Pepsico (NYSE: PEP ) acquired Grupo Mabel on Monday for $450 million, pushing
the company deeper into Brazil and exhibiting another step in the multinationals
plan to capture market share in emerging markets. The stock, however, has
continued to underperform. So why not invest in stock that's currently in the
bargain bin? Im talking about Diamond Foods (Nasdaq: DMND ), the relatively tiny
California company attempting to buy Pringles from Procter & Gamble (NYSE: PG ).
Its stock has dropped 50% this month after an accounting controversy. But, no
risk, no reward. The linchpin of Pepsi's expansion plan is the move into
emerging markets expansion plan and nowhere is that more evident than in India,
the birth country of Pepsi CEO Indra Nooyi. Pepsi is generic for cola in India,
where it outsells Coca-Cola (NYSE:KO) by a 3-to-2 margin. But will this last?
Coke said Monday it was investing $2 billion in India over the next 5 years.
Atul Singh, CEO of Coca-Cola India, believes that the investment is crucial for
maintaining its robust growth in this emerging market. While Pepsi might outsell
Coke, India is one of Cokes top 10 markets in terms of sales volume and its
largest in its Eurasia and Africa group. Considering Pepsi entered the Indian
market in 1989, four years earlier than Coke, its advantage isnt that
impressive. My guess is that Coke will catch Pepsi by the end of its five-year
commitment. At the end of the day, Cokes international business accounts for 70%
of its revenue compared to about 38% for Pepsi. It will always do a better job
than Pepsi outside North America. Diamond Foods had a day of reckoning on Nov.
1. It was forced to postpone the December closing of its deal to purchase
Pringles from P&G because its board was investigating accounting issues related
to payments for walnut growers. Everything Ive read seems to point to about $50
million in payments that will require earnings restatements. While this is a
serious issue, Im not sure the number of lawsuits or at least investigations
potentially leading to lawsuits is warranted, but until the board releases its
findings, my guess is as good as yours. Barrons suggested earlier this month
that a restatement would cut operating earnings per share for fiscal 2011 from
$2.61 a share to $1.14. However, Id be shocked if all $50 million is allocated
to one fiscal year (but well know soon enough). The worst-case scenario is that
the Pringles deal doesnt get done. Diamond finished 2011 with revenue of $966
million. At the revised EPS of $1.14 per share, the company's
price-to-earnings ratio would be around 31. Its earnings are growing close to
30%, so its stock at current prices wouldnt be expensive. The big problem, of
course is you're taking away what was clearly the catalyst for the stock
moving all the way up to $96 in September. Michael Mendes is a good CEO and will
weather the storm. Furthermore, I have to question whether Procter & Gamble
wants to put Pringles back on the market. They want out of the food business,
and unless its proven that Diamond Foods acted improperly, I have to think theyd
be willing to wait an extra six months for the deal to go through. I believe the
deal gets done. But even if it doesnt, and regardless of what happens with the
accounting investigation, Diamond Foods is still a good company with a good
future. It comes down to whether you want to invest in a company like Pepsi
thats moving in the slow lane or take a chance that this is much ado about
nothing that will be forgotten by next summer. No risk, no reward. As of this
writing, Will Ashworth did not own a position any of the stocks named here.
No comments:
Post a Comment