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Americans can eat only so many Doritos and drink so much Pepsi. And when Michelle Obama reminds us we really shouldn’t be eating and drinking the stuff, the folks at PepsiCo (NYSE:PEP) get nervous. Sure, they say they’re developing healthier foods but the real growth is selling those bad-for-you snacks and drinks (and some “good” foods) in other places around the world.

Take the company’s latest move: a $5.4 billion bid for Russian food company Wimm-Bill-Dann Foods (NYSE:WBD). With the deal, PepsiCo solidifies its presence in a fast-growing economy, racing past arch-rival Coca-Cola (NYSE:KO). Emerging economies are essential for PepsiCo. The only impressive growth in profit (20%) and sales (9%) in 2009 came from the company’s Asia, Middle East & Africa business. But even with double-digit growth in countries like India, that division makes up only 13% of sales. Time to start acquiring. While PepsiCo gains new product lines, including Yogurt and other dairy items, it also will use the latest acquisition to sell more salty snacks (“savory” is the word the company uses) to more Russians.

Investors balked earlier this month at the 32% premium PepsiCo is paying for Wimm-Bill-Dann and Pepsi stock dipped. In 2010, PepsiCo shares lag Coca-Cola and the S&P 500. Now the stock is undervalued, according to YCharts Pro, which rates PepsiCo attractive.


With Wimm-Bill-Dann, PepsiCo would take control of the biggest dairy products and children’s foods seller in Russia. With about $2.6 billion in sales estimated this year, Wimm-Bill-Dann serves a market of about 280 million people in Russia and surrounding countries, according to the company’s website. PepsiCo badly needs growth businesses. In 2009, sales for the company’s biggest division, Frito-Lay North America (Doritos, Lay’s, Cheetos), rose 6%, while other divisions (except Asia-Middle East-Africa) declined. Overall sales were flat at $43 billion.


The Russian deal adds to earnings within a year after the acquisition closes (expected in the middle of 2011). PepsiCo plans to pay for it with cash on hand and short-term borrowing.


YCharts Pro rates PepsiCo’s fundamentals strong with a 10 out of 10. In addition to acquisitions, the company uses its cash to pay dividends.


But Pepsi’s revenue growth is a challenge and while the company’s marketing machine cranks out news about healthier snacks — Frito Lay North America pledges to make half its products with “all natural ingredients” by the end of 2011 — the kinder, healthier PepsiCo is really counting on growth from new markets.

Disclosure: No position

Source: Investors Take Dim View of Pepsi's Russian Deal as Prices Fall