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Pepsi Just Made a $1.2 Billion Acquisition of Something That Has Nothing to Do with Carbonated Drinks

    After 10 years in business, the Garza family sold their company to Siete Foods PepsiCo (Nasdaq: pep) for a cool $1.2 billion. The deal for Siete was announced in October but closed in January. Pepsi is a huge company, and for that, $1.2 billion is relatively small. But any purchase over $1 billion is still notable.

    What may be surprising to some investors is that Siete Foods doesn't have a single beverage in its product portfolio, let alone carbonated drinks. Rather, the company makes food products that target people looking for grain-free and dairy-free options in Mexican-American food.

    The acquisition of Siete Foods fits in nicely with Pepsi's November acquisitions of Sabra and Obela. Pepsi had already owned half of both joint ventures, but moved to acquire the rest, bringing more food products into Pepsi's portfolio.

    If it surprises you that Pepsi is acquiring food companies, then it's likely you don't understand Pepsi's business. In fact, food products are one of the best reasons to invest in the business today.

    In the past 12 months, Pepsi has generated sales of more than $90 billion. But a relatively small percentage of this is due to liquor sales in North America. In the company's fiscal third quarter of 2024 (which ended in early September), the North American beverage division was just 31% of the company.

    Almost as big as beverages, 28% of Pepsi's Q3 revenue came from snacks and food in North American markets. The company generates the remainder of its revenue from food and beverages in international markets.

    However, snacks and food in North America are the most important parts of Pepsi's business, as they are more profitable by a mile. The company's North American Frito-Lay division alone accounted for 39% of its total Q3 operating profit; By comparison, only 24% of operating profit came from the North American beverage unit.

    Going further, Pepsi's Quaker Foods Division in North America is small at just 3% of the company's overall sales in Q3. But again, it offers better profits. Quaker Foods in North America had a Q3 operating margin of 15%, compared to just an 8% margin for beverages in North America.

    Considering the size of Pepsi's non-boss portfolio and looking at its margins, it's not surprising that the company is doubling down with acquisitions like Sabra and Siete Foods. It's a good business.

    When it comes to investing in Pepsi stock, it's important to have realistic expectations. Over the past 10 years, Pepsi has averaged only a 7% annual profit, according to Macrotrends. Returns were positive, which counts for something – but they were nothing to write home about.