PepsiCo: Plan to Turn Around Lagging Performance Looks Cogent, but Execution Is Key

Key Morningstar Metrics for Pepsico

• Fair Value Estimate: $164
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

On Sept. 2, active investor Elliott Investment Management disclosed a $4 billion stake in PepsiCo PEP and proposed a series of measures to the firm’s management and board to boost PepsiCo’s financial performance and share price. PepsiCo stock rose 2% on the news.

Why it matters: Despite owning household names in soft drinks and snacks, PepsiCo has been slow to boost its sluggish top line and weak margins in North America (60% of sales) in the past two years. We see no easy fix but expect Elliott’s involvement to help speed up changes at the consumer behemoth.

• Elliott’s plans for PepsiCo to adjust its brand portfolio and increase its focus on innovation efficiencies look cogent. We think the divestiture of noncore brands is implementable in the near future, but we remain skeptical about refranchising the soda business, which is highly complex and time-consuming.
• Elliott now ranks among the top five investors in PepsiCo excluding index funds, although with a 2% stake, we expect the active investor to seek changes mainly through collaboration with the firm. It adopted a similar approach in its recent involvements at Starbucks and Constellation Brands.

The bottom line: We don’t plan any material change to our $164 fair value estimate for wide-moat PepsiCo, leaving shares slightly undervalued as the market seems to underestimate its ability to revive the US snack business in the coming quarters.

• We believe the firm remains on track to deliver the 4% sales growth and 15% operating margins that we forecast for the 10-year period, as it steps up innovation and marketing for the snack business and sharpens the focus on extracting synergies between the snack and beverage units.