However, the stock has underperformed since the market began its rebound on March 10. And since the end of March, Pepsi’s shares have lagged those of arch rival, The Coca-Cola Co. (NYSE: KO), since the end of March, as well.  I recommended Coca Cola last week after the company reported stellar growth in the emerging markets.

While Pepsi’s less-than-stellar performance is not yet a major concern, the trend is discomforting.  In addition, there has been a major divergence in the strategies of these two companies.

While both Coke and Pepsi divested of their bottling operations many years ago, Pepsi just agreed to buy back two of them: Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS). And it paid a stiff premium in each deal, about 24% and 23%, respectively, above their pre-deal market prices. The total value of the deal was a cool $7.8 billion.

Now allow me to say that these companies are impressive operations by themselves:

• Pepsi Bottling Group is PepsiCo’s largest bottler. The company takes in $14 billion a year and operates in the United States, Canada, Greece, Mexico, Russia, Spain and Turkey, and boasts 67,000 employees.

• Pepsi Americas is PepsiCo’s second-largest bottler. It brings in $4.9 billion annually from operations in the United States, Ukraine, Poland, Romania, Hungary, the Czech Republic and Slovakia.  In addition, its new joint venture covers the Caribbean and Central America.

So why bother with these acquisitions?

The justification for this move is that “in a rapidly changing, more-complicated global market, a leaner, more agile business model is pretty important,” said Pepsi Bottling Group Chief Executive Officer Eric J. Foss.

Pepsi touted the tie-up itself, citing such advantages as attempting to create a more-flexible, efficient and competitive system that is more inclusive of other Pepsi brands.

The idea is that a merged operation will allow for much faster introduction of new products, for bundled offers, for enhanced customer service, and for cost savings from redundancies and economies of scale.

Sure, we can buy into many of those ideas, which are sure to result in some gains.  In fact, we can even envision the many new marketing initiatives that will result from these acquisitions.

But make no mistake: What has pushed Pepsi to go in this direction is the superiority of Coca Cola in the emerging markets.  While both firms prided themselves on product innovation and marketing, Coca-Cola has come out on top, as I wrote last week.

In addition, the capital requirements of a bottling and distribution operation are very high and the return on equity is much lower than Coca-Cola’s core business of creating the product, marketing it, and selling the concentrate and bottling rights to bottlers.  This decision will make less cash available in the immediate future for stock buybacks and dividend increases and represents a big gamble.

There are two pressing questions to have in mind:

• Will the marketing synergies PepsiCo claims it will garner from the deals be successful in winning market share away from its rival and thus justify the added capital requirements of the newly acquired operations?
• And will Pepsi be able to capture the synergies from the merger fast enough?

What’s for sure is that Pepsi’s action goes against its decision to concentrate on its core competencies. Management theory has proven time and again that companies should concentrate in one segment of the entire value chain (in Coca Coal’s case, product innovation and marketing) and leave the less-attractive and less-profitable areas to others.

Furthermore, it’s clear to me that “asset-light” companies – firms such as C.H. Robinson Worldwide Inc. (NYSE: CHRW), which divested assets that have large financing requirements and that carry large fixed costs – reduce the cyclicality of the business, and thus reduce the risks to profits from economic downturns.  That means “asset-light” companies are preferable to “asset-heavy” companies.

Therefore, my bias is against the added complexity and capital requirements involved with the Pepsi deal.  And we must now wait to see if the company can deliver on the two key questions above.  But we can never count out Pepsi’s innovation and resiliency, and so we will give them the benefit of the doubt.

PepsiCo stock closed down 9 cents, or 0.16%, at $57.74 a share Friday. That’s up 32% from its hit 52-week low of $43.78, reached in Early March.

Recommendation: “Hold” PepsiCo Inc. (NYSE: PEP), but do not add to your position, and give preference to Coca Cola’s stock – at least until Pepsi is able to prove that it can execute the merger efficiencies and win market share from its arch-rival (**).

** Special Note of Disclosure: Horacio Marquez holds no interest in PepsiCo Inc.

Source: Buy, Sell or Hold: Will PepsiCo Inc.’s (NYSE: PEP) Recent Acquisitions Pay Off?

• Shares of C.H. Robinson Worldwide, Inc. (CHRW) climbed as high as 4.8% in trading yesterday (Monday) before closing at $44.03 a share. For the past five days, the company’s stock jumped nearly 16%. Money Morning Contributing Editor Horacio Marquez recommended investors buy C.H. Robinson’s stock yesterday in his popular Buy/Sell/Hold series.

• A team of economists at Morgan Stanley (MS) believes Latin America’s economy may contract 4% this year, which would be the biggest decline since 1980. Leading the region’s decline is South America’s largest economy, Brazil, whose gross domestic product could fall as much as 4.5%, Morgan Stanley said.

• Foreign investing in China fell by 15.8%, or $5.83 billion, in February, from the year earlier. The decline marks the fifth straight month that companies and government tightened their spending on Chinese assets, Bloomberg reported.

• The 146-year-old Seattle Post-Intelligencer will publish its final print issue today, becoming an online-only news portal. The paper’s owner, The Hearst Corp., made the decision after failing to find a buyer for the newspaper, Reuters reported.

• The government said Sunday that it intends to seize real estate, cash, bonds, art, autos, boats and other property worth more than $100 million from Bernard Madoff and his wife, including the Madoffs’ $7 million Upper East Side apartment in Manhattan and homes in Montauk, New York, Palm Beach, Florida, and France. Prosecutors will seek $17 million in cash and $45 million in bonds in accounts in Ruth Madoff’s name, acting Manhattan U.S. Attorney Lev Dassin told Bloomberg. Madoff, 70, pleaded guilty March 12 to defrauding investors of as much as $65 billion in the biggest Ponzi scheme in history.

• The U.S. Treasury said yesterday (Monday) that foreigners were net sellers of U.S. securities in January, a worrying development at a time when the government is rolling out a massive spending plan to mitigate the 14-month recession. Adding to the economy’s problems, the U.S. Federal Reserve said industrial production fell to its lowest level in almost seven years in February. U.S. industrial output fell 1.4% in February, following a 1.9% drop in January, according to government data, Reuters reported.

• MGM Mirage (MGM) is in talks with banks to pledge casinos as loan collateral, as it seeks to modify lending terms and avoid default on a $7 billion senior credit facility. The company agreed in December to sell the its Treasure Island casino and canceled a condominium development at CityCenter, MGM’s joint venture Strip development with Dubai World. The Las Vegas-based casino company said it is also open to selling more assets, Bloomberg reported, citing a person with knowledge of the discussions.

Source: Global Investment News Briefs Tuesday, March 17, 2009

And yet the U.S. stock market – as a discounting mechanism – experienced a robust rally last week, posting a four-day rally that saw the Dow Jones Industrial Average gain 9.0% and the Standard & Poor’s 500 Index a resounding 10.7%.

Unfortunately, in an economy that has been deeply hurt by huge imbalances that took years to build, we are left with key sectors that are operating in a distress mode. They are now at the mercy of the aggressive government actions being taken in an attempt to whip them back into shape.

Of course, it is always preferable to invest in an environment where the private sector is taking the steps to increase efficiency on its own and adjusting to economic realities as needed. But we do not have that luxury today.

What we need to remember, though, is that the stock market will be the leading indicator of the coming recovery. In fact, the stock market will rally well before unemployment peaks and before all the other problems wrought by the financial crisis are actually solved.

The only problem is that the speed and stability of any eventual rebound will depend on the prudence and appropriateness of actions taken by Congress and the U.S. Federal Reserve. And because these actions, and their effectiveness, are very difficult to predict, we are going to resist the temptation to speculate.

Instead we will take advantage of stocks that have been oversold, in spite of having favorable fundamentals. That leads us to C.H. Robinson Worldwide Inc. (Nasdaq: CHRW), a shipping and transportation-services company that enjoys consistent growth, high profit margins, strong cash flow, no debt and proven stability.

Last year, I recommended CH Robinson in Money Morning’s sister publication, The Money Map Report, and I was not disappointed.

Despite the very challenging economic conditions, CHRW’s stock not only greatly outperformed, as I expected, but it actually traded up, while the Standard & Poor’s 500 Index traded down. In fact, we ended up taking profits of close to 20% profits. The stock then consolidated and overreacted to the crisis. But today, we find the company vastly oversold, and trading well below its fundamentals.

C.H. Robinson shares closed Friday at $42.72. That means the shares are up 17% from their 52-week low of $36.50, but remain down 36% from their 52-week high of $64.36.

That’s better that the market. In fact, even over the longer-term C.H. Robinson’s shares have exceeded that of the broad market. Over the last couple of years, if you held only this stock, you would be down just 20% – and not the near-50% that the S&P 500 is down over the same period. This speaks volumes about the quality of CH Robinson’s business model.

C.H. Robinson: The Asset-light Antidote for Recession

I stumbled upon C.H. Robinson many years back, when I was working on an acquisition of a major grocery wholesaler. My task was to financially “model” the deal, and our team leader kept referring to the transformation that we were going to bring about on the target company by selling off its production farms and transportation assets in an effort to increase the company’s efficiency, flexibility and core focus.

A company that has huge investments in fixed assets is generally hit hard in recessions. The reason: As its volumes go down, the very high proportion of fixed costs in its cost structure not only destroys its profit margins, it can put the entire company in peril, as the debt might be difficult to refinance.

C.H. Robinson actually went through a similar transformation many years back. It shed most of its assets and became the premier virtual third party logistics company in the United States, focusing on trucks. I say “virtual” because the company does not own any trucks, ships, or airplanes.

Think of C.H. Robinson as an extremely efficient cargo-reservation system with an unparalleled network of trucking companies and independent truckers that hunger for whatever business that they can get from C.H. Robinson. C.H. Robinson gets booking fees from these companies and individuals without taking on the added costs or risks associated with actually owning the vehicles.

Therefore, in recessionary times, when business is down, the value of C.H. Robinson actually increases for the truckers, as it can actually mean the difference between financial life and death.

Despite a 4% drop in trucking volume in the fourth quarter, C.H. Robinson actually managed to marginally increase its revenue, expanding its gross margin from close to 17% to more than 18%. Similarly, return on assets (ROA) advanced from 17% to 20%, while net cash flow more than doubled to $272 million.

The fact that the company has no debt also helps, because there are no interest expenses. And the strong cash flow has helped C.H. Robinson to increase its cash holdings to almost $500 million. That will allow the company to continue with its aggressive buyback of shares, increasing returns and preserving its ultra-safe dividend yield – currently a comforting 2.25%.

C.H. Robinson has managed to achieve all of these targets while expanding international operations to Prague, in the Czech Republic, and Corpus Christi, Tex.

Its unique business model – one that endows C.H. Robinson with a strong-and-sustainable competitive advantage, operating flexibility, negligible fixed costs and most importantly, a long list of value-added services – matches up with the company’s solid financial strength, and is invaluable in these times, when cash and financial strength rule.

C.H. Robinson, which last year grew revenue by 17% and profits by 10% in the midst of the worst recession since 1929, is an absolute steal: The shares were recently trading at a Price/Earnings (P/E) ratio of slightly more than 20.

We are likely to see an orderly restructuring and a jump-starting of the Detroit automakers in the next few years, as carmakers reach agreements with their unions and bring their workforce costs down to competitive levels. This, combined with the very aggressive measures from the U.S. Federal Reserve and the Obama administration stimulus plan, should stabilize the economy and restart growth.

So the question is not if, but when to buy CHRW. Our recommendation is that investors should capitalize on the current oversold condition of the market and buy two-thirds of your intended position in this stock now, leaving yourself room to buy the final third in case the market re-tests its lows.

Recommendation: Buy shares of the Eden Prairie, MN-based C.H. Robinson Worldwide Inc. (Nasdaq: CHRW), a leading shipping and transportation-services company that enjoys consistent growth, high profit margins, strong cash flow, no debt and proven stability (**). Buy two-thirds of your intended position now, leaving the final third unfilled in case the broader stock market re-tests its lows.

(**) Special Note of Disclosure: Horacio Marquez holds no interest in C.H. Robinson Worldwide Inc. (Nasdaq: CHRW).

Source: Buy, Sell or Hold: Shipper C.H. Robinson Worldwide Inc. is Poised to Deliver Major Profits