Coca-Cola (KO) gets all the press, especially with longtime supporter Warren Buffett consistently adding to his position year after year. Pepsi has encountered growing pains of late, especially in its beverage business, which has struggled to gain traction against Coke. Pepsi's snacks division (Frito-Lay), on the other hand, has maintained a dominant position, with a 39% share of the U.S. snack market, and impressive growth overseas with third-quarter China and India snack sales up 31% and 26%, respectively.
Rumors have swirled surrounding the potential separation of the snacks and beverage divisions, yet management has worked hard to support its "Power of One" mission, claiming the synergies gained from keeping the two are immeasurable.
There have also been grumblings regarding CEO Indra Nooyi and her recent focus on healthier offerings. Investors are concerned that Nooyi may be taking her eye off of the beverages business, due to the continued market-share losses to Coke. The company's Global Nutrition Group aims to double revenue to $30 billion by 2020.While I can't knock the success of Coca-Cola, I prefer Pepsi's stock over Coke's for a few reasons. One, Coke lacks a diversified business line, including snacks. Two, Pepsi is being valued solely as a beverage concern and deserves a higher multiple based on the growth in its snacks business. Three, even with management defending its stance to keep the company whole, I think that given the surrounding chatter, something is likely to happen, whether a spin-off or some sort of management change. That could only be a good thing for shareholders. I did a sum-of-the parts analysis on Pepsi and came up with a valuation of $76 (20% upside). I applied a 17 multiple to the consistent Frito Lay snacks business (value of $23 per share), 11 multiple to Quaker Foods (value of $3/share), 13 multiple for Pepsi America Beverage (value of $19 share), 25 multiple to the fast-growth Latin American foods business (value of $10 share), 15 multiple to the European snack and beverage business ($11 per share) and a 21 multiple for the EMEA beverage and snacks business (value of $10 per share).