{ "docId": "019dd923-622b-71dc-a6db-4a755dd43689", "docSlug": "8b17eeb54806", "documentTitle": "PepsiCo (PEP)", "authorId": "06_Trian_Partners", "authorName": "Nelson Peltz", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "activist_investor", "sourceTypeLabel": "Activist investor", "presentationDate": "2014-02-19 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 27, "pageCount": 41, "prevPage": 26, "nextPage": 28, "slideType": "thesis_headline", "function": "summarize", "density": "overcrowded", "nDataPoints": 6, "notes": "This is a text-heavy research note page from Trian Partners regarding PepsiCo.", "elementsJson": [ "paragraph" ], "metadataConfidence": 0.9, "imagePath": null, "slideHref": "/slides/019dd923-622b-71dc-a6db-4a755dd43689/27", "deckHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689", "deckJsonHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689.json", "deckAnchorHref": "/decks/019dd923-622b-71dc-a6db-4a755dd43689#slide-27", "components": [ { "bbox": null, "kind": "callout", "text": "We foresee a full separation driving much higher value for shareholders over time than other alternatives, even assuming management executes its plan of high single digit EPS growth in the current structure.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-1ac2-71b6-bf4f-552d16943c83", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.18, "w": 0.78, "x": 0.11, "y": 0.48 }, "kind": "paragraph", "text": "Recent reports and management commentary have hinted at several structural alternatives that PepsiCo could consider beyond a full separation. One notion is to further integrate beverages and snacks, potentially even combining distribution, in an attempt to create synergies. Given the deterioration in culture and poor operating performance that we believe have accompanied previous integration efforts and \"Power of One\" programs, we view this approach as fraught with risk. It should come as no surprise that Trian does not support any action that further entangles the businesses and blurs the lines of accountability.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "28072f94-5dd0-4e5e-81a4-75e7be1abf24", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.1, "w": 0.78, "x": 0.11, "y": 0.9 }, "kind": "paragraph", "text": "As PepsiCo represents one of the largest positions in our portfolio, Trian has a vested interest in the future of the company's businesses and brands. We take pride in our standing as a long-term shareholder of companies where we seek to work constructively with the Board and management to implement strategic and operating initiatives to enhance value. We would not recommend a separation of the snacks and beverage businesses if we were not convinced that it is the best path forward for PepsiCo, its brands and shareholders for the long-term.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "86a3ab67-dca5-4b06-9b37-849a543380f1", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.22, "w": 0.78, "x": 0.11, "y": 0.67 }, "kind": "paragraph", "text": "We foresee a full separation driving much higher value for shareholders over time than other alternatives, even assuming management executes its plan of high single digit EPS growth in the current structure. But we are concerned that PepsiCo will not execute its plan. As we have shown, EPS growth in recent years has been well below public targets and that of peers. We question the quality of earnings in 2013 given one-time items and tax, while we view 2014 EPS guidance as weak. Results are particularly disappointing following a major EPS re-set in 2012 that was intended to re-ignite growth. The profit growth that PepsiCo has generated over the past seven-plus years has too often been driven by price increases and advertising reductions. If PepsiCo continues down this path, we foresee an ongoing cycle whereby management intermittently re-sets EPS lower, delivers several years of unsustainable growth, only to re-set EPS yet again when brand reinvestment is inevitably needed", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a2613f49-fa21-4f34-b5c1-80593a734fbc", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.78, "x": 0.11, "y": 0.15 }, "kind": "paragraph", "text": "This is the case for focused large cap companies (Hershey, with a market cap of $23bn, trades at 25.2x PE, a premium to diversified food and beverage companies such as PepsiCo at 17.0x PE) and focused mega-cap companies (L'Oreal, with a market cap of $74bn, trades at 22.7x PE, a premium to diversified personal care companies such as P&G at 17.6x PE).", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b0b618c4-0a14-4ef6-851d-690c806f70cc", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.28 }, "kind": "paragraph", "text": "Meanwhile, a standalone beverage business offers investors lower growth but strong, stable free cash flow that can be optimized through an efficient balance sheet and capital return program. Kraft Foods Group, perceived to be a slow growth N. American grocery business recently spun-off from Mondelez, trades at a premium multiple to many large-cap food peers based on similar positioning. We believe PepsiCo's beverage business can be stronger than Kraft Foods' grocery business.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e60dec6a-76a1-4d4f-8b07-da0f31ae9f1f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.08 }, "kind": "paragraph", "text": "A standalone snacks business offers investors a compelling growth story combined with strong margins and free cash flow generation. Moreover, focused consumer staples companies, particularly snacks businesses, can trade at as much as a 40% premium to diversified peers.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f71bb2dd-b8f1-41cf-9a2b-75927ffdb540", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.1, "x": 0.11, "y": 0.44 }, "kind": "title", "text": "Summary", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "c1c25c1d-217e-47aa-b7a9-bf2b46dc514c", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 27, "from": 23, "beatId": "a1ceaa85-836d-47c5-9c4b-32d4a2fa7caa", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Solution (Provide relief)", "beatSlug": "problem-agitate-solution-solution-provide-relief", "evidence": "The document presents the benefits of separating snacks and beverages businesses.", "position": 2, "confidence": 0.8, "parentBeatName": "Resolution", "parentBeatSlug": "resolution" } ], "loops": [ { "to": 27, "from": 11, "name": "Logic Chain", "slug": "01-logic-chain", "bestFor": "Skeptical audiences, controversial recommendations, rigorous analysis", "matchId": "4d567b7d-0bb0-40c7-bec4-4acbbd035cfb", "evidence": "The document presents a clear and logical sequence of arguments.", "position": 0, "objective": "To present a logical chain of arguments for separating snacks and beverages businesses.", "structure": "Premise 1 (Accepted truth) -> Premise 2 (Observed fact) -> Therefore... 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