Ignore the Activist Investors: Pepsi Still Satisfies

NEW YORK (TheStreet) -- It seems fitting that shareholders of PepsiCo (PEP) -- which owns the rights to the motto, "Bet you can't eat just one" -- are never satisfied. While no one would dare call Pepsi a slouch, the company has always had bigger ambitions than to play second fiddle to rival Coca-Cola (KO).

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 (MDLZ). While I do understand the rationale behind this proposed acquisition, I don't subscribe to the notion that it will immediately remedy what is believed to be ailing Pepsi. Let's not forget, while volumes have indeed been on the decline, this has also been an issue for both Coca-Cola and other rivals like Dr. Pepper Snapple (DPS).

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.


Now I'm not suggesting that Pepsi is "better" than Coke. I won't get into that sort of debate. But Pepsi has beaten estimates in nearly every meaningful category amid significant headwinds. And I have to question why is now the time for activist investors to want to mess with something that clearly isn't broken. Management knows what it's doing.

All told, making a bold push for Modelez seems ill-timed, if not completely misguided. Besides, I don't believe Mondelez is an exceptional bargain, given that shares are sitting near their 52-week highs. And let's assume that Pepsi does make this acquisition. There's now the risk that Pepsi's management will not be able to execute to a level that exceeds the company's current output.

So although there are reasons to deal for Mondelez, I believe the greater risk would be to take the sort of action that disrupts Pepsi's current momentum. And Mondelez hasn't exactly performed to a level that deserves the sort of premium it would command. Until there is more compelling evidence that drastic action needs to be taken, I will have to side with management to maintain Pepsi's current structure as a diversified food and beverage operation.

Pepsi stock presents tremendous value here at around $78 per share. To the extent that management can execute on its long-term plans to improve operating margins, I don't see how this stock will ever go flat. And with the company still in the midst of $3 billion stock buyback, $90 per share seems a reasonable assumption in the next 6 to 12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

More from Opinion

It's Dumb to Think Legalizing Weed Is Still a Political Issue

It's Dumb to Think Legalizing Weed Is Still a Political Issue

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider