Could Pepsi Benefit From a Smaller Snack?
If Nelson Peltz is right, all PepsiCo needs to do to supercharge the growth of an investment in the beverage maker is remake itself into a snack foods company. Jettison the smaller and dwindling drinks business, and snatch up global snack maker Mondolez International .
Snacks, through its Frito Lay segment, already account for two thirds of Pepsi's revenues, and is enjoying volume growth across the board. Beverages, on the other hand, are suffering from years of volume declines, and while its Gatorade brand has been revitalized in recent periods, analysts still say the sports-drink market has probably peaked, while nutrition bars as a sub-segment of the snack food line is ascendant.
Where the recent results from Kellogg suggest Peltz has his finger on the pulse of what could make Pepsi a powerhouse investment again -- its Pringles snack foods business contributed 11% growth to sales last quarter -- the quarterly earnings of Snyder's-Lance might offer a different outlook, one more in keeping with the drink maker's go-slow decision.
While revenues jumped 10% over the year ago period, to $439 million, and per-share profits after adjustments of $0.24 were 9% higher, both were well below analyst expectations, and shares of the pretzels-and-chips maker have fallen more than 12% over the past two days. Of course, Snyder's still believes it's on track to witnessing 10% to 12% sales growth for 2013, and adjusted profits rising some 22% to 32% -- a fairly broad range that allows for all sorts of possibilities -- it does allow for the snack food company to still hit Wall Street's targets.
Yet, it also shows that it's not a simple straight-line ramp-up of growth should Pepsi undertake Peltz's plan, even without digesting Mondolez. Not that the billionaire investor suggests it is, instead being a prescription for growth that plays the averages and looks where the market is going; but with the money required to effect the change it would likely create a serious hiccup in operations.
Perhaps Pepsi could take a page from the playbook of both Peltz and management and snatch up a smaller prize like Snyder's-Lance, which could benefit from the drink maker's deep distribution bench. That would give Pepsi another opportunity to bolster its position in a growing market without necessitating the upheavals that full adoption would bring with it.
Without question, the real impetus behind Peltz's program is shedding the beverage business completely, regardless of whether there are smaller or larger snack food acquisitions to swallow. And an investment in Pepsi won't experience the growth necessary to make it worthwhile, unless and until it rids itself of the anchor weighing it down.
The article Could Pepsi Benefit From a Smaller Snack? originally appeared on Fool.com.Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. 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.
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