PepsiCo (PEP, Financial) has had a rocky ride these past few months especially as the company neared its 52-week low in late February. As of March 14, PepsiCo is back on the upswing as it once again climbed above $80, closing at $81.60 per share. However, competition is stiff and global markets are becoming increasingly volatile for the food and beverage company giving 2014 an outlook that is potentially just as shaky as the last year.
Causes for decline
One major contribution to the recent decline that PepsiCo witnessed in February is the ongoing fight with majority stakeholder, Nelson Peltz, over whether or not to split the company’s declining beverage division from its successful snacks division. The activist investor argued in his 37 page letter to the company that the split would allow for a greater focus on the more profitable snack sector. However, other investors and board members have come out in support of the company’s rejection of Peltz’s proposal, arguing that the two businesses will be more profitable for investors if they remain together.
However, this ongoing fight with Nelson Peltz pales in comparison to the potential risks we can expect to see in emerging and global markets. PepsiCo has invested a lot in these markets over recent years. As large emerging economies like China begin to stagnate and foreign currencies begin to decrease in value, the company stands to suffer significant losses. A major source of worry comes from Russia, PepsiCo’s second largest market after the United States. With recent tensions surrounding the Ukraine conflict, this $5 billion food and beverage market is at exceptionally high risk. However, emerging market volatility alone is not reason enough to sell your position in PepsiCo as there is still hope for stabilization and growth in the future. As for the Russian market, the company will only really be affected if the conflict takes an especially dark turn.
Positive outlooks and growth areas
Wall Street has expressed confidence in Indra Nooyi, the current CEO of PepsiCo. Her rejection of Peltz’s proposal for a split with Frito Lay has, therefore, earned some general support as the market believes she will do what is best for the company. Strong leadership, especially confidence in that leadership, is one of the keys for success in business and PepsiCo has that strength and confidence.
Even better news comes from China and the report of an important new deal to be one of the primary beverage suppliers, along with its Chinese partner Tingyi, in Shanghai’s new Disneyland theme park slated to open in 2015. This represents not only a major win for PepsiCo but a significant loss for Coca Cola (KO, Financial) and lends further credence to Nooyi’s insistence that the company’s food and beverage businesses should not be split. Pelz’s proposal is perhaps a little premature as the declining demand for soft drinks in the United States is clearly not representative of global market trends.
Influential investor, Warren Buffet, has also expressed his bullish outlook for PepsiCo and other Western companies despite the growing conflict between Russia and the Ukraine. Buffet argues that even in times of war when money begins to lose value, it’s better to invest in assets that have the potential to recover and advance over time rather than hold onto cash while it depreciates in value.
Conclusions
PepsiCo has faced and continues to face many challenges in the highly competitive food and beverage market. As demand for soft drinks and other sugary beverages decreases in the United States, the company’s profits have started to take a somewhat downward turn. However, it’s snack business is still going strong and there is major potential for increased revenue from its beverage sales in global markets. For investors, PepsiCo makes itself attractive as a value stock as well as a dividend stock; having increased its dividends consistently for the past 41 years which we can expect to continue well into the future.
