PepsiCo's (PEP 0.27%) recent earnings report showed that the company had a very successful year. PepsiCo once again outperformed close rival The Coca-Cola Company (KO 0.91%). PepsiCo is really starting to outpace Coca-Cola, which brings to mind a critical decision made by PepsiCo management one year ago.
Investors likely recall that PepsiCo faced a great deal of pressure back then to split itself up. In a high-profile campaign led by activist investor Nelson Peltz of Trian Fund Management, PepsiCo was urged to separate its beverage unit from its food business. The reasoning was that each company could stand as an independent entity, and that the two businesses would collectively earn a higher valuation than they do presently.
Yet PepsiCo resisted. PepsiCo Chief Executive Officer Indra Nooyi ultimately decided the company would be better if left intact. One year later, it's clear that she was absolutely right.
PepsiCo expands its lead over Coca-Cola
PepsiCo's organic revenue grew 5% last quarter, one full percentage point above Coca-Cola's growth. This capped off a very strong year for PepsiCo, in which it solidly outperformed Coca-Cola.
Last year, Coca Cola's revenue declined 2% and its earnings per share fell 16%. To be fair, unfavorable currency fluctuations took a large bite out of Coca-Cola's results. However, even excluding the effects of currency, Coca-Cola struggled. Global case volumes of Coca-Cola's sparkling beverages grew by just 1% for the fourth quarter and the full year, and the core Coca-Cola brand was flat for the year.
The biggest difference between Coca-Cola and PepsiCo is that PepsiCo's food business is very strong and putting up excellent growth, particularly in emerging markets. Like Coca-Cola, PepsiCo also had a tough currency environment to deal with, but it still put up strong organic growth.
Excluding currency, revenue and earnings per share grew 4% and 6%, respectively, in 2014. Food and snacks did most of the heavy lifting for PepsiCo, as the company's revenue is evenly split between food and beverage.
PepsiCo's Frito-Lay division, which holds the key snacks brands, produced 3% organic revenue growth last year, thanks to rising volumes. Segment operating profit grew 6%, thanks to revenue growth, cost savings, and lower commodity costs. PepsiCo's food business did even better outside North America. For example, the Latin America foods division grew organic revenue by 10% last year, along with 9% growth in operating profits.
PepsiCo's performance is not only impressive on its own, but especially since this time last year, Nooyi faced criticism for her decision not to split up the company. In hindsight, she was absolutely right to keep PepsiCo intact.
PepsiCo is indeed better together
Last year, Peltz urged PepsiCo to split itself up. In what he believed would be accretive to shareholders, Peltz wanted PepsiCo to spin off its beverages unit. This, he theorized, would create value because the two companies would garner a higher valuation separately than together.
His pressure was so strong that it forced PepsiCo management to issue an official response. Along with PepsiCo's fourth-quarter 2013 earnings report, the company stated it would not break itself up.
Nooyi reiterated that the Pepsi brand was still profitable, despite the lack of strong growth in soda. Furthermore, and more importantly, keeping both the food and beverage businesses together provided both with significant scale and leverage benefits with retailers. This is the critical point that Peltz and others urging a break-up missed.
As a PepsiCo shareholder throughout this period, I was adamant early on that I did not want to see the company break itself up. I detailed my position in this article. I'm very glad that PepsiCo did not bow to pressure and split up the company. I look forward to holding my shares for many years to come.
