U.S. Markets closed

PepsiCo May Like Oreos Enough to Consume Mondelez

Marc Courtenay

NEW YORK ( TheStreet) -- Animated ads don't often catch my eye and my imagination but this one did and it brought back sweet childhood memories.

Now, before you watch the video of the ad and enjoy the catchy song, remember you're reading this because you want to know if PepsiCo and some activist investors may have dollar signs in their eyes when they also see the video.

First, I'd like to send out congratulations to the folks who manage PEP. On Wednesday shares of PEP hit a new 52-week high of $84.45, lifting PEP's market cap to well above $130 billion. Coincidentally its bigger rival, Coca-Cola also hit a 52-week high ($43.10) giving it a market cap of $191 billion.

So both these consumer goods giants are being awarded rich earnings multiples for their stock prices. PEP and KO are trading at a forward PE (one-year) of around 18 and at a generous price-to-earnings-to-growth (PEG) ratio above 2. Investors feel safe owning these beverage and food titans, period!

Let's get back to PepsiCo with its 2.7% dividend sustained by a payout ratio that, in my opinion, is on the high side (55%). Whether or not its dividend can keep growing will probably depend on how fast it can grow its revenue and Ebitda earnings per share. Take a look at this one-year chart illustrating the point.

PEP data by YCharts

What jumps off this chart is that revenue have been heading north while the Ebitda earnings have been plunging. The meteoric rise in PEP's share price from the Dec. 31, 2012, low of $67.39 to Wednesday's high of $84.45 is a thirst-stimulating 25.3%. Not too shabby for a stock whose price chart used to resemble the EKG of a "stiff" in the coroner's office!

So what can PEP do about its Ebitda earnings and how might it keep its trailing 12-month revenue per share numbers looking rosy? Why not buy or merge with the company that makes the world's favorite cookie -- Mondelez International , the snack manufacturer spun off from Kraft that started 2013 with a whimper?

Shares of MDLZ are also trading for about 18 times forward earnings at around $31.40, giving it a market cap of over $56 billion. That makes MDLZ an expensive takeover target.

Now here's where the plot becomes an interesting cookie-cruncher (and a numbers-cruncher as well).

Back around April 18, billionaire and activist investor Nelson Peltz disclosed sizable positions in both Mondelez and PepsiCo. This action followed earlier reports the influential deal-maker (Peltz was the activist investor behind the Heinz deal that worked out so well for shareholders) may desire some sort of "marriage" between PEP and MDLZ.

In a statement on April 19, PepsiCo also let it be known that it had held meetings with Peltz's Trian Fund Management in recent weeks to consider its "ideas and initiatives" for long-term growth. MDLZ has been relatively silent about Peltz's nearly $495 million position in MDLZ stock.

MDLZ's first-quarter 2013 earnings results, reported on May 7, were relatively flat to disappointing. Year-over-year quarterly earnings fell by more than 30%. Ouch!!

Even with great products like Oreo cookies and other Nabisco treats, MDLZ has one looming sword of Damocles over its head. I'm referring to its $18.56 billion in total debt as of March 31. This doesn't compare favorably to its total cash position of $2.89 billion as of the same date.

The company reported encouraging trailing 12-month (TTM) operating cash flow of $4.39 billion and levered free cash flow (TTM) of $1.95 billion. Its EBIDTA earnings (TTM) were $5.12 billion, which has to be an attractive feature to the operating officers of PEP as well as to investors like Peltz.

By the way, Peltz's Trian Fund Management now has accumulated nearly a $270 million stake in PEP, which has its own issues with a large debt load of around $29.4 billion versus total cash of $7.01 billion as of March 23. This may motivate PEP's board to be more receptive to Peltz's ideas.

Most of the activist investors tend to communicate with each other, so it wouldn't surprise this analyst that a group of them may come together to propose some major changes with both companies. What that may eventually look like is undisclosed at this time.

With financing available at record low interest rates, billionaire investors and funds can use relatively inexpensive leverage to "coax" these two companies. Both have similar debt problems and compatible product lines which may lead to some sort of a mutually beneficial arrangement. MDLZ has what PEP needs and vice versa.

Well, it's time for my milk and Oreo cookies snack break, so I'll leave investors with these final thoughts. It's too early to tell which company would be the major beneficiary of Peltz's influence, but suffice it to say he has a much larger stake in MDLZ, so that would be my guess.

Put another way: Why not follow Peltz's example (and impressive track record)? For every $2.70 you invest in PEP, why not invest $4.94 in MDLZ? Trian Fund filed on April 20 that it owned about 3.93 million PepsiCo shares valued at about $269.1 million as of Dec. 31.

On the same day, the Investment Management Fund reported it had purchased 19.4 million shares of Mondelez valued at about $494.2 million at the end of 2012. Need I say more?

Now go back to the beginning of the article and enjoy the animated video. The ad campaign and activist investor actions bode well for MDLZ and the future of its stock price.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.