Shares of PepsiCo, Inc. (NYSE:PEP) popped on news activist investor Nelson Peltz bought a fresh stake in the snack and beverage behemoth. Also juiced on the news were shares of Mondelez International Inc (NASDAQ:MDLZ). Both companies gained more than 3% on speculation Mr. Peltz, along with other investors, will push Pepsi to split its snack and drink business, or merge with Mondelez, or perhaps both.
Pepsi, whose products include Pepsi-Cola, Frito's, Doritos, Quaker brands and Lay’s potato chips, has been in the midst of a turnaround. While its snacks segment has been growing, soda consumption has been waning, an industry trend that began eight years ago. In 2012, soda sales slumped 0.6%. In volume terms, sales slipped 1.8%. Reasons include healthier choices, more options and lower-priced beverages.
But, as a nation, we still drink plenty of the bubbly pop. A recent Yale University Rudd Center for Food Policy and Obesity study found that half of Americans drink soda every day, with the average daily intake at 2.6 glasses daily.
PepsiCo, Inc. (NYSE:PEP) remains committed to its name brand and has rebuffed calls in the past to split up the company by separating the slower growing beverage business from the rest of the company. In response, the company said it's instead focusing on restructuring.
The company has shifted efforts on key global brands and categories in its most important developed markets to drive growth. Pepsi is the No. 1 snack player in many developed markets.
PepsiCo, Inc. (NYSE:PEP) maintains that its strength lies in the fact that while its portfolio is diverse, it's also related. Consumers frequently buy chips and a soda. This, the company says, is complementary. It provides a natural hedge that allows the company to deliver good returns.
And it has delivered nice returns. Last year, core earnings were $4.10 a share. Organic revenue was up 5%. It saved $1 billion in the company’s first year of its productivity program and remains on track to deliver $3 billion in savings by 2015. Through repurchases and dividends, it returned some $6.5 billion to shareholders last year alone.
But a split, and/or a merger with Mondelez International Inc (NASDAQ:MDLZ), could unlock even more rewards. And Mr. Peltz could be be the person to get it done.
Mr. Peltz’s Trian Management Fund has an impressive record when it comes to getting drinks and food companies to split.
In 2007, Mr. Peltz prodded Cadbury, in which he had amassed a sizable stake, to split its drinks and candy business. Cadbury complied just a few months later. Also in 2007, Mr. Peltz built a nice stake in Kraft Foods Group Inc (NASDAQ:KRFT), the nation’s largest food company. He urged Kraft to buy Cadbury (which it did). He then egged Kraft on to separate its slow-growing North American business of grocery staples from its fast growing international snacks business.
And Kraft did. Its snack business was named Mondelez International Inc (NASDAQ:MDLZ), a combination of Latin words meaning delicious world. Among its cache of coveted brand are Toblerone and Cadbury chocolates, Oreo and Chips Ahoy cookies, Trident and Stride chewing gum, and Halls cough drops.
Mondelez is a low-margin, high growth business. Since the split from Kraft, MDLZ has been focusing on region specific product development. For example, it has a heat resistant chocolate that won’t melt in hot climates. In addition, Mondelez International Inc (NASDAQ:MDLZ) is also testing different flavors of its iconic Oreo cookies and Ritz crackers that will appeal to diverse world palates. Since being spun-off, Mondelez has enjoyed a steady ascent.
Kraft is a low growth and high margin business, thanks to lower priced private label competition, rising commodity costs and higher fuel costs. Its brands include Nabisco, Oscar Mayer, Planters, Capri Sun, Crystal Light and Tang brands. In development is a Planter NUTrition line of peanut better that contains nuts and fruits. Kraft has performed well since shedding Mondelez International Inc (NASDAQ:MDLZ). Shares are trading near a 52 week high.
But, Pepsi is the stock in play.
Whole or separate, PepsiCo, Inc. (NYSE:PEP) is an attractive stock. It has a boat-load of world recognized brands. It has a growing presence in emerging and developed markets. And, forward thinking, Pepsi is adding more and more nutritious conscious items.
In April, Pepsi will unveil a new package design for its cola drinks—its first redesign since 1997.
The 16 oz and 20 oz bottles will have an updated label and a swirled grip, making them easier to hold and a better fit for cup holders. A new 12 oz glass bottle with a twisted shape will also debut.
The new packaging is part of Pepsi’s “Live for Now” marketing campaign which also kicks-off in April. The concept of the campaign is to capture the excitement of now.
For PepsiCo, Inc. (NYSE:PEP) shareholders, exciting times are right now.
The article Here’s Why You Should Put Pepsi in Your Portfolio originally appeared on Fool.com and is written by Diane Alter.
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