Removing PEP and MDLZ from Long Bias list
We are removing PepsiCo (PEP) and Mondelez (MDLZ) from our Long Bias list. We want to stay disciplined with our investment ideas because we cannot research each company to the level necessary if we have too many companies on our list. We want to keep our focus on the best ideas.
PepsiCo has performed exceedingly well in a global pandemic. What the company lost in off-premise beverage sales it gained from consumers snacking at home. Management also repositioned its energy drink portfolio in 2020 to see a major piece fall through months later. In March, PepsiCo acquired Rockstar Energy for $3.85B, which allowed it to end the exclusive distribution agreement. PepsiCo wasted little time in filling a hole in its portfolio. In April, PepsiCo signed the distribution agreement with Bang Energy and entered into the fitness energy drink market. This week we learned that Bang was firing PepsiCo due to weak results in the months since the agreement. Losing Bang Energy will leave a hole in its energy drink portfolio that can not be filled by extending Rockstar or Mountain Dew. We expect another acquisition or agreement in beverages in the future as the category’s growth is too important.
Mondelez has also performed well during the pandemic, with strength in some markets and business lines offsetting others' challenges. Mondelez’s portfolio demonstrated the strength of its brand portfolio and management team. The biggest concern when we added Mondelez to our long bias list was its exposure to emerging markets, which is now signaling a rebound. There have been challenges to those markets, but some developed markets' strength more than offset the weaknesses. In the future, we expect emerging markets to continue to lag in the recovery. Mondelez has strong global brands with pricing power and organic growth, likely with more valuation upside than downside.
Moving LW and BUD to top of Long Bias List
We are also moving Lamb Weston and Anheuser Busch InBev to the top of our Long Bias list.
With successful trial results from two vaccines, many restaurant stocks have approached pre-pandemic levels despite many states instituting new restrictions on restaurants, bars, and other group gatherings while colder weather is ending the popular outdoor dining option. At this point, we want to look past the current restrictions to a staged rollout of vaccines in 2021 and 2022. We do not expect everyone to get the vaccine, but we think government restrictions will be untenable when vaccines are available. The staged rollout will also combine with easy comparisons to provide improving results throughout 2021. So we would look to take advantage of any pullbacks from shortfalls caused by the new restrictions.
We are raising Anheuser Busch InBev on our Long Bias list as we look out to 2021, anticipating improving on-premise trends, continued gains in hard seltzer, and less leverage. The company's on-premise mix is less than 20% in the US, but several countries operate with a much higher on-premise mix, as seen in the following chart.
Lamb Weston is not past the entirety of the risk from competitive pricing pressure. Still, the recovery we expect in restaurants, cafeterias, and other foodservice providers will drive improving results throughout 2021. Several developments will have to play out for shares to reach $90 again, but we expect the odds to continue to improve. The disconnect between the recovery discounted in restaurant stocks, and that of a key supplier is an attractive investment opportunity. We continue to research the developments that need to play out, including the competitive pricing environment. So far, our research points to price increases being more likely than meaningful discounts or contract losses.
Our updated position monitor is below:
FreshDirect acquired (AD-AMS)
Ahold Delhaize announced it is buying the online grocery service FreshDirect. The deal's terms were not disclosed beyond Ahold becoming the majority shareholder and Centerbridge Partners acquiring a 20% stake. FreshDirect had been looking for a buyer for the past year. FreshDirect will retain its name and operate independently from its New York City facility. Fresh food accounts for more than 60% of FreshDirect’s sales. Amazon and Walmart both vetted the business but did not pursue the company. FreshDirect only has a presence in the New York City area. Ahold Delhaize has a strong presence on the East coast but is limited in New York City. The surge in pandemic deliveries was seemingly enough for Ahold.
