PepsiCo Inc.

Equity Research Report Analysis

ENKHTSETSEG
2009100496
 ENKHTSETSEG [ENY] 2009100496

PepsiCo Inc. ENKHTSETSEG BAT-ERDENE

KHU: 2009100496

(82-0)10-8061-6203

eny_hr@yahoo.com

COMPANY PROFILE

Name: PepsiCo Inc.

Ticker: PEP (NYSE)

Industry: Processed & Packaged Goods

COMPANY OVERVIEW
Number of Shares of Common Stock Outstanding:
1.58 Billion

PepsiCo is a world leader in convenient foods and

beverages. The company’s revenue is more than ONE YEAR SHARE PRICE PERFORMANCE

$ 43.23 billion with net income of $5.95 billion

(2009 annual report) and employs around 203,000
employees. The company’s products are sold in
approximately 200 countries and they operate in
four divisions: PepsiCo Americas Foods (PAF),
PepsiCo Americas Beverages (PAB), PepsiCo
Europe, and PepsiCo Asia, Middle East and Africa
(AMEA).
PepsiCo (symbol: PEP) is a publicly traded
company. Its shares are traded principally on the 5 YEAR SHARE PRICE PERFORMANCE
New York Stock Exchange in the United States
(NYSE). The company is also listed on the
Amsterdam, Chicago, Swiss and Tokyo stock
exchanges. PepsiCo has consistently paid cash
dividends since the corporation was founded in
1965. The stock currently trades $63.99 as of
Friday, November 26, 2010.

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PepsiCo World Headquarters is located in

BRANDS
Purchase New York approximately 45 minutes
from New York City. Edward Durrell Stone Pepsi Cola Brands
designed the 7 building headquarters complex.
The building occupies ten acres of 144 acre
complex that includes the Donald M. Kendall
Sculpture Gardens, “a world acclaimed sculpture Frito-Lay Brands
collection in a garden setting” designed by Russell
Page.
PepsiCo’s success is the result of superior
products, high standards of performance,
Tropicana Brands

distinctive competitive strategies and the high

integrity of its people. The corporation’s mission is
as follows:
Gatorade Brands
“Our mission is to be the world’s premier
consumer products company focused on
convenience foods and beverages. We seek to
produce healthy financial rewards to investors as Quaker Brands
we provide opportunities for growth and
enrichment to our employees, our business
partners and the communities in which we
operate. An in everything we do, we strive for
honesty, fairness and integrity.”
PepsiCo consists of ① the snack businesses of
Frito-Lay North America and Frito-Lay
International, ② the beverage businesses of Pepsi
Cola North America and PepsiCo Beverages
International, ③ Gatorade/Tropicana North
America juice products, and ④ Quaker Foods
North America, manufacturer and marketer of
ready to eat cereals and other food products.

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Revenue Mix
 PepsiCo food brings in 63% of revenue while beverages bring in the remaining 37%
 PepsiCo has 52% of its revenue coming from the US and 48% coming from other countries. Besides
the United States, the largest amount came from Mexico (7%), Canada (5%), and the United Kingdom
(4%).
PepsiCo, Inc
Sector:
Sector: Consumer
Consumer Goods
Goods
Industry:
Industry: Processed
Processed & Packaged
& Packaged Goods
Goods
Index
Index S&PS&P
Membership:
Membership: 100;
100; S&PS&P 500;
500; S&PS&P 1500
1500 Super
Super Comp
Comp
700700
Headquarter:
Headquarter: Anderson
Anderson HillHill Road,
Road, Purchase,
Purchase, NYNY 10577,
10577, United
United States
States
Full
Full Time
Time Employees:
Employees: 203,000
203,000
Key
Key executives:
executives: Indra
Indra Nooyi
Nooyi (Chairman,
(Chairman, CEO);
CEO); Hugh
Hugh Johnston
Johnston (CFO);
(CFO);
Fiscal
Fiscal Year
Year Ends:December
Ends: December
Revenue:
Revenue: 43.23
43.23 billion
billion (2009/12);
(2009/12); 15.51
15.51 billion
billion (2010/09)
(2010/09)
NetNet Income:
Income: 5.95
5.95 billion
billion (2009/12);
(2009/12); 1.92
1.92 billion
billion (2010/09)
(2010/09)
Stock
Stock TypeClassic
Type: ClassicGrowth
Growth
Stock
Stock Style:
Style: LargeGrowth
Large Growth
Website:
Website: http://www.pepsico.com
http://www.pepsico.com

MANAGEMENT

Indra K. Nooyi is the Chairman of the Board and

Chief Executive Officer of PepsiCo, Inc since 2007.
She is 54 years old, with sixteen years of service
with company. Her total annual pay is $4.30million
including salary, bonuses etc. as Dec 31.2009.
Hugh Johnston is CFO since 2010 and his
compensation and options compensation are not
available now.
John Compton is the CEO of PepsiCo Americas
Foods since 2007. His compensation is $ 2.13M
and he has exercised 1,381,085 options in the
company and its value is $3.61M as Dec 31.2009. FIGURE 1: Key Executives

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COMPETITION

BEVERAGES
In the domestic beverage market, the Coca-Cola
Company (KO) is PepsiCo’s main competitor. In
2008, Coca-Cola had 23% share of U.S non-
alcoholic beverage volume, while PEP held a 25%
share. KO has a higher worldwide share of
carbonated soda beverages, but PepsiCo has a
more diverse product line and leads the industry in Figure 2: 2008 U.S non-alcoholic beverage
markets by volume
non-carbonated soft drink innovations. PepsiCo’s
revenues are also substantially higher than Coca-
Cola’s, due to PepsiCo’s snack and convenient
foods business, a market in which KO doesn’t
participate.
Pepsi also pays the Dr Pepper Snapple Group
(DPS) for the rights to sell its products, along with
KO.

Figure3: 2008 U.S Snack Market by volume

SNACKS and CONVENIENT FOODS
PepsiCo’s Frito-Lay and Quaker brands compete in
various parts of the larger food industry. Its snack
foods manufactured by the Frito-Lay segment hold
a commanding share of the U.S market, accounting
for around 39% of domestic snack food sales in
2006. PepsiCo’s main competitor in the food
market overall is Kraft Foods (KFT). Kraft’s
products include snacks, chesses, diary, and cereal
products, which puts it in competition both with
Frito-Lay and Quaker products. Muck like the KO,
Kraft doesn’t participate in both the food and soft
drink markets, giving PEP the advantage of having a
more diverse offering of products. Figure4: COLA vs. Pepsi: 1year share price
Performance

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Current statistics for Pepsi’s competitors are found below:

PepsiCo Coca-Cola Dr. Pepper Industry

Current Price 64.18 63.09 36.27
Market Cap 101.58B 146.54B 8.27B 257.57M
Revenue (ttm) 52.92B 32.14B 5.58B 507.08B
P/E (ttm) 16.16 19.42 17.13 16.26
EPS (ttm) 3.97 3.25 2.13 0.61
Net Income (ttm) 6.28B 7.58B 530.00M N/A
Dividend Yield 2.94% 2.79% 2.48% 3.2%
ROE 40.01 30.25 19.06 28.7%

PepsiCo vs. Coca Cola market share by segment (2009)

Companies Soft Drinks Orange Juice Bottled Water Iced Tea Specially Drinks
Starbucks
Pepsi Tropicana Aquafina Lipton
PepsiCo Frappuccino
13.6% > 40% 15.1% 32.8%
Sobe
Coca Cola Minute Maid Dasani Nestea
Coca-Cola N/A
Classic 20.40% <20% 8.7% ~16%

Figure 5: PepsiCo vs. Coca Cola market share by segment

While cola drinks have historically dominated the non alcoholic beverage segment, the last decade has seen a
reversal of this trend in favor of non-carbonated drink growth benefiting Pepsi. Pepsi will seek to continue its
diversification strategy through planned experimentation with the flavored water and energy drinks segments
and healthier products in cola and snack segments.

According to some researches there are several reasons why a diverse product strategy works for Pepsi. One,
Pepsi’s products do not cannibalize from each other; revenues for both drinks and food products rose when
they were paired each other at convenience store checkouts. Its products mix also balances the seasonality of
their products lines as food products sell higher in the cooler months and drink sales sell higher in the warmer
months. Last, Pepsi stands to gain as health conscious consumer’s switch from colas and soft drinks to water
and tea because its non carbonated drink brands are category leaders.

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TRADING INFORMATION VALUATION MEASURES FINANCIAL HIGHLIGHTS

Volatility (Beta): 0.53

Last Price: $64.54 Market Cap: 102.54B ROA (ttm): 10.70%

52 Week Change: 2.88% P/E: 16.1 ROE (ttm): 36.27%

52 Week High (6 Oct): $68.11 P/B: 5.1 Revenue: 43.232M

52 Week Low (Feb8): $58.75 P/S: 1.9 Net Income: 5.946M

50 Day Moving Average: $65.08 P/CF: 12.6 (Dec 2009)

200 Day Moving Average: $64.71 Dividend Yield%: 2.9

Shares Outstanding: 1.58B

Payout ratio: 47%

Analyst Recommendations:

FIGURE 6: Analyst Recommendations trends

FIGURE 7: Analyst Recommendations trends

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Pepsi has seen over 8% average annual growth
over the past five years. They have also seen 8%
average earnings growth over the past five years.
EPS (Earnings per share) growth for 2010 and 2011
is estimated by analysis to be 12% per year.
fact that for the last several years PepsiCo has
been too highly valued and is now at a more
reasonable stock price.
Dividend Growth

YEAR DIVIDEND YEILD

Cash Flow Growth:
2009 $ 1.775 3.10%
YEAR CASH FLOW
2008 $ 1.65 2.60%
2009 $ 6.8 billion
2007 $ 1.425 2.20%
2008 $ 7.0 billion
2006 $ 1.16 1.90%
2007 $ 6.9 billion
2005 $ 1.01 1.85%
2006 $ 6.1 billion
2004 $ 0.85 1.70%
2005 $ 5.8 billion
2004 $ 4.3 billion
Pepsi has grown their dividend by over 15%

PepsiCo has seen nearly 10% annual cash flow annually over the last 5 years.

growth over the past five years.

Profit Margin
PEP has a net profit margin of 14% which it has
maintained over the last 5 years or more. This is
lower that the profit margin of Coca Cola because
PEP sells both snacks and beverages while Coke
sells only beverages, which typically carry a higher
profit margin.
One of the PepsiCo’s biggest draw is its dividend
policy. A fierce competition between Coca-Cola
and PepsiCo over the last decade has resulted in
consistent dividend raises, regardless of economic,
industry or firm climate. Using a simple linear
prediction, Pepsi’s 2010 dividend will research
$1.91 per share.

Dividend growth
PEP is currently rocking an over 2.9% dividend
yield. Looking through its dividend yield history,
one sees that PepsiCo’s yield has steadily increased
over the last several years. This is due in part to
quickly increasing dividend, but is also due to the
FIGURE 8: PEP & KO Dividend Payout

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SUMMARY

Five year average revenue growth: 8%

Five year average earnings growth: 8%

Five year average cash flow growth: 10%

Current dividend yield: 2.9%

Five year dividend growth 15% through this year’s dividend growth was 6%

CAPM

k=rf + β (Erm-rf)

Risk free rate: 3.0% (10-year US. Treasuries in 2010.Dec, Bloomberg)

Expected market return: 10.2% (S&P expected return as of Dec.2010 http://www.standardandpoors.com/ )

Beta: 0.53

k=rf + β (Erm-rf) = 3+0.53(10.2-3) = 6.816%

DDM model:

Five year dividend growth 15% through this year’s dividend growth was 6%

Dividend of the previous year is $1.775

First 2 years: 15%

Following 3 years: 7%

Growth rate forever: 3%

I believe that for the next 5 years PepsiCo will have a growth a growth rate somewhere between 6-7%.

Afterwards, PepsiCo will ultimately grow at the rate of the economy (GDP) which I set at 4% or 3%.

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According to my Excel Spreadsheet that I made: V=$65.982

After this evaluation and valuation of the DDM I estimate the market price for a share of PepsiCo is
somewhere in between $65.982 (3%) and $86.54 (4%).

Current price of PEP is $64.18 on November 31

The recommendation at this time is buy or a strong hold.

1
FIGURE 1: Key Executives from http://uk.finance.yahoo.com
FIGURE 2: 2008 U.S non-alcoholic beverage markets by volume
www.wikinvest.com/stock/Pepsico_(PEP)
FIGURE 3: 2008 U.S Snack Market by volume
www.wikinvest.com/stock/Pepsico_(PEP)
FIGURE 4: COLA vs. Pepsi: 1year share price Performance
http://quote.morningstar.com
TABLE 1: PepsiCo vs. Coca Cola market share by segment
http://www.wikinvest.com/stock/Pepsico_(PEP)
FIGURE 5: Analyst Recommendations trends
http://uk.finance.yahoo.com
FIGURE 6: Analyst Recommendations trends
http://quote.morningstar.com
FIGURE 7: PEP & KO Dividend Payout

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