PepsiCo Expanding Its American Portfolio With Dairy Products

Jul.11.12 | About: PepsiCo Inc. (PEP)

After signing a partnership with the German dairy company, Theo Muller Group, PepsiCo Inc. (NYSE:PEP) decided to release its first set of dairy products. As dairy consumption increases in the United States and soda consumption decreases, this is a good chance for PepsiCo to increase its revenues. Similarly, this is also a good chance for Theo Muller Group to get exposure to the fast-growing American market.

PepsiCo has a successful dairy business outside of the United States, and this will be the company's first attempt at dairy products in the country. The company's first products will involve yogurt. Theo Muller Group has a lot of expertise and experience in dairy products and PepsiCo can learn a lot from this company. The company's yogurt products are well known in Germany and other parts of Europe.

The yogurt products will be first introduced to the Northeastern U.S, market followed by Mid Atlantic U.S. market. In 2013, the product will be introduced to other parts of the country as the partnership's production plant in New York will be ready for distribution by then. The 363,000-square-foot plant will be able to produce $5 billion cups of yogurt products annually.

In addition to Theo Muller Group's existing dairy product portfolio, PepsiCo will invest in research activities in order to come up with completely new dairy products for the U.S. market. PepsiCo is known to be an innovative company in the snacks industry with a large portfolio of well-diversified products. PepsiCo will continue to see most of its near-term growth through launching new products in the existing markets.

Some of PepsiCo's biggest strengths are the company's distribution channels, strong brand name and large marketing capability. The company is mostly known for its soda brand; however, it plans to derive a smaller percentage of its overall revenues from the soda business in the next decade. Both The Coca-Cola Company (NYSE:KO) and PepsiCo are shifting towards healthier options in order to take advantage of the recent trends of eating and drinking healthier.

The market for dairy foods is expected to grow much faster than the market for any other type of food in the next five years. PepsiCo targets annual global revenue of $30 billion from healthy snacks by the end of the decade. Recently, the company acquired Wimm-Bill-Dann from Russia and formed a strong partnership with Saudi Arabia's Almarai. Both companies are the biggest dairy producers in their countries. PepsiCo is definitely doing a good job of tracking the latest trends and acting accordingly in order to maximize its gains in the foreseeable future. As an investor, I love it when a company's management is proactive about taking advantage of the trends in the consumer world.

By 2016, nearly 100 million households are expected to buy yogurt products, generating annual revenue of $9 billion. Currently, each consumer who buys yogurt products spends about $60 per year on these products. The number is up from $49 a few years ago, and it is expected to continue to grow at a similar rate in the next few years.

The joint venture between PepsiCo and Theo Muller Group is named Quaker Dairy. The first products will be Theo Muller's existing products that are popular in Europe and the distribution will start as early as this month. In time, PepsiCo will release new products as it will create variants of Theo Muller Group's existing products through innovation.

Currently, PepsiCo has a trailing P/E ratio of 17. The company is expected to earn $4.18 this year and $4.81 next year, giving it forward P/E ratios of 16 and 14, respectively. From February to early March, the company was undervalued, but at the moment, it is fairly valued.

The company's margins currently suffer from high advertisement and marketing costs; however, the margins will find some relief in lowered commodity and material costs. PepsiCo was able to raise prices of some of its products last year in order to cover some of the increased costs and I believe that it will be a while before it can raise its prices again.

The company has a solid history of dividend growth. Income investors could get in the train anytime; however, growth investors should seek out a better entry point. I like PepsiCo and all that it has to offer, but I would look for a lower entry point or increase my number of shares. Any price between $60 and $65 would be a good entry point for long-term investors of PepsiCo.

Disclosure: I am long PEP, KO.