- FY25 earnings guidance maintained; packaged food companies see double digit FY earnings decline
- Keurig Dr Pepper’s acquisition of JDE Peet’s and Kraft Heinz’s split perceived negatively
- Elliott Management pushing for rethink of corporate strategy at PepsiCo to unlock value
- Selective opportunities in counters anchored by attractive valuations and enduring brands
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FY25 adjusted constant currency earnings growth guidance remains intact though YTD progress remains mixed. Major packaged F&B players have maintained guidance, except for Mondelez and Kraft Heinz, which are guiding for negative earnings growth of -10% and -15% respectively. For Mondelez, their key challenge lies in their limited ability to pass through sharp cocoa cost increases, while Kraft Heinz continues to face volume attrition in a soft consumer environment. Both Mondelez and PepsiCo are tracking behind guidance YTD, though management expects a stronger momentum in 2H25. Mondelez is planning price increases and cost control to improve profitability in 2H25, whereas PepsiCo plans to rightsize its underperforming North America snacks business to meet its full year earnings target.
Negative market reactions to recent corporate actions; upcoming ones likely to be better received. Two recent moves aimed at unlocking value triggered investor selloff: 1) Keurig Dr Pepper’s late-August agreement to acquire JDE Peet’s and 2) Kraft Heinz’s early-September plan to split into two listed entities. For Keurig Dr Pepper, investors focused on the high leverage needed to fund the deal. For Kraft Heinz, Berkshire, a major shareholder, publicly voiced disappointment with the split. In contrast, Elliott Management’s USD4bn stake in PepsiCo, equivalent to about 5% of the fund’s AUM and 2% of shares outstanding, was better received. Elliott highlighted recent underperformance and is urging refranchising of PepsiCo’s bottling operations and divestment of non-core assets such as Quaker. The aim is to refocus on the brand-led core and redeploy capital into core brands or emerging high-growth categories, supporting a valuation re-rating. Separately, Coca-Cola is exploring a sale of its underperforming Costa Coffee business, acquired for USD4.9 bn in 2018, with a muted initial reaction as losses estimated to be in the billions appear largely priced in.
Potential buy-the-dip opportunities anchored by attractive valuations and potential re-rating via corporate actions. Among the four, we see a more favourable risk-reward profile in Kraft Heinz and PepsiCo. Keurig Dr Pepper’s sharp correction looks justified given an estimated post-deal net debt to EBITDA of about 5.5x, a level seen in several underperforming consumer mega-mergers (e.g. Kraft’s merger with Heinz and AB InBev’s merger with SABMiller). While Kraft Heinz and PepsiCo face fundamental headwinds, they both possess enduring brands and are more likely to see a valuation re-rating should the appropriate corporate actions materialise. Historically, major spin-offs and demergers within the packaged F&B sector have tended to deliver outsized positive returns.
Figure 1: Returns post major splits and mergers in the packaged food and beverage space
Source: Refinitiv, DBS; note: returns are calculated based on changes in share prices and exclude dividends
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