We’ll start with Pepsico, which was Citadel’s second largest position at the end of June with a total of 4 million shares. Eagle also added shares in the second quarter and reported ownership of 6.5 million. Pepsi is perhaps trading just a bit above pure value levels, at a trailing P/E of 19, but sell-side analysts expect growth next year and the P/E based on 2013’s earnings is only 17. Considering the 3% dividend yield and Pepsico’s low correlation with the broader market (its beta is 0.3), this would be a fair price for a global consumer company with a strong brand. In the first half of 2012 revenue was essentially unchanged from the first half of 2011, but higher COGS drove down earnings. This appears to have been driven by lower margins specifically in the American beverages segment, with the other three segments (American foods, EMEA, and Asia) showing little change in operating income compared to a year ago. Pepsico’s closest peer is Coca-Cola (NYSE:KO). It should be noted that Eagle had an even larger position in Coca-Cola than in Pepsico (partly because the fund apparently places a high value on Warren Buffett’s value-finding ability: Berkshire Hathway (BRK-B) is its largest reported position of all). Coca-Cola pays a lower dividend yield at current prices than Pepsico does, and its earnings multiples edge higher at 21 on a trailing basis and 18 on a forward basis. Coca-Cola does seem to be doing better than Pepsi in recent quarters, with a slight increase in revenue and essentially unchanged earnings in its last quarter compared to the same period in 2011. Between that and its brand, it may well deserve a slightly higher multiple.
Citadel’s buying of Wal-Mart brought its position to 3.2 million shares, well behind Eagle’s 8.5 million but still representing a large increase in Citadel’s holdings over the course of the quarter. The leading discount retailer’s stock also has a low correlation with the market at a beta of 0.4, and it trades at respectable value levels: its trailing price-to-earnings ratio is 15 and the forward multiple is 13. This low pricing comes despite respectable growth last quarter including growth in same-store sales. Between February and July (the fiscal year ends in January), Wal-Mart has increased its revenues 6% and its earnings per share 10% compared to the same period in 2011. The company also raised its guidance for 2012, shrugging off- or possibly expecting benefits from- a questionable consumer environment. Like Pepsico, Wal-Mart is the Blue Team to its rival’s Red: Target (NYSE:TGT) in this case. Target matches Wal-Mart’s earnings multiples- 15 trailing, 13 forward- as its more appealing brand name in certain circles makes up for its smaller scale.
Both of these companies seem well priced compared to their most closely associated peer. We would say that the big-box retailers are underpriced compared to the diversified food and beverage companies, and that Wal-Mart looks to be the cheapest of all as it relentlessly expands its earnings even at its massive size. The diversified food and beverage companies are a tougher call. We think that Coca-Cola deserves a very slightly higher multiple than Pepsico, and that’s exactly what it has. Smart investors are on either side (or, in the case of Eagle, both).
