After running a successful family business for a decade, the Garza family decided to sell Siete Foods to PepsiCo (PEP 0.34%), pocketing a substantial $1.2 billion from the transaction. The deal, initially announced last October, only finalized this January. While PepsiCo is a massive company where $1.2 billion might seem modest, any transaction over a billion dollars definitely warrants attention.
Some investors might be taken aback to learn that Siete Foods doesn’t include a single beverage in its lineup, let alone the fizzy drinks Pepsi is famous for. Instead, Siete focuses on delivering grain-free and dairy-free options within the Mexican-American food segment.
The acquisition of Siete Foods aligns perfectly with Pepsi’s recent moves in November to acquire Sabra and Obela. Having already held a 50% stake in both ventures, Pepsi further expanded its food product range by purchasing the remaining shares.
If you find it surprising that Pepsi is heavily investing in food companies, you might not fully grasp the intricate nature of Pepsi’s operations. In fact, the company’s foray into the food sector greatly enhances its attractiveness to investors.
Pepsi’s Expansive Portfolio
In the past year, Pepsi’s revenue exceeded $90 billion, with just a small slice stemming from North American beverage sales. By the end of its fiscal third quarter in 2024, which wrapped up in early September, the North American beverage division made up only 31% of Pepsi’s total business.
Close on its heels, snacks and food comprised 28% of Pepsi’s Q3 revenue in North America. The rest of Pepsi’s income is a mix from its international food and beverage ventures.
However, the real moneymaker lies in its North American snacks and food segment due to markedly higher profitability. For instance, the North American Frito-Lay division alone constituted 39% of Pepsi’s entire operating profit in Q3, whereas the beverage unit only contributed 24%.
To delve deeper, the North American Quaker Foods division may be relatively small, representing just 3% of Q3’s overall revenue, but its profitability is impressive. During Q3, it boasted an operating margin of 15%, overshadowing the 8% margin from North American beverages.
With such a substantial and profitable non-beverage repertoire, Pepsi’s pursuits of acquisitions like Sabra and Siete Foods certainly make good business sense.
Assessing Pepsi Stock for Investors
When considering investing in Pepsi stock, tempering expectations is vital. Over the past decade, Pepsi has delivered a modest average annual gain of 7%, as per Macrotrends. While the returns have been positive, they haven’t been spectacular.
These average returns are mainly attributed to its slow revenue growth rate. Being a colossal entity in a low-growth sector means it’s challenging to accelerate growth, which is crucial for boosting stock returns.
That said, PepsiCo’s stock does offer compelling advantages. Its extensive and well-loved product assortment positions it as one of the safest bets globally, offering investors reliable profit stability. Moreover, with the stock price dip in 2023 and 2024, it’s currently more affordable than typical.
Pepsi’s price-to-earnings (P/E) ratio stands at 22, lower than its average P/E valuation of 26 over the past decade. Coupled with a dividend yield exceeding 3.5%, the potential for income is currently significant, underscoring Pepsi’s status as a reliable Dividend King.
PEP PE Ratio data by YCharts.
Moreover, in the first three quarters of 2024, 39% of Pepsi’s revenue stemmed from international markets. While revenue in North America is on a downturn, its international markets are experiencing growth, with profits improving as they scale. Given these trends, profit growth could outstrip revenue growth for Pepsi in the coming years, potentially giving its stock an extra boost.
Conclusion
Pepsi’s acquisition streak in the food sector is primarily because of its higher-margin revenue compared to carbonated drinks. While the company might not showcase dazzling growth figures due to its size, strategic focus on more promising opportunities, combined with attractive stock pricing and international growth prospects, could provide a significant uplift as profitability increases.
While PepsiCo shares might not be my top choice for beating the S&P 500 over the next three to five years, they’re certainly a solid option. With its appeal largely stemming from safety and dividends, Pepsi stock is a viable option to consider for investors.
