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.
These pedestrian returns for Pepsi stock were due to the similarly pedestrian rate of sales growth. Being one of the largest companies in the world, and in a low-growth industry, means it's difficult to grow quickly. And growth is important for stock returns.
That said, PepsiCo stock is not without its merits. For starters, the company's diverse and beloved product portfolio makes it one of the safest companies in the world, so investors can reasonably expect stable profits. And because the share price fell in 2023 and 2024, it is now cheaper than normal.
Pepsi's price-to-earnings ratio (P/E) of 22 is below its 10-year average P/E valuation of 26. And with a dividend yield of over 3.5%, its income potential has never been higher; That's important because Pepsi is an ultra-reluctant dividend king.
PEP PE ratio data by Ycharts.
Finally, through the first three quarters of 2024, Pepsi generated 39% of its revenue from international markets. As a whole, sales are growing in international markets while declining in North America. Furthermore, profits in international markets improve with scale. Based on these trends, it's possible that earnings growth will outpace revenue growth for Pepsi in the coming years, which would provide additional boost to the stock.
Pepsi acquires food companies because food is a big part of the business and offers better margin revenue than carbonated drinks. The company may not post impressive growth metrics due to its size. But management is focused on its better opportunities, the stock is cheap and international growth could provide a boost as profitability improves.
All that said, PepsiCo stock isn't my top pick for making things better S&P 500 in the next three to five years. But investors could do a lot worse than Pepsi. And the stock has merit from both safety and dividend perspectives, which could be important in making a decision.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Pepsi Just Made a $1.2 Billion Acquisition of Something That Has Nothing to Do with Carbonated Drinks, was originally published by the Motley Fool
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