After 10 years in business, the Garza family sold their company Siete Foods to PepsiCo(NASDAQ: PEP) for a cool $1.2 billion. The deal for Siete was announced back in October but closed this January. Pepsi is an enormous business, and for it $1.2 billion is relatively small. But any purchase over $1 billion is still noteworthy.
The surprising thing for some investors may be that Siete Foods doesn’t have a single beverage in its product portfolio, let alone any carbonated beverages. Rather, the company makes food products that cater toward people looking for grain-free and dairy-free options in Mexican-American food.
The acquisition of Siete Foods dovetails 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’s surprising to you that Pepsi is acquiring food companies, then it’s likely that you don’t understand Pepsi’s business. In fact, food products are one of the best reasons to invest in the company today.
Over the last 12 months, Pepsi has generated revenue of over $90 billion. But a relatively small percentage of this is attributable to beverage sales in North America. In the company’s fiscal third quarter of 2024 (which ended in early September), the North American beverage division only accounted for 31% of the business.
Nearly 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 sales from food and beverages in international markets.
However, snacks and food in North America are the more important parts of Pepsi’s business, because they’re more profitable by a mile. The company’s North American Frito-Lay division alone accounted for 39% of its total Q3 operating profit; in comparison, just 24% of operating profit came from the North American beverage unit.
To drill down further, Pepsi’s Quaker Foods division in North America is small at just 3% of the company’s overall revenue in Q3. But again, it commands better profits. Quaker Foods in North America had a Q3 operating margin of 15%, compared with just an 8% margin for beverages in North America.
Given the size of Pepsi’s non-beverage portfolio and looking at the margins, it’s not surprising that the company is doubling down with acquisitions such as Sabra and Siete Foods. It’s good business.
When it comes to investing in Pepsi stock, it’s important to have realistic expectations. Over the last 10 years, Pepsi has averaged only a 7% annual gain, according to Macrotrends. Returns were positive, which counts for something — but they weren’t anything to write home about.
These pedestrian returns for Pepsi stock were due to its similarly pedestrian rate of revenue growth. Being one of the biggest businesses in the world already, and in a low-growth industry, means that it’s hard to grow fast. And growth is important for stock returns.
That said, PepsiCo stock isn’t without its merits. For starters, the company’s diverse and beloved product portfolio makes it one of the safest businesses in the world, so investors can reasonably expect stable profits. And because its stock price went down in 2023 and 2024, it’s now cheaper than usual.
Pepsi’s price-to-earnings (P/E) ratio of 22 is below its 10-year average P/E valuation of 26. And with a dividend yield of over 3.5%, the income potential has never been higher; that’s significant because Pepsi is an ultrareliable Dividend King.
PEP PE Ratio data by YCharts.
Finally, Pepsi has generated 39% of its revenue from international markets through the first three quarters of 2024. As a whole, revenue in international markets is growing while it’s declining in North America. Moreover, profits are improving in international markets with scale. Based on these trends, it’s possible that profit growth outpaces revenue growth for Pepsi in the coming years, which would provide the stock with an added boost.
Pepsi is acquiring food companies because food is a big part of the business, and provides better-margin revenue than carbonated beverages. The company may not post impressive growth numbers due to its size. But management is focusing on its better opportunities, the stock is cheap, and international growth could provide a boost as profitability improves.
All that said, PepsiCo shares aren’t my best pick for outperforming the S&P 500 over the next three to five years. But investors could do a lot worse than Pepsi. And the stock does have merit from the perspectives of both safety and dividends, 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 Beverages was originally published by The Motley Fool
