The Week That Was: Beverage Stocks

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PepsiCo

This week we take a look at the new developments associated with the non-alcoholic drinks maker PepsiCo (NYSE:PEP) and the brewer Anheuser-Busch InBev (NYSE:BUD). Both these beverage giants have one problem in common — declining drink sales in the U.S. While PepsiCo has been struggling to derive growth in the Pepsi Americas Beverages division, especially in the carbonated soft drinks (CSD) category, AB Inbev is losing out to imported and craft beers in an already ailing U.S. beer market. The problem of a saturating CSD and beer market has prompted PepsiCo and AB InBev respectively to come up with new business strategies in order to spur sales.

PepsiCo

PepsiCo has been suffering declining soda sales in the domestic market, as consumers continue to shift away from calorie and sugar fueled soft drinks. The performance of PepsiCo’s CSDs, whose sales fell by 8% between 2011-2013, seems worse in comparison with the company’s snacks division, which has been thriving. The snacks industry in the U.S. is still growing, and its industry value added (IVA), i.e. an industry’s contribution to the economy, is estimated to rise at a CAGR of 4.6% through 2019. Snacks have brighter growth prospects and also fatter margins, which amplified investor pressure on PepsiCo in the last couple of years, to spin-off the beverages division, allowing the snacks division to unlock its true potential.

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We estimate a $91 price for PepsiCo, which is roughly 7% below the current market price. The stock rose 1.7% in the last week.

See Our Complete Analysis For PepsiCo

Leading the push for separating the company’s two businesses was the activist investor Nelson Peltz, CEO of Trian Partners hedge fund, which holds a 1.19% stake in PepsiCo. However, it seems that the two opposing sides have called a truce, with PepsiCo electing William Johnson, an advisory partner at Trian Fund Management, to its board, recently. While the management has remained committed to deriving cost benefits from synergies between the two businesses, investors have argued how the cost-cuttings at each company, following the split, would more than make up for their current synergies. Cost-cuts resulting from the split, for example, a possible consolidation of PepsiCo’s four U.S. headquarters into two, could result in lower corporate overhead for each company and more than offset the present synergies. This new development, i.e. appointment of Johnson to PepsiCo’s board, could either mollify some of the pressure to spin-off beverages, or could possibly hand more power to Trian to force the issue, this time from the inside.

Anheuser-Busch InBev

AB InBev recently announced its acquisition of the Seattle-based Elysian Brewing Company, the fastest-growing brewer in Washington, to add to its craft beer portfolio. The U.S. is the single largest market for AB InBev, and as the overall volumes in the country’s beer market continue to decline, organic growth for Anheuser in the domestic market could be limited in the future. Beer consumption in the U.S. declined by 6% from 2009-2013, with the exception of a slight rise in 2012 due to new innovative product launches. Anheuser holds a massive 47% share in the U.S. mainly on the back of large volumes for domestic beer brands Budweiser and Bud Light. However, volumes for the brewer have been declining in the U.S., as the demand for domestic beers remains tepid.

We have a $116 price estimate for Anheuser-Busch InBev, which is roughly 3% below the current market price. The stock jumped 7.1% in the last week.

See Our Complete Analysis For Anheuser-Busch InBev

In a bid to derive growth in the U.S., AB InBev has looked to acquire thriving craft brewers, a segment which is growing at a fast pace in the country’s beer market. Last month, Anheuser acquired Oregon’s 10 Barrel Brewing, to add to the company’s craft beer portfolio in the U.S., which already comprised the likes of Blue Point and Goose Island brands. Elysian Brewing Company sold around 5.87 million liters of beer in 2014, while 10 Barrel sold around 4.7 million liters of beer, much lower than the 12,000+ million liters of volume sales for Anheuser in North America. Each individual craft brewer that AB InBev buys doesn’t add a meaningful revenue stream for the company, but the brewer’s strategy seems clear — to make inroads in the fast-growing craft beer market, leveraging the local brands’ already established consumer base and further expanding it, given the scale and reach that Anheuser can provide. Penetrating the craft brewer industry could spell growth for AB InBev in the U.S. going forward.

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