There's More Than 1 Way to Win With PepsiCo

PepsiCo has multiple ways to reward shareholders: It could beat Coca-Cola, or it could merge with Mondelez International. So many ways to win gives shareholders reason to hold on.

Jul 24, 2014 at 9:00AM

As soon as it looked like his battle to break up PepsiCo (NYSE:PEP) was lost, activist investor Nelson Peltz emerged to reaffirm his commitment to splitting the company in two. Peltz told attendees of the Delivering Alpha conference in New York that he would consider initiating a proxy contest to wrest control of PepsiCo's board. PepsiCo's beverage unit underperformed Coca-Cola's (NYSE:KO) in 2013, but the gap has since closed. Still, Peltz's original plan -- to spin off the beverage unit and acquire Mondelez International  (NASDAQ:MDLZ) -- would be an exciting move that could unlock shareholder value. Here's why PepsiCo investors will win no matter what happens.


Better together
If you eat a bag of Fritos, do you reach for a beverage? For PepsiCo CEO Indra Nooyi, the answer is an adamant "yes." Nooyi is decidedly against breaking up her company, arguing that snacks and beverages complement one another. "[Snacks and beverages] are better together, not just in the United States, but around the world," Nooyi said in an interview on CNBC.

The unique combination of the world's leading salty snacks business with the world's No. 2 soft drink business may give PepsiCo a slight edge over Coca-Cola. PepsiCo says it exploits over $100 million worth of operating synergies from the combined snacks and beverage operations.

Coca-Cola must make do without the synergies in its cost structure. Unlike PepsiCo, Coca-Cola is wholly reliant on the beverage market. What Coca-Cola lacks in diversification, however, it makes up for in profitability. The world's largest soft drink company's North American and Latin American operations generated about $5.3 billion in operating income on $26.5 billion in revenue last year. That's a 20% operating margin.

By contrast, PepsiCo Americas Beverage's operating margin was just 14% on $21 billion in revenue during 2013. Although product mix influences profit margin – soft drinks account for most of Coca-Cola's beverage revenue while non-soda beverages account for most of PepsiCo's – it's clear that $100 million is not a game changer on billions in revenue. In fact, the cost savings amount to just 1% of PepsiCo's total operating profit. As a result, the beverage business needs to grow in order to justify the combination.


A better option?
Although there's a strong case for keeping the company intact, there may be an even stronger case for splitting it up. Instead of savoring the small boost to operating profit, PepsiCo could spin off its beverage business and merge with international snacks giant Mondelez International.

The two snack companies are a perfect fit. Between 50% and 70% of PepsiCo's food profits come from food sold in the Americas. Mondelez, on the other hand, makes most of its money in other parts of the world. Nearly two-thirds of Mondelez's profits come from outside the Americas, with 42% coming from Europe. A merger would give both companies exposure to geographies where the other has greater scale and distribution.

In addition, the companies' products complement one another. Mondelez's snack brands – which include Wheat Thins, Ritz crackers, and Oreo – attract the same customers as PepsiCo's portfolio of chips, dips, and oatmeal. The two companies are a natural fit.

Why PepsiCo investors win no matter what
At 20 times earnings, "investors win no matter what" may not be an entirely safe statement. Still, the company's options give investors more ways to make money. If PepsiCo's beverage business regains its footing and starts growing as quickly as it has in the past, investors will be rewarded with a higher stock price.

However, if the beverage business continues to struggle, Peltz could wage a proxy battle that results in a spinoff. Foolish investors know that spinoffs often outperform the market, making corporate divorces a pleasant affair for shareholders.

As a result, PepsiCo shareholders can cheer if profits go up and cheer if profits go down. For how many other companies can you say the same?

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Ted Cooper is a member of an investment club that owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers