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Published:
July 14, 2008
Whether you prefer Coke (NYSE: KO) or Pepsi (NYSE: PEP), you
have to admit both companies have done a remarkable job of
putting their products in the hands of consumers around the world.
There is virtually not a single restaurant, convenience store, or
supermarket in the country that doesn't offer one or both of these
brands.
But have you ever stopped to think about how those drinks made it
from the factory to the soda fountain?
That's where bottlers like Minneapolis-based PepsiAmericas (NYSE: PAS, $19.46) come in.
The company is a vital link in the massive Pepsi distribution chain,
supplying Pepsi, Mountain Dew, 7-Up, Lipton Iced Tea, Aquafina and
other brands to customers across the U.S. and in 15 countries around
the globe. Overall, the company handles one-fifth of Pepsi's volume
and covers a territory representing more than 120 million thirsty
consumers.
Of course, PAS is not the only distributor of Pepsi products. But it
is the second largest, with $4.5 billion in annual revenues.
Furthermore, the company is firmly entrenched in 19 states
throughout the Midwest U.S. -- where Pepsi is the carbonated beverage of
choice and enjoys strong market share. Finally, PAS is far more
profitable than its peers, with an operating margin of 10%, versus
8% for Pepsi Bottling Group (NYSE: PBG) and 5% for Coca-Cola
Bottling (Nasdaq: COKE).
Though carbonated beverage growth remains sluggish for the most
part, demand for teas, energy drinks and other new products
continues to rise. In fact, PAS reported healthy volume growth of
+8% from this category last quarter. However, the most promising
growth opportunities don't lie in new products, but in untapped new
markets.
Specifically, sales in Central and Eastern Europe continue to soar.
Driven largely by robust demand in Romania and Poland, volume in
this region spiked +62% last quarter. Those gains, along with
stronger pricing and favorable currency translation, helped push
sales in this area up an impressive +84%. More importantly,
operating income generated in these faster-growing markets
quadrupled last year and now accounts for over one-quarter of the
firm's total -- and that percentage is likely to continue marching
higher.
However, rising production and packaging costs and higher
transportation expenses have weighed on the stock lately. After
posting outsized gains of +60% in 2007, PAS shares have lost more
than one-third of their value so far this year, sliding from $33 to just
under $20.
Yet, returns on invested capital are expanding. And as the firm
continues to consolidate market share in fragmented emerging markets
overseas, earnings are forecast to rise at a healthy
double-digit pace over the next few years. Management has also been
using a large chunk of cash to repurchase shares and boost
dividend payments.
Based on my calculations, PAS has a fair value of $30. And investors who take advantage of this recent sell-off have an
opportunity to see a +50% share price appreciation. This
also represents a refreshing margin of safety for anyone interested
in a conservative way to tap into the continued development of
Eastern European countries.
Nathan Slaughter
Editor
Half-Priced
Stocks
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About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing primarily in deeply discounted securities. He
uses advanced discounted cash flow techniques, along with a host of fundamental
research, to uncover quality stocks that are trading well below their actual
intrinsic value.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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