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Poorly-Received Russian Deal Helps Make Pepsi Shares Cheap

 December 31, 2010 09:06 AM
 


Americans can eat only so many Doritos and drink so much Pepsi. And when Michelle Obama reminds us we really shouldn't be eating and drinking the stuff, the folks at PepsiCo (PEP) get nervous. Sure, they say they're developing healthier foods but the real growth is selling those bad-for-you snacks and drinks (and some "good" foods) in other places around the world.

Take the company's latest move: a $5.4 billion bid for Russian food company Wimm-Bill-Dann Foods (WBD). With the deal, PepsiCo solidifies its presence in a fast-growing economy, racing past arch-rival Coca-Cola (KO). Emerging economies are essential for PepsiCo. The only impressive growth in profit (20%) and sales (9%) in 2009 came from the company's Asia, Middle East & Africa business. But even with double-digit growth in countries like India, that division makes up only 13% of sales. Time to start acquiring. While PepsiCo gains new product lines, including Yogurt and other dairy items, it also will use the latest acquisition to sell more salty snacks ("savory" is the word the company uses) to more Russians.

[Related -Coca-Cola Company (KO) Dividend Stock Analysis]

Investors balked earlier this month at the 32% premium PepsiCo is paying for Wimm-Bill-Dann and Pepsi stock dipped. In 2010, PepsiCo shares lag Coca-Cola and the S&P 500. Now the stock is undervalued, according to YCharts Pro, which rates PepsiCo attractive.

[Related -Pepsico, Inc. (PEP) Dividend Stock Analysis]

PEP, KO, SPY Chart by YCharts

With Wimm-Bill-Dann, PepsiCo would take control of the biggest dairy products and children's foods seller in Russia. With about $2.6 billion in sales estimated this year, Wimm-Bill-Dann serves a market of about 280 million people in Russia and surrounding countries, according to the company's website. PepsiCo badly needs growth businesses. In 2009, sales for the company's biggest division, Frito-Lay North America (Doritos, Lay's, Cheetos), rose 6%, while other divisions (except Asia-Middle East-Africa) declined.


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