Ignore the Activist Investors: Pepsi Still Satisfies
Having outperformed its chief nemesis in some critical metrics over the past couple of quarters, I believe management is on the right track. But just like eating one potato chip, investors are far from content.
Pepsi shareholders, led by activist investor Nelson Peltz, are demanding drastic operational changes. They are pleading for the company to breakup its beverage business from its snack food operation. They believe Pepsi would generate significantly more value through a key acquisition. These demands are being made despite the fact that Pepsi shares have led Coca-Cola's by as much as 15% over the past several months.
The name at the top of investors' shopping list is snack-food giant Mondelez
For that matter, weak volume and compressed margins have been the story within the entire food and beverage sector. As I've pointed out recently, Pepsi is battling a shift in beverage consumption due to (among other things) nutritional fears. Obesity has become an issue for nearly 40% of Americans and has become a global concern.
To that end, acquiring Mondelez, which specializes in sweet snack foods, won't fix this. Nor will it help spur higher beverage consumption. Pepsi's Frito-Lay business, which posted 4% growth in the fourth quarter, continues to be the strength of the overall operation. Not to mention, almost all of the growth was organic.
Thus, Pepsi's salty snacks are outperforming Mondelez's sweet snacks by a decent margin. As for Pepsi "catching up" to Coca-Cola, given that Pepsi's year-over-year revenues increased 1% this quarter compared to Coca-Cola's 4% decline, an argument can be made that Pepsi has already surpassed its chief rival. This is now the third consecutive quarter in which Pepsi has bested Coke in terms of performance.