Ticker symbol: PEP (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 3.0%
Company Profile
PepsiCo is a global beverage, snack, and food company. It manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks and foods, carbonated and non-carbonated beverages in approximately 200 countries, with its largest operations in North America (United States and Canada), Mexico, the United Kingdom, and now Russia. You"ll recognize most of the major PepsiCo brands which range widely from the familiar Pepsi Cola and are likely to show up in abundance in your refrigerator and kitchen cupboard at any given time.
PepsiCo is organized into three business units and six reportable segments, as follows: PepsiCo Americas Foods, which includes Frito-Lay North America (Fritos, Doritos, Lay"s, Cheetos, Tost.i.tos, Ruffles, SunChips), Quaker Foods North America (Quaker, Aunt Jemima, Cap"n Crunch, Life, Rice-A-Roni, and Near East), and all of the Latin American food and snack businesses, including the locally branded Sabritas and Gamesa businesses in Mexico PepsiCo Americas Beverages, which includes PepsiCo Beverages North America and all of the Latin American beverage businesses, and brings to market Tropicana and Gatorade products, in addition to several familiar soft drink brands PepsiCo International, which includes all PepsiCo businesses in the United Kingdom, Europe, Asia, the Middle East, and Africa. The international business accounts for about 43 percent of sales and 29 percent of profits.
Many of PepsiCo"s brand names are over 100 years old, but the corporation is relatively young. PepsiCo was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. PepsiCo now has at least eighteen brands that generate over $1 billion in retail sales. The top two brands are Pepsi-Cola and Mt. Dew, but beverages const.i.tute less than half of Pepsi"s sales. It is primarily a snack company, with beverages coming in second. Frito-Lay brands alone account more than half of the U.S. snack chip industry.
PepsiCo began its international snack food operations in 1966. Today, with operations in more than forty countries, it"s the leading multinational snack chip company, with more than a 25 percent market share of international retail snack chip sales. Brand Pepsi and other Pepsi-Cola productsincluding Diet Pepsi, Pepsi-One, Mountain Dew, Slice, Sierra Mist, and Mug brandsaccount for nearly one-third of total soft drink sales in the United States, a consumer market totaling about $60 billion. Pepsi-Cola also offers a variety of non-carbonated beverages, including Aquafina bottled water, Lipton ready-to-drink tea, and Frappuccino ready-to-drink coffee through a partnership with Starbucks.
PepsiCo acquired Tropicana, including the Dole juice business, in August 1998 and now markets these products in sixty-three countries. Tropicana Pure Premium is the third largest brand of all food products sold in grocery stores in the United States. Gatorade, acquired as part of the Quaker Oats Company merger in 2001, is the world"s leading sports drink.
At the beginning of FY2011, the company completed the acquisition of 60 percent of Wimm-Bill-Dan, a major branded food and beverage company in the Russian market for $3.8 billion, giving PepsiCo a 77 percent stake in the company, with plans to purchase all remaining shares eventually.
Financial Highlights, Fiscal Year 2010
Sales through the 2009 recession year were basically flat. In FY2010, the company acquired a substantial portion of its bottling business (a similar strategy to c.o.ke; see that company"s a.n.a.lysis) giving a nearly 40 percent boost to the top line. Without this acquisition, top line growth has returned to the mid-single digits, with snack volumes up 2 percent and beverage volumes up 11 percent in late FY2010 quarters compared to the previous year. FY2010 earnings grew 12 percent to $4.13 per share, in line with most estimates, but rising commodity prices dinged Q4 earnings a bit and caused the company to give a cautious outlook for FY2011. Yet, unless commodity prices spike, cost synergies with the bottling business and a change to in-house distribution for Gatorade should bring healthy earnings increases in FY2011: Estimates currently call for $4.60 per share vs. $3.77 in the recession-attenuated 2009. The company raised its dividend to $1.92 per share in early 2011.
Reasons to Buy
PepsiCo continues to offer a compelling combination of earnings, dividend, and cash flow growth potential with a strong measure of safety. Earnings and dividends continue to grow at a faster pace than the business overall, a good sign of increasing productivity and efficiency.
The company is taking an aggressive approach to geographical expansion, with good results so far. Its Russian business is expected to grow at double-digit rates over 2009"s $2 billion in revenue, and PepsiCo plans to invest more than $2.5 billion in manufacturing and distribution in China over the next three years.
Reasons for Caution
PepsiCo will need to move quickly to retain the health-conscious market. They have many new and reformulated products in the works that use healthier ingredients and reduced levels of sodium and trans-fats, but the compet.i.tion for this segment is intense. The company has created a "Global Nutrition Group" to address this challenge. On the plus side, there"s no clear leader in this emerging segment, and there"s no better distributor for new products than Frito-Lay, but it may require some retooling of this brand image to seriously address the market the company estimates at $30 billion by the year 2020. Also, the company enjoyed a dip in commodity prices in 2010; that cycle is reversing as 2011 progresses and the company will have to deal with higher ingredient costs; the ability to pa.s.s them on remains to be seen but has been successful at many of PepsiCo"s compet.i.tors. In fact, the food business is one of the big differentiators between Pepsi and rival Coca-Cola, and rising commodity prices will hurt Pepsi more than c.o.ke.
AGGRESSIVE GROWTH.
Perrigo Company
Ticker symbol: PRGO (NASDAQ) S&P rating: NA Value Line financial strength rating: B++ Current yield: 0.4%
Company Profile
Perrigo is the world"s largest manufacturer of over-the-counter pharmaceutical products for the store brand market. They also manufacture generic prescription pharmaceuticals, nutritional products, and active pharmaceutical ingredients (APIs).
The company operates in three segments: Consumer Healthcare, Rx, and API. Consumer Healthcare is by far the largest segment, generating about 81 percent of Perrigo"s revenue in 2010.
The company"s success depends on its ability to manufacture and quickly market generic equivalents to branded products. It employs internal R&D resources to develop product formulations and manufacture in quant.i.ty for its customers. It also develops retail packaging specific to the customer"s needs.
If you have bought a store-branded over-the-counter medication like ibuprofen or cough medicine in the past year, there"s a good chance (a 70 percent chance, in fact) that it was made by Perrigo. The company produces and markets over 2,400 store brand products in 12,000 individual SKUs to approximately 800 customers, including Wal-Mart, CVS, Walgreens, Kroger, Target, Safeway, Dollar General, Costco, and other national and regional drugstores, supermarkets, and ma.s.s merchandisers. Wal-Mart is its single largest customer and accounts for 23 percent of Perrigo"s net sales. The retail market for the branded equivalents of Perrigo"s most widely used products is over $12 billion.
The Rx operations produce generic prescription drugs, obviously benefiting when key patented drugs run past their patent protection. As of April 2010, the company markets approximately 300 generic prescription products, with over 620 SKUs, to approximately 120 customers, accounting for about 10 percent of sales, while the API division markets an a.s.sortment of active ingredients to other drug manufacturers, accounting for about 6 percent.
The company"s products are manufactured in nine separate facilities around the world. Its major markets are in North America, Mexico, the United Kingdom, and China. About 33 percent of sales are overseas.
Financial Highlights, Fiscal Year 2010
Perrigo"s FY2010 finished strong, with record sales of $2.3 billion, a 13 percent gain, and record earnings of $2.83 per share, a 51 percent gain over FY200 (which itself was a record year). In early 2011, the company raised full year FY2011 earnings guidance to between $3.28 and $3.43 per share, an implied growth rate of 2429 percent.
Gross and operating margin expansion have been a key part of the growth story. The consumer store-branded products market is large and secure but relatively low margin, so the company has been putting more focus on the Rx and API businesses. Operating margins have risen from the low teens in the mid-decade to the mid-teens in 2008 and 2009, 20 percent in 2010 and are projected at 21.2 percent in 2011.
Reasons to Buy
Perrigo is a real success story of solid niche dominance (store-branded medications) with a couple of high-growth, high-margin businesses mixed in. Steady growth in sales combined with a steady growth in margins have a multiplicative effect, and the company has enjoyed well above average profit growth in this industry.
Not only does the company dominate a nicheit is a growing niche. People are becoming more sensitive to their own health care costs and spending in general, and are opting more often for the store brand; after all, 200 mg of ibuprofen is 200 mg of ibuprofen. And this is all affected by the demographic tailwind of the aging population.
Perrigo expects that over the next four years, prescription drugs worth $9 billion in sales will be approved for OTC use. Prescription-to-OTC transitions are one of Perrigo"s main revenue drivers. Similarly, Perrigo sees an additional $2.6 billion in sales of branded Rx products with potential for generic equivalent product introductions. With its 70 percent market share of the private-label OTC market, Perrigo is in a position to capture the larger share of those new opportunities.
Perrigo is consolidating its API production and is closing its higher-cost API production facility in Germany. The company has purchased a large stake in an API manufacturing facility in India, which it plans to expand and use as a production center for higher-volume API products as well as Rx and Rx-to-OTC candidates.
Cash flow has improved dramatically over the last three years and the company is well funded for growth through acquisition. The company continues to make acquisitions to increase geographic coverage or expand categories. One was generic drug manufacturer Paddock Laboratories. In early 2010 the company paid $808 million cash for PBM holdings, a $300 million store-brand infant formula manufacturer that did well in FY2010, and expanded its international presence among other things by acquiring a leading OTC pharmaceutical supplier in Australia and New Zealand.
Reasons for Caution
There are some risks in the generic pharmaceutical industry; among them are patent infringement lawsuits and manufacturing problems. The company has had a few lawsuits but fortunately none of the manufacturing problems experienced by rival Johnson & Johnson; a major hiccup could put a dent in the company"s business. Also, the stock price has followed the story upward, so new investors should choose buying opportunities carefully.
CONSERVATIVE GROWTH.
Praxair, Inc.
Ticker symbol: PX (NYSE) S&P rating: A Value Line financial strength rating: A Current Yield: 2.1%
Company Profile
Praxair, Inc., is the largest producer of industrial gases in North and South America and the second-largest supplier of industrial gases in the world. The company, which was spun off to Union Carbide shareholders in June 1992, supplies atmospheric, process, and specialty gases; high-performance coatings; and related services and technologies.
Praxair"s primary products are atmospheric gasesoxygen, nitrogen, argon, and rare gases (produced when atmospheric air is purified, compressed, cooled, distilled, and condensed), and process and specialty gasescarbon dioxide, helium, hydrogen, and acetylene (produced as byproducts of chemical production or recovered from natural gas). Customers include petroleum refiners and makers of primary metals, chemicals, health care products, electronics, gla.s.s, pulp and paper, and environmental products.
The gas products are sold into the packaged-gas market and the merchant market. In the packaged-gas market, bulk gases are packaged into high-pressure cylinders and either delivered to the customer or to distributors. In the merchant market, bulk gases are liquefied and transported by truck to the customer"s facility.
The company also designs, engineers, and constructs cryogenic and non-cryogenic gas supply systems for customers who choose to produce their own atmospheric gases on-site. This is obviously a capital-intensive delivery solution for Praxair, but results in lower delivered cost to the customer and higher returns for Praxair, as all operational costs are paid by the customer. Contracts for these installations can run to twenty years.
Praxair Surface Technologies is a subsidiary that applies metallic and ceramic coatings and powders to metal surfaces in order to resist wear, high temperatures, and corrosion. Aircraft engine makers are its primary market, but it serves others, including the printing, textile, chemical, and primary metals markets, and provides aircraft engine and airframe component overhaul services.
Financial Highlights, Fiscal Year 2010
Praxair followed most of the industrial world into a soft FY2009, and has followed that world back to a degree of prosperity. As has become a familiar story, Praxair saw a sharp revenue dip in FY2009 but managed to attenuate the drop in earnings with cost-cutting measures. In FY2010, revenues bounced back, and as the cost-cutting and efficiency measures remained in place, the company delivered strong profitability and cash flow. For full year 2010, revenues grew 13 percent to $10.12 billion, while adjusted earnings per share were $4.74, up 19 percent year over year and above management"s guidance range of $4.67$4.72. Most estimates place Praxair"s earnings between $5.38 and $6.08, maintaining a steady 13.5 percent growth rate at the midpoint.
Reasons to Buy