$PEP overpaid for its stake in $CELH
Background

Recently, CNBC reported that PepsiCo took a $550 million stake in Celsius. In this deal, PepsiCo will help Celsius gain more shelf space in existing retailers and expand more into independent stores (i.e. gas stations). At the same time, PepsiCo gets an 8.5% stake in Celsius.

During the early days of the pandemic, PepsiCo bought out energy drink maker Rockstar to diversify its beverage portfolio outside of soda. Since Celsius recently overtook Rockstar in popularity, PepsiCo sees its stake in Celsius as a way to hedge against a potentially lousy buyout deal.

There have been rumors that $PEP could see itself acquiring $MNST, but those rumors disappeared recently when PepsiCo chose to invest in Monster Energy's rival, Celsius.

The issue with the deal

$CELH is currently trading with a PE of 783.75. Basically, PepsiCo acquired its stake at nosebleed valuations. Being a company whose products recently became popular, it's hard to tell whether their products will continue to be popular among consumers or prove to be a fad.

Another concern with Celsius is that its internal controls are "materially weak". The weakness of their internal controls makes the company's financials ripe for fraud. Hopefully, PepsiCo's deal with Celsius won't resemble General Motors's deal with Nikola under the leadership of Trevor Milton.

Even if the company is hiring accountants with decades of experience and is working with their auditors to improve their internal controls, there's a strong risk that the company might have to restate their financials and those restatements could show that their revenues are a lot lower than what was originally reported.

My concluding thoughts

The Celsius deal doesn't mean much to PepsiCo considering that it has other bets to bank on for growth, like their partnership with $BYND and its numerous investments in expanding recycling access and making its bottles 100% recyclable will give the company access to more consistent pricing on plastic overall as it looks to buy the plastic directly form recycling centers rather than from producers of plastic.

This company will continue to pay dividends and raise prices alongside inflation.
Reasonable Yield's avatar
I am not sure valuing Celsius on a price to earnings ratio is warranted, but tend to agree with the conclusion all the same. Their operation in China lacks the disclosure I would like as an investor, regardless of how popular the drink is.

That said, Pepsi is huge and can afford the risks.
Dollars and Sense's avatar
looks like $PEP is about 8 years to late. Would have been a great company to invest in at the end of 2014.

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