Stock Picks: PBG Up, ADM Down

Shares of Pepsi Bottling Group (PBG) and PepsiAmericas (PAS) rose more than 8% in morning trading Tuesday after PepsiCo (PEP) boosted its offer to buy the soft drink bottlers in a pair of deals valued at $7.8 billion.

PepsiCo, which spun its largest bottlers out into separate companies about a decade ago, bid to buy back the companies last April, but the offer was rejected. The company is now offering to pay $36.50 a share for Pepsi Bottling, and $28.50 a share for PepsiAmericas. That's a considerable increase from its April offers of $29.50 and $23.37 a share, respectively.

Pepsico Chairman and CEO Indra Nooyi said the North American beverage and snack market has reached a point where Pepsi must derive earnings and revenue growth by controlling costs and consolidating distribution -- a reversal of the strategy it laid out 10 years ago. The deal would give Pepsi control of 80% of its North American distribution. It already owns 33% of Pepsi Bottling and 43% of PepsiAmericas.

"We believe in the North American beverage business, but we also know it is fundamentally different in every way from the category we saw in 1999 when we spun off the bottlers and that evolution will continue in the future," she said. "The operating model that exists right now makes it very difficult for any participant in the [liquid refreshment beverage] business to deliver sustainable top-line growth in profitability over the long term because the profit pool for any system is not growing enough in total to reinvest in the business and feed the appetites of multiple growth companies."

"Volumes were flat and they knew they were not going to see much growth in such a mature market," says analyst David Silver, at Wall Street Strategies. "Now that they have their bottlers, they can really group the snacks and beverages much closer together. That adds another synergy to the company."

Bottom Line: Hold
The sweetened deal terms certainly have made some investors happy. But at this point, those wanting even sweeter returns will have to wait until the companies start reaping the benefits of the combination.

Agribusiness giant Archer Daniels Midland (ADM) saw its shares tumble more than 4% in midday trading Tuesday after it reported that its fiscal fourth quarter profits fell 83% year-over-year and were well short of analysts' expectations.

The Decatur, Ill.-based company said weakness in its corn and ethanol businesses contributed to the shortfall. For the quarter, ADM earned 10 cents a share, a sharp drop from the 58 cents a share it earned in the year-ago period. Revenue fell 24% to $16.53 billion. Wall Street analysts expected earnings of 45 cents a share on revenue of $15.24 billion.

"In the fourth quarter, we felt the impact of the global economic downturn as we concluded a year of good performance overall," CEO Patricia Woertz said on a Tuesday conference call. "This really was a year of mixed performance with weak results in corn and other processing and very strong results from oilseeds and ag services. [ADM had] weak second-half results and a strong first half of the [fiscal] year."

Commodity prices are down from last summer's peak, the company said, and its ethanol business swung to a $160 million loss from a $123 million profit a year ago.

On the call, Vincent Andrews, an analyst with Morgan Stanley, raised concerns that ADM had not previously lost money in its agricultural services division, which had a weak showing that was compounded by the losses from the ethanol business.

Looking forward, the company also said changes to regulations about the composition of different ethanol blends could increase demand for corn, at least on an incremental basis.

Bottom Line: Hold
Agricultural commodities are volatile, but ADM has a long track record of smoothing out the bumps over time.