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tdp2664 InvestorPlace Pepsico (NYSE: PEP ) acquired Grupo Mabel on Monday for $450 million, pushing the company deeper into Brazil and exhibiting another step in the multinational’s 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? I’m 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 Coke’s 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 isn’t that impressive. My guess is that Coke will catch Pepsi by the end of its five-year commitment. At the end of the day, Coke’s 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 I’ve read seems to point to about $50 million in payments that will require earnings restatements. While this is a serious issue, I’m 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. Barron’s 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, I’d be shocked if all $50 million is allocated to one fiscal year (but we’ll know soon enough). The worst-case scenario is that the Pringles deal doesn’t 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 wouldn’t 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 it’s proven that Diamond Foods acted improperly, I have to think they’d be willing to wait an extra six months for the deal to go through. I believe the deal gets done. But even if it doesn’t, 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 that’s 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.
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