Wednesday, April 6, 2011

Yacktman on PepsiCo & Coca-Cola

Here's a new interview with Donald Yacktman, Stephen Yacktman, and Jason Subotky of Yacktman Asset Management at GuruFocus.

Donald Yacktman - President and Co-Chief Investment Officer
Stephen Yacktman - Vice President, Co-Chief Investment Officer
Jason Subotky - Vice President, Portfolio Manager

Yacktman Focused Fund (YAFFX) returned 243.03% in the ten years ended March 31, 2011 while the Yacktman Fund (YACKX) returned 223.7% over the same period.

Two of the larger holdings in their funds is PepsiCo (PEP) and Coca-Cola (KO).
(As of the last reporting period, 12/31/10, PepsiCo made up greater than 10% and Coca-Cola more than 6% of the Yacktman Focused Fund.)

In the interview they were asked why they own more PepsiCo than Coca-Cola:

PepsiCo is a larger position than Coca-Cola for us because it is less expensive and, in our opinion, has a similar growth profile over time. The overlap between PepsiCo and Coca-Cola's businesses is lower than it appears on the surface, as the majority of Pepsi's value is derived from food businesses including Frito Lay and Quaker Foods, not beverages.

Coca-Cola is selling at at multiple of 17.4x this year's expected earnings while Pepsi is selling at 14.6x.

Both are great businesses but if valuations were similar I'd give Coca-Cola the slight nod over Pepsi. At today's prices Pepsi would be my choice. Both are core long-term positions. I look forward to the market temporarily making shares of either business available at a discount.

PepsiCo has lost carbonated soft drink market share in North America. Recently Pepsi ceded its long held 2nd position to Diet Coke.

So Coca-Cola now has the #1 (Coke) and #2 (Diet Coke) positions in market share.

Some thoughts from Yacktman on PepsiCo losing market share:

The domestic carbonated soft drink (CSD) business is not an especially important component of the value of PepsiCo. Frito Lay, Quaker Foods, Gatorade, and many other brands are far more important than domestic CSD's. We would not be excited about the future of either Coca-Cola or PepsiCo if we were only looking at the North American CSD businesses. Both companies have strong global franchises and a wide variety of brands which we expect will provide solid growth over time.

Read the complete interview here.

Adam

Long positions in both KO and PEP established at lower prices
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