PepsiCo.Inc
Executive Summary
PepsiCo.Inc operates three major businesses: Snack Foods, Bevarages, and
Quaker oats. The company's snack-food products include Fritos, Doritos, and Tostitos
corn chips; Lay's and Ruffles potato chips; Cheetos cheese-flavored snacks; Rold Gold
pretzels; and Cracker Jack candy-coated popcorn. Fifty four percent of 2001 sales and
Fifty Six percent of operating profits for PepsiCo came from its Snack Food business.
The Company’s Beverage Business makes soft drinks, including Pepsi-Cola, Diet Pepsi,
Pepsi One, Mountain Dew, Slice, and Mug, which it distributes to independent and
company-owned bottlers. PepsiCo also produces Tropicana juice products and Aquafina
bottled water products. It’s Beverage Business in 2001 brought in 39% of PepsiCo’s
sales, and 35% of operating profits. PepsiCo acquired Quaker Oats in 2001. Quaker
Oats makes the Gatorade sports drink, Breakfast Cereals, Oatmeals, grits, pancakes, rice,
and pasta. Quaker Oats brought in 7% of PepsiCo total sales and 9% of operating profit.
PepsiCo international business is 29% of sales. Many of PepsiCo's brand names are over
100-years-old, but the corporation is relatively young. PepsiCo was founded in 1965
through the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and
PepsiCo merged with The Quaker Oats Company, including Gatorade, in 2001.
PepsiCo’s success is the result of superior products, high standards of performance,
distinctive competitive strategies and the high integrity of there people.
PepsiCo’s main competitor is Coca Cola. We feel that PepsiCo has a better growth
potential then Coca Coal. We also like the fact that PepsiCo is also in the Snack Foods
Business; this adds diversity to the companies’ product range. PepsiCo recently sign
some big contracts with Burger King and Applebee's, this will help PepsiCo gain market
share over Coca-Cola. Although PepsiCo is involved in three major businesses we feel
that this business fit in with each other and together give PepsiCo a competitive
advantage especially since they use similar distribution channel through out there
businesses. This could give them bargaining power in the future once there brand name
products become necessities in most stores.
UConn Foundation Student Managed Fund
Trade Form
Presentation Date: 02/03/03
Covering managers: Andreas Miliotis, Javed Singha
Anticipated date for trade: 01/30/03
Stock Name: PepsiCo.Inc
Ticker: PEP
Decision: Buy
Number of shares: approximately 127 shares
Approximate cash value: $5000
Limits:
Stop Loss: at $32.38 or 20 % of current price
Appreciation review price target: $47.2
Vote results
For: 11 against: Abstain:
Trade executed by: Professor Ghosh
Trade manager present:
University of Connecticut Student Managed Fund
Stock Analysis Report
February 02, 2003
PepsiCo.Inc (NYSE)
Large Cap: $ 70.9 Billion
Industry: Beverages
Sector:
Consumer/Non-Cyclical
Valueline: Timeliness: 3
Safety: 1
Technical: 3
Business Summery
PepsiCo, Inc., incorporated in 1919, manufactures, markets and sells soft drinks and
concentrates, and snack foods. PepsiCo and its divisions and subsidiaries operate in three
business segments: Worldwide Snacks, Worldwide Beverages and Quaker Foods North America
(QFNA). The Company's snack food business is comprised of two business units: Frito-Lay North
America (FLNA) and Frito-Lay International (FLI). The Company's beverage business is
comprised of three business units: Pepsi-Cola North America (PCNA), Gatorade/Tropicana North
America (GTNA) and PepsiCo Beverages International (PBI). On August 2, 2001, the Company
completed a merger transaction with The Quaker Oats Company (Quaker) whereby Quaker
became a wholly owned subsidiary of PepsiCo.
Worldwide Snacks
FLNA manufactures, markets, sells and distributes a varied line of salty, sweet and grain-based
snack foods throughout the United States and Canada, including Lay's potato chips, Doritos and
Tostitos tortilla chips, Cheetos cheese flavored snacks, Ruffles potato chips, Fritos corn chips, a
variety of dips and salsas, Quaker Chewy granola bars, Rold Gold pretzels, Sunchips multigrain
snacks, WOW! brand low fat and no fat versions of potato and tortilla chips, Funyons onion
flavored rings, Grandma's cookies, Quaker Fruit and Oatmeal bars, Cracker Jack candy-coated
popcorn and Quaker Quakes rice cakes. FLNA also sells and distributes Oh Boy! Oberto brand
meat snacks under an agreement with the Oberto Sausage Company.
FLI's products are available in approximately 120 countries outside the United States and
Canada through Company-owned businesses and affiliated companies. On most of the European
continent, the Company's snack food business is conducted through Snack Ventures Europe, a
joint venture between PepsiCo and General Mills, Inc., in which PepsiCo owns a 60% interest. In
ten Latin America countries, the Company's snack food business is conducted through joint
ventures with Libracor, Ltd., a part of Venezuela's Empresas Polar Group. The Company has a
50% interest in these ventures, except in one country where it owns a 70% interest. FLI sells a
variety of salty and sweet snack food products that appeal to local tastes including Sabritas snack
foods, Alegro and Gamesa sweet snacks in Mexico, Walkers snack foods in the United Kingdom
and Smith's snack foods in Australia. In addition, many of the Company's U.S. brands, such as
Lay's, Doritos, Tostitos, Cheetos, Ruffles and Fritos brand salty snack foods, have been
introduced internationally. FLI's products also include various Quaker food and snack products.
Principal international markets include Mexico, the United Kingdom, Brazil, Spain, the
Netherlands, Australia and South Africa.
Worldwide Beverages
PCNA manufactures concentrates for Pepsi, Diet Pepsi, Wild Cherry Pepsi, Pepsi One, Pepsi
Twist, Mountain Dew, Mountain Dew Code Red, Mug, Sierra Mist, Slice and FruitWorks. PCNA
also manufactures and sells Dole single-serve juices and juice drinks, SoBe juice drinks and teas,
and AMP energy drinks. These concentrates and beverages are sold to bottlers in the United
States and Canada. PCNA's bottlers are licensed, within defined territories, to manufacture,
market, sell and distribute Pepsi beverages and syrups. PCNA also licenses its bottlers to
process and distribute Aquafina bottled water. PepsiCo has a minority interest in six of these
bottlers, including its three anchor bottlers, The Pepsi Bottling Group, PepsiAmericas and Pepsi
Bottling Ventures, which distribute approximately three-quarters of the Company's North
American volume. The Pepsi/Lipton Tea Partnership, a joint venture of PepsiCo and Unilever
N.V., sells tea concentrate to Pepsi bottlers, and develops and markets ready-to-drink tea
products under the Lipton trademark, including Lipton Brisk and Lipton's Iced Tea. PepsiCo's
partnership with the Starbucks Corporation develops ready-to-drink coffee products, which are
sold under the Starbucks Frappuccino trademark and are distributed by PCNA's bottlers.
GTNA produces, markets, sells and distributes Gatorade sports drinks, Tropicana Pure Premium,
Tropicana Season's Best, Tropicana Twister, Dole and Tropicana Pure Tropics juices and juice
beverages, and Propel fitness water.
PBI manufactures concentrates for Pepsi, Pepsi Light, Pepsi Max, Wild Cherry Pepsi, 7UP, Diet
7UP, Mirinda, KAS, Mountain Dew and other brands for sale to bottlers outside of the United
States and Canada. PBI's bottlers are licensed, within defined territories, to manufacture, market,
sell and distribute Pepsi beverages and syrups. The Company has a minority interest in
approximately 40 of these bottlers. In certain countries PBI owns and operates the bottling
businesses that manufacture, sell and distribute Pepsi beverages. PBI also produces and sells
Gatorade sports drinks and Tropicana juices and juice beverages outside of the Untied States
and Canada through Company-owned and independently owned bottlers and distributors. PBI
beverages are sold in approximately 170 countries. Principal international markets include
Mexico, China, Saudi Arabia, India, Argentina, Brazil, Thailand, the United Kingdom, Spain and
The Philippines.
Quaker Foods North America
QFNA manufactures, markets and sells hot and ready-to-eat cereals, flavored rice and pasta
products, mixes and syrups, hominy grits and cornmeal in the United States and Canada. QFNA
products include Quaker oatmeal, Cap'n Crunch and Life ready-to-eat cereals, Rice-A-Roni rice,
Aunt Jemima mixes and syrups, Quaker grits, Pasta Roni pasta and Near East rice. QFNA
utilizes both its own and broker sales forces, which sell to a variety of wholesale and retail
accounts.
Financial Data
For the 36 weeks ended 9/7/02, net sales increased 7% to $17.66 billion. Net
income increased 26% to $2.51 billion. Revenues benefited from volume gains across all
divisions and increased prices. Net income also reflects a higher operating profit margin
due to efficiencies. According to Multex, analysts expect the Company to report fourth
quarter earnings per share of $0.50 and full year 2002 earnings per share of $1.95.
Ratio Comparisons.
For the ratio analysis we compared the stock to the industry and to its main competitor
Coca-Cola Company (Ko) and one other smaller competitor Hansen Natural Corp
(HANS)
Valuation
Ratios
P/E Ratio
(TTM)
P/E High Last 5 Yrs.
P/E Low Last 5 Yrs.
Beta
Price to
Sales
(TTM)
Price to
Book
(MRQ)
Price to
Tangible
Book
(MRQ)
Price to
Cash Flow
(TTM)
Price to
Free Cash
Flow
(TTM)
% Owned
Institutions
PEP
KO
HANS
Industry
Sector
S&P 500
23.25
25.54
13.75
24.9
21.96
22.9
45.73
93.75
28.66
74.42
47.99
49.28
20.89
26.14
8.37
23.99
18.73
16.55
0.73
0.41
0.89
0.53
0.35
1
2.88
4.94
0.44
3.73
2.38
2.85
7.52
9.15
1.55
7.91
6.75
4.18
15.76
13.13
4.01
14.16
13.1
6.66
17.32
21.3
10.87
18.33
15.96
16.4
26.73
60.75
8.04
44.2
32.26
25.71
65.67
57.22
11.86
56.34
53.32
61.88
We noticed a few interesting things from the valuation ratios. Firstly PepsiCo’s P/E is in
line with its competitors and the industry. We can also see that Pepsi is trading near its 5
year low P/E this could indicate a bottom price. Also we can see that it’s five year high
P/E indicates a good upward potential for the company. Pepsi also has a much lower
price to Free Cash Flow ratio then Coca Cola this is exactly what we would expect to see
from a company that offers value. We also see a large percentage of institutional
ownership this is also good because there are many professional investors constantly
watching to make sure the company is doing the right things today, and making strategic
plans for the future.
Dividends
Dividend
Yield
Dividend
Yield - 5
Year Avg.
PEP
KO
HANS
Industry
Sector
S&P 500
1.46
1.87
NA
1.59
2.47
2.25
1.3
1.1
0
1.15
1.95
1.33
Dividend 5
Year
Growth
Rate
Payout
Ratio
(TTM)
5.26
7.57
NM
7.73
7.49
1.52
32.38
46.48
0
38.27
40.41
26.94
Pepsi Dividend yield is in line with it’s competitors. We also picked Pepsi because we
believe the elimination of double taxation on stocks is a real possibility, and that this will
benefit dividend paying stocks. Pepsi has been one of the company that has constantly
paid and increased it’s dividend since 1986. We believe that many investors will move
towards dividend paying stocks, since the internet Bubble. Investors want to see real
returns not just paper returns and this is exactly what a dividend paying stock like Pepsi
Offers.
Growth
Rates(%)
Sales
(MRQ) vs
Qtr. 1 Yr.
Ago
Sales
(TTM) vs
TTM 1 Yr.
Ago
Sales - 5
Yr. Growth
Rate
EPS
(MRQ) vs
Qtr. 1 Yr.
Ago
EPS
(TTM) vs
TTM 1 Yr.
Ago
EPS - 5
Yr. Growth
Rate
Capital
Spending 5 Yr.
Growth
Rate
PEP
KO
HANS
Industry
Sector
S&P 500
6.6
13.36
16.84
10.1
8.24
8.31
5.03
19.48
25.59
12.97
12.18
4.22
5.78
1.48
21.01
4.09
4.63
11.52
57.1
8.33
0
27.76
35.36
24.99
18.52
26.19
12.41
23.81
31.27
18.12
20.19
2.94
49.68
9.84
8.25
8.8
-4.07
-4.93
32.32
-3.03
-0.08
-0.99
PepsiCo has a 5 year sales growth rate which is much larger Coca Cola’s this is actually
one of the main reasons for us choosing Pepsi over Coca Cola. We believe that they will
continue to have this strong growth. Capital spending per share has gone down, this can
be good and bad however in current financial conditions. I believe this is a necessary step
as it leaves the company with more free cash flow.
Financial
Strength
Quick
Ratio
(MRQ)
Current
Ratio
(MRQ)
LT Debt to
Equity
(MRQ)
Total Debt
to Equity
(MRQ)
Interest
Coverage
(TTM)
PEP
KO
HANS
Industry
Sector
S&P 500
0.82
0.61
1.18
0.71
0.64
1.15
1.17
1.02
3.16
1.08
1.18
1.66
0.24
0.24
0.17
0.51
1.15
0.74
0.32
0.48
0.18
0.71
1.43
0.98
24.68
27.01
20.61
25.56
14.94
10.98
PepsiCo Quick Ratio is higher then the Industry and Sector in which it competes. This is
very good because it means that PepsiCo is more Liquid then all the other companies. It
also has a better Current ratio.
Profitability
Ratios (%)
Gross
Margin
(TTM)
Gross
Margin - 5
Yr. Avg.
EBITD
Margin
(TTM)
EBITD - 5
Yr. Avg.
Operating
Margin
(TTM)
Operating
Margin - 5
Yr. Avg.
Pre-Tax
Margin
(TTM)
Pre-Tax
Margin - 5
Yr. Avg.
Net Profit
Margin
(TTM)
Net Profit
Margin - 5
Yr. Avg.
Effective
Tax Rate
(TTM)
Effective
Tax Rate - 5
Yr. Avg.
PEP
KO
HANS
Industry
Sector
S&P 500
56.13
68.3
43.29
61.03
48.03
47.55
59.26
69.22
45.56
62.5
47.69
47.87
18.29
30.29
5.86
24.18
19.92
20.65
14.4
27.5
8.63
21.23
18.47
22.05
17.71
26.44
5.7
21.24
16.89
18.49
13.62
23.75
8.1
18.14
14.99
18.34
18.18
26.91
5.43
21.28
15.54
15.58
13.58
24.97
7.48
18.31
14.02
17.34
12.38
19.33
3.23
15.01
10.45
10.47
9.18
16.8
4.78
12.32
9.04
11.38
31.9
28.17
40.44
30.1
33.3
32.28
31.02
33.19
31.95
32.04
36.4
35.49
Morningstar
Profitability Grade:
A+
What is this?
Fiscal year-end: December
Return on Assets %
Industry Rank
Return on Equity %
Industry Rank
TTM = Trailing 12 Months
2001
TTM
1997
1998
1999
2000
----NMF
---
----NMF
---
12.6
6
NMF
---
12.3
13
33.6
13
12.3
18
30.8
27
13.3
6
33.3
12
--1.1
---
--1.1
---
10.0
1.3
---
10.0
1.2
2.7
9.9
1.2
2.5
11.3
1.2
2.5
Industry Rank (100=Worst)
ROE Breakdown
Net Margin%
Asset Turnover
Financial Leverage
We believe that a better measure of Profitability can be found using Morningstar
information shown above. Although further above show PepsiCo to be less Profitable
then Coca Coal when we look at more relevant indicators of profitability such as Return
On assets, and return on equity we see that PepsiCo is better then Most of its competitors.
Efficiency
Revenue/Employee
(TTM)
Net
Income/Employee
(TTM)
PEP
KO
HANS
Industry
Sector
S&P 500
179,308
567,211
976,981
390,111
397,797
545,543
22,203
109,632
31,567
66,920
43,388
74,148
10.02
10.58
16.54
10.44
12.24
9.39
Inventory Turnover
(TTM)
7.85
5.58
5.03
7.26
6.68
10.62
Asset Turnover
(TTM)
1.11
0.9
2.51
0.98
1.18
0.94
Receivable
Turnover (TTM)
PepsiCo has a better inventory turnover then Coca-Coal this shows that it is more
efficient. Its other ratios need some improvement in this section but efficiency is
something that can be improved easier then some other parts of the business.
CHART
Recent news
PURCHASE, N.Y., Jan. 31 PRNewswire-FirstCall-AsiaNet -- The Board of Directors of PepsiCo
(NYSE: PEP) today declared a quarterly dividend of 15 cents per share. The dividend is
payable March 31, 2003 to shareholders of record on March 14, 2003.
January 03, 2003
Burger King Corporation announced that it has signed a multi-year, exclusive agreement with
PepsiCo Inc.'s Pepsi-Cola North America to offer Aquafina bottled water in each of its 8,200
restaurants in the United States. The new beverage offering will become the exclusive bottled
water of the Burger King system in the U.S.
December 19, 2002
Applebee's International, Inc., a casual dining concept with nearly 1,500 restaurants worldwide,
has selected PepsiCo Inc.'s Pepsi-Cola North America as its refreshment beverage supplier of
choice in the United States. The multi-year agreement features a full range of Pepsi beverages,
including carbonated and non-carbonated products.
PURCHASE, N.Y. (Reuters) - Beverage and snack food company PepsiCo Inc. (NYSE:PEP - News)
on Thursday said Robert Morrison, head of its North American operations, would retire and leave the
board of directors along with Pepsi's former chairman, Roger Enrico.
July 19, 2002
PepsiCo Inc. announced that its Board of Directors has authorized the Company to buy back up
to $5 billion of common stock over the next three years. PepsiCo said the Securities and
Exchange Commission agreed that the repurchases would not violate the terms of the pooling-ofinterests accounting the Company has used for its merger with The Quaker Oats Company.
PURCHASE, NY (October 7, 2002) – In response to a tender offer issued today by The Pepsi
Bottling Group (NYSE: PBG), PepsiCo (NYSE: PEP) today affirmed its intention to tender all
shares it holds in Mexican bottler Pepsi-GEMEX (NYSE: GEM).
PepsiCo is currently the second largest shareholder in GEMEX. Successful completion of the
tender offer would make The Pepsi Bottling Group, already the world’s largest Pepsi bottler, the
largest Pepsi bottler in Mexico. Among world soft drink markets, Mexico ranks second in size only
to the United States.
PepsiCo Chairman and Chief Executive Officer Steve Reinemund said: "PBG is uniquely
equipped to build on the outstanding success of GEMEX founder Enrique Molina. We fully
support this transaction as an important step to enhance the long-term growth opportunities for
Pepsi in Mexico."
August 19, 2002
The Wall Street Journal reported that PepsiCo Inc. said it plans to expand distribution of
Gatorade to Pepsi vending machines and to schools, which sell other Pepsi beverages.
April 19, 2001
The North American Coffee Partnership (NACP), a joint venture between Starbucks Coffee
Company and PepsiCo, Inc., unveiled a new flavor to complement the existing bottled
Frappuccino coffee drink line-up, Hazelnut. The newest offering is currently available in West
Coast markets and in Chicago, Texas and Oklahoma. Distribution to the entire USA is expected
by September 2001.
Models:
Risk Free Rate:
S&P500 (10 year average return, rm):
Beta:
4.095%
7.930%
.70
1. DDM Model
k=rf +β(rm-rf): 6.78
Earnings 1993: .98
Earnings 2002: 1.95
ge: (1.95/0.98)^(1/9)-1= 7.9%
Average ROE: 31.75 (4 year average)
Average Retention: 1-[(.355+.346+.301+.268)/4] = 68.25%
gr: ROE*retention ration (b)=.3175 *.6825=21.7%
Average g= (.217+.079)/2=14.8%
1. Multistage Growth Model
Is not necessary since this is a mature company growth will continue to be steady.
2. No Growth
Po = Eo/k = 1.95/.0678 = $29
3. P/E Model
Avg P/E ratio 25
Expected EPS (VLIS)= $2.15
5-Year Horizon: $2.90
P/E Ratio: 22.1
Projected high price for the next 5 years: $2.9 * 22.1 = $64.09
Lowest price in the last 3 years: $29.7
Current Price: $40.48
Quartiles
Strong buy: $29.7-38.29
Weak buy:
$38.30-46.89
Hold:
$46.90-55.49
Sell:
$55.49-64.09
Upside potential:
$64.09-40.48= 23.61
Downside potential $40.48-29.7 = 10.78
Upside/Downside potential:
Buy.
4. Valuepro.net
Intrinsic Value
Growth Rate
Risk Free Rate
WACC
56.82
12
4.095
6.97
5. SSG Model
Historical Sales
Sales Growth Used
Historical EPS
EPS
7%
6.3%
2.9%
-2.6%
Recommendation: Buy
Upside/Downside potential 4.1
6. Valueline Model
CEFT: Long Term Debt + Shareholder Equity:
Cash Flow Growth Estimate:
Common Shares Outstanding:
Average Annual P/E Ratio:
Return on total capital:
The Future Price: =$116
7. Recommendation
Buy 127 shares shares at $39.37 = $5000
Downside review:
$ 33
Stop loss:
$ 31.49 (-20%)
Upside review:
$ 47.244 (20%)
11,325(million)
9.5%
1550 (million).
23
28%
N=10
Ownership Structure
Ownership
· Insider and 5%+ Owners: 0%
· Over the last 6 months:
· 3 insider sells; 540.0K shares
(7.3% of insider shares)
· Institutional: 66% (66% of float)
(2,961 institutions)
· Net Inst. Selling: 10.3M shares (+0.91%)
(prior quarter to latest quarter)
Top Institutional Holders
Shares %Out*
Value** Reported
Barclays Bank Plc
73,037,867
4.23 $3,158,157,369 30-Sep-02
FMR Corporation (Fidelity
Management & Research Corp)
62,037,350
3.59 $2,682,495,014 30-Sep-02
State Street Corporation
46,915,373
2.72 $2,028,620,728 30-Sep-02
Vanguard Group, Inc. (The)
31,585,198
1.83 $1,365,743,961 30-Sep-02
Bank of America Corporation
31,363,176
1.82 $1,356,143,730 30-Sep-02
Taunus Corporation
26,959,032
1.56 $1,165,708,543 30-Sep-02
Citigroup Inc.
24,893,557
1.44 $1,076,397,404 30-Sep-02
Wellington Management Company,
Llp
24,508,591
1.42 $1,059,751,474 30-Sep-02
Mellon Bank, N.A.
23,858,787
1.38 $1,031,653,949 30-Sep-02
Goldman Sachs Group Inc
22,363,810
1.29
$967,011,144 30-Sep-02
Insider Trading Activity
Filers Name
Thompson, Peter M.
Thompson, Peter A.
Thompson, Peter M.
Thompson, Peter M.
Morrison, Robert S.
Morrison, Robert S.
Title
Trade
Date
Trade
Type
Shares
Trade
Price
Range
PR
11/13/02 Option
20,000
$16.96
PR
11/13/02 Sell
20,000
$44.00
PR
11/08/02 Option
20,000
$16.96
PR
11/08/02 Sell
20,000
$44.00
VCB
08/06/02 Sell
500,000
$40.75 - $41.76
VCB
08/06/02 Option
500,000
$20.88
Shares
Held
93,806
0
113,806
0
346,026
1,800,000
Enrico, Roger A.
Enrico, Roger A.
Mckenna, Matthew M.
Mckenna, Matthew M.
DIR
06/28/02 Sell
6,052
$49.22
DIR
06/28/02 Option
6,052
$16.37
OFF
03/20/02 Option
101,249
$18.58 - $27.38
OFF
03/20/02 Sell
101,249
$50.66
50,095
0
0
0