Kraft, who spun off their North American snack division last year.
Additional disclosure: I am a former employee of PepsiCo.