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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