PepsiCos Wimm-Bill-Dann deal offers significant potential

PepsiCo's Wimm-Bill-Dann deal offers significant potential

PepsiCo's purchase of Wimm-Bill-Dann last month makes it a better investment bet than The Coca-Cola Co heading into 2011, according to analyst group Sanford Bernstein.

PepsiCo announced its intention to buy 66% of Wimm-Bill-Dann for US$3.8bn last month. It plans to follow this by acquiring full ownership of the firm, in a move that will make it the largest food and beverage group in Russia.

Bernstein analysts Ali Dibanj and Steve Powers said in a note that PepsiCo remains their "top pick" out of beverage and snack companies in the US.

"We continue to believe that challenges in the company's beverages business will be overcome by strengths in snacks/food," the analysts said. "We also believe that Pepsi Bottling Group/PepsiAmericas/Wimm-Bill-Dann integration costs and other reinvestment needs can be overcome by significant cost savings opportunities."

The analysts said that, while the gap between PepsiCo and Coca-Cola (KO) has been closing, "the relative valuation between Coca-Cola and PepsiCo leads us to prefer PepsiCo at present".

However, they added: "That being said, we do not see a clear-cut need to make a 'PEP vs KO' decision as we continue to like both. In Coca-Cola's case, we see the company benefiting from strong momentum and a healthy global system."

Looking ahead, the analysts lowered their earnings per share estimate for PepsiCo from $4.66 to $4.61 for 2011, to account for the initial effects of the Wimm-Bill-Dann deal.