YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

"You can't...turn on the faucet and have chips come out"

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In WSJ’s weekend journal, there was a quote from Pepsi’s finance chief “You can’t…turn on the faucet and have chips come out.”

He was referring to how beverage sales are slowing as consumers choose tap water, but that snack sales are actually increasing. They attributed some of this increase to their ability to raise prices (which comes from owning strong brand names, especially among small price-tag items).

The company name “PepsiCo” is certainly misleading, as the company actually makes more profit from their snacks business. Perhaps they should rename themselves “Frito-Lay.”

If you’ve been reading our shareholder letters, you’d probably recognize that Pepsi definitely fits the bill for the type of company we like these days. Strong brands (able to raise prices should inflation begin to surge over the years), large international presence (40% revenues from overseas), very high return on tangible assets (have excess cash to repurchase stock, make acquisitions, etc.), fairly non-cyclical earnings (barring a volatile dollar) stemming from disposable products that are still used in a recession (people certainly don’t stop eating during tough times…in fact, I understand if you’re feeling down and out, you may actually increase your snack consumption), and all this at a fair price.

Dropping from $79 a year ago to $50 today, it’s off 37% from its high. Businesses that are this solid don’t deserve to trade at such low cash flow multiples, and if they do, we’re happy to become owners. As we stated in our 2008 Q4 letter, stock prices DO NOT dictate the value of a business. Sometimes, stock prices can take a nose dive while the business continues to grow. Pepsi is a great example. Pepsi’s stock has gone from the 70’s to about $50, and yet, over that year, Q4 revenue grew 3.1% (12% growth overseas). This kind of stock price volatility certainly does not reflect what’s going on inside the company.

Thank-you “Mr. Market” for the buying opportunity. I’m going to start telling my wife to purchase more snacks at the grocery store!

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | February 17, 2009 | Permalink

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