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PepsiCo Inc. (PEP - Analyst Report) in agreement with privately held, German dairy producer, Theo Muller Group, has formed a joint venture to sell yogurt products in U.S. This marks the company’s entry into the American dairy market.

The joint venture to be called Muller Quaker Dairy will supply a range of dairy products like Muller Corner, Muller Greek Corner and Muller FrutUp from mid-July 2012 through supermarkets and club retailers in the Northeast and Mid - Atlantic States.

The deal which brings together PepsiCo’s brand name and marketing prowess and Muller’s more than 100 years of dairy expertise is expected to be beneficial for both companies. PepsiCo will leverage Muller Group’s popularity in Europe to capture a growing share in the U.S. dairy market.

PepsiCo already sells dairy products outside U.S. In September last year, PepsiCo acquired Russia’s largest dairy company, Wimm-Bill-Dann. It also has a joint venture with Almarai, Saudi Arabia's largest dairy company, since 2009.

Changing consumer preferences for healthier drinks and foods are affecting PepsiCo’s carbonated soft drinks (CSD) volumes. Accordingly, the company is looking to diversify into healthier food and beverage categories like energy drinks, yogurt and wholesome snacks. In fact, PepsiCo hopes to grow its global nutrition portfolio to $30 billion in revenue by 2020. Some of its popular health and wellness brands include Quaker, Tropicana and Gatorade.

Our Recommendation

Currently, the stock has a Zacks #4 Rank (short-term Sell rating). Over the long term, we provide a Neutral recommendation on PepsiCo.

We are encouraged by PepsiCo’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. Moreover, PepsiCo’s marketing support investments, brand building innovation and cost saving efforts will boost growth in the long term.

However, a challenging consumer spending environment combined with higher commodity costs raises concern. Moreover, PepsiCo faces strong competition from The Coca-Cola Company (KO - Analyst Report). The Coca-Cola Company commands a larger share of CSD consumption in the U.S. measured channels and also enjoys higher market share in many markets outside the United States than PepsiCo.

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