January 20th, 2012
Consumer Goods
PepsiCo, Inc.
Ticker: PEP
Recommendation: Buy
Current Price: $64.40
Implied Price: $77.00
Investment Thesis
Key Statistics
52-Week Price Range
50-Day Moving Average
$58.50 - $71.89
$XX$XX.XX
65.04
Estimated Beta
.52
Dividend Yield
$2.06
Market Capitalization
$100.68B
Nutrition Business Opportunities
PepsiCo will see an increased demand in its products by developing its
nutrition business. This particular approach will attract more customers and
diversify its product portfolio.
6,763,780
Environment Friendly Business Development
PepsiCo‘s sustainable practices will decrease waste, create more sustainable
packaging, and have a positive effect on the environment. As a result, this
action will help PepsiCo reduce some costs and increase its brand
reputation.
Trading Statistics
Average Volume (3-Month)
Institutional Ownership
International Growth Prospects
PepsiCo‘s expansion into emerging markets will help PepsiCo diversify its
operations and geographical presence. This strategic movement will enable
PepsiCo to have a greater access to capital and establish its brands in the
new markets.
68.20 %
Insider Ownership
.09%
Average 3-Year EV/EBITDA
9.74x
PepsiCo Price (1- Year)
$72.00
Margins and Key Ratios
$70.00
$68.00
Gross Margin
60.1%
$66.00
EBT Margin
14.96%
$64.00
Net Margin
9.86%
Asset Turnover
1.35%
Inventory Turnover
9.71%
$62.00
$60.00
$58.00
$56.00
$54.00
$52.00
May-11
Jul-11
Price
Sep-11
50-Day Avg
Nov-11
Jan-12
200-Day Avg
Covering Analyst: Tulepbergenova Aia
aigerimt@uoregon.edu
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University of Oregon Investment Group
January 20th, 2012
University of Oregon Investment Group
Business Overview
PepsiCo is a world leader in manufacturing, marketing, and sale of foods,
snacks, and carbonated and non-carbonated beverages worldwide.
PepsiCo currently operates in more than 200 countries. The largest operations
are in North America (United States and Canada), Mexico, Russia and the
United Kingdom.
PepsiCo, Inc. was originally founded in Delaware in 1919 and was
reincorporated in North Carolina in 1986. Current headquarters are located in
Purchase, NY.
PepsiCo‘s operations are divided into such business units as PepsiCo Americas
Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, PepsiCo
Asia, Middle East and Africa (AMEA):
PepsiCo Americas Foods (PAF) business unit includes Frito-Lay North
America (FLNA), Quaker Foods North America (QFNA) and all Latin
American food and snack businesses (LAF), including Sabritas and Gamesa
businesses in Mexico
PepsiCo Americas Beverages (PAB) business unit includes PepsiCo Beverages
Americas and Pepsi Beverages Company
PepsiCo Europe business unit includes all beverage, food and snack businesses
in Europe.
PepsiCo Asia, Middle East and Africa (AMEA) business unit includes all
beverage, food and snack businesses in AMEA region.
These four business segments are further divided into such business units as:
Frito-Lay North America (FLNA)
manufactures, sells and distributes branded snack foods such as ―Lay‘s potato
chips, Doritos tortilla chips, Cheetos cheese flavored snacks, Tostitos tortilla
chips, branded dips, Ruffles potato chips, Fritos corn chips, Quaker Chewy
granola bars and SunChips multigrain snacks.‖ These products are sold to
independent distributors and retailers. By creating a joint venture with Strauss
Group, FLNA produces Sabra refrigerated dips and spreads.
FLNA‘s net revenue was $13.4 billion in 2010, $13.2 billion in 2009 and $12.5
billion 2008.
Quaker Foods North America (QFNA)
sells such products as cereals, rice, and pasta. QFNA‘s products include Quaker
oatmeal, Aunt Jemima mixes and syrups, Cap‘n Crunch cereal, Quaker grits,
Life cereal, Rice-A-Roni, Pasta Roni and Near East side dishes.
QFNA‘s net revenue was $1.8 billion in 2010 and $1.9 billion in both 2009 and
2008.
Latin America Foods (LAF)
LAF manufactures, sells, and distributes a variety of snack foods such as
Doritos, Marias Gamesa, Cheetos, Ruffles, Emperador, Saladitas, Sabritas and
Lay‘s, and many Quaker-brand cereals and snacks. These branded products are
sold to independent distributors and retailers.
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LAF‘s net revenue was $6.3 billion in 2010, $5.7 billion in 2009, and $5.9
billion in 2008.
PepsiCo Americas Beverages (PAB)
sells and distributes beverage concentrates, fountain syrups and finished goods.
The brands include Pepsi, Mountain Dew, Gatorade, 7UP (outside of the U.S.),
Tropicana Pure Premium, Electropura, Sierra Mist, Epura and Mirinda.
PAB also licenses the Aquafina water brand to its independent bottlers and
markets this brand, makes ready-to-drink tea, coffee and water products through
joint ventures with Unilever (under the Lipton brand name) and Starbucks.
Moreover, PAB manufactures and distributes certain brands licensed from Dr
Pepper Snapple Group, Inc. (DPSG), including Dr Pepper and Crush.
PAB‘s net revenue was $20.4 billion in 2010, $10.1 billion in 2009 and $10.9
billion in 2008.
Europe
makes, markets and sells a variety of leading snack foods such as Lay‘s,
Walkers, Doritos, Cheetos and Ruffles, as well as Quaker-brand cereals and
snacks. Europe also, either independently or through contract manufacturers,
produces fountain syrups and finished goods under various beverage brands
such as Pepsi, 7UP and Tropicana. In certain markets, however, Europe operates
its own bottling plants and distribution facilities. In addition, Europe licenses the
Aquafina water brand and sells ready-to-drink tea products under the joint
venture with Unilever (under the Lipton brand name).
Europe‘s net revenue was $9.3 billion, $6.7 billion and $6.9 billion in 2010,
2009 and 2008.
Asia, Middle East & Africa (AMEA)
sells a number of snack food brands such as Lay‘s, Chipsy, Kurkure, Doritos,
Cheetos and Smith‘s, through consolidated businesses as well as through noncontrolled affiliates. AMEA also markets beverage concentrates, fountain syrups
and finished goods, under such brands as Pepsi, Mirinda, 7UP and Mountain
Dew.
AMEA‘s net revenue was $6.6 billion, $5.6 billion and $5.1 billion in 2010,
2009 and 2008.
Strategic Positioning
Research and Development
In order to continue its rapid growth strategy, PepsiCo performs a variety of
R&D Activities such as the development of new products and improvement in
the quality of existing products.
Global Nutrition Group One serves as one of such examples. In 2010, PepsiCo
created Global Nutrition Group, that was led by Chief Scientific Officer,
―charged with collaborating with each of our divisions to grow our nutrition
portfolio by focusing on four target platforms: fruits and vegetables, grains,
dairy and functional nutrition.‖
PepsiCo also expands its research to products that contain all-natural
ingredients, increased amount of whole grains, fruits, vegetables, nuts, seeds and
low-fat dairy. PepsiCo is also working hard to reduce the average amount of
sodium, saturated fat and added sugar per serving in some of its products.
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In order to improve tasting qualities and reduce the amount of calories for some
of beverages, PepsiCo started working with Senomyx, Inc. Senomyx, Inc is a
leading company that primarily focuses on proprietary technologies that helps
PepsiCo discover and develop sweet enhancers and natural sweeteners.
PepsiCo also invests in its agricultural development and implementation of new
technologies. The new technology enhances the quality and value for PepsiCo‘s
products, and minimizes the impact and damage posed on environment. Such
approach includes building facilities that conserve energy, reduce waste and
total packaging volume.
Seasonality
Some of the beverages and food products are subjects to seasonality. The sales
for beverages tend to be higher during warmer months while the sales for some
food products are higher in the cooler months. Holidays also affect the sales
figures: Weekly beverage and snack sales are generally highest in the third
quarter due to seasonal and holiday-related patterns. Consumption figures are
usually low in the first quarter.
Ingredients and Other Supplies
The ingredients for PepsiCo products are generally purchased in the open
market. PepsiCo employs specialists to secure adequate supplies reduce the
possibility for significant continuous shortages. The main ingredients that are
used in the production are ―apple and pineapple juice and other juice
concentrates, aspartame, corn, corn sweeteners, flavorings, flour, grapefruits and
other fruits, oats, oranges, potatoes, rice, seasonings, sucralose, sugar, vegetable
and essential oils and wheat‖.
The main packaging materials include plastic resins that are used to produce
beverage bottles and packaging for snack foods. Fuel and natural gas are also
important commodities due to their use in plants and delivering trucks.
Brands
PepsiCo owns a variety of trademarks. The company has authorized, through
licensing arrangements, the use of many of its trademarks in the area of snack
food joint ventures and beverage bottling appointments. Moreover, PepsiCo also
licenses the use of its trademarks on some promotional items in order to increase
its brand awareness.
Customers
Wholesale distributors, grocery stores, convenience stores, mass merchandisers,
membership stores, authorized independent bottlers and foodservice distributors,
including hotels and restaurants are included among PepsiCo‘s primary
customers.
In 2010, the top five retail customers represented approximately 31% of 2010
North American net revenue, with Wal-Mart (including Sam‘s) representing
approximately 18%.
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Business Growth Strategies
Building and extending the macro snack portfolio
PepsiCo is planning to enhance the core salty brands and expand into more
snack categories such as crackers, bread bites and baked snacks. Creating new
flavors is among one of the most important goals for PepsiCo.
Extending beverage business worldwide
In 2010, PepsiCo enhanced the Gatorade brand and the no-calorie carbonated
category by promoting Pepsi Max. The main focus in 2011 is to continue
growing the business in North America while also continuing to invest in
emerging and developing markets such as China and India markets.
Providing better value for the customer
The Power of One was created to provide better value for customers. The Power
of One brings together PepsiCo‘s top food and beverage leaders to leverage the
combined scale of the company's snack and beverage businesses across North,
South and Central America.
The Power of One serves as a Council that will ensure full coordination across
the food and beverage operating systems, while also unlocking opportunities to
create value across the business. It will focus on creating opportunities in
complementary food and beverage products to attract and reach retailers and
consumers in the areas as such how the products are displayed and through
which channels the products are produced and advertised.
Building and expanding the nutrition business
One of the most important goals for PepsiCo is to heavily expand the nutrition
business both organically and through strategic acquisitions. This particular
approach includes the way to encourage people to live healthier lives by offering
a portfolio of both enjoyable and wholesome foods and beverages.
One of the most significant plans of action is the recent acquisition of
of Wimm-Bill-Dann Foods (WBD). PepsiCo plans to emphasize the portfolio of
products made with all-natural ingredients that will have a higher amount of
whole grains, fruits, vegetables, nuts, seeds and low-fat dairy.
Major Acquisitions
The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS)
On February 26, 2010, PepsiCo acquired PBG and PAS to create a more fully
integrated supply chain and go-to-market business model that will improve the
effectiveness and efficiency of the brand distribution and will help PepsiCo
enhance growth.
"This transaction provides outstanding value for PBG shareholders, offers new
and expanded opportunities for PBG employees and positions the combined
company to accelerate growth going forward," said Eric Foss, Chairman and
CEO of PBG.
Wimm-Bill-Dann Foods (WBD)
On February 3, 2011, PepsiCo announced that it had completed the previously
announced acquisition of ordinary shares of WBD, Wimm-Bill-Dann, the
Russian dairy and juice company.
PepsiCo‘s profit rose 4% across its snacks and beverage businesses from this
acquisition.
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Industry
Overview
The Industry‘s performance depends on the following key drivers:
Demand from supermarkets and grocery stores
As demand for groceries increases, the industry‘s revenue expands. The driver is
expected to increase in 2012.
Per capita disposable income
Grocery consumption is restricted by its disposable income. As a result, low
income households tend to consume staple grocery products such as milk ad
bread while also restricting them to the cheapest brand. Middle to high-income
households favor higher quality brands. That is why, as disposable income
increases, the wholesale demand for groceries will increase as well.
Number of Households
As the rate of household formation increases, the demand for grocery
consumption will increase as well. The driver is expected to increase in 2012.
Industry Performance can be identified by the operating conditions:
Life Cycle
Life Cycle is considered to be mature. Total food consumption tends to be
relatively stable because people are already well nourished. The industry is
expected to pick up in the later years and maintain its maturity.
Marker Share Concentration
The industry is highly price competitive. According to IBIS World, the
concentration is going to increase over the next five years due to the larger firms
having a greater capacity to expand its logistics and distribution technologies.
Competition
The high level of competition is caused by the ease of entry, the existence of a
large number of small firms and lack of product differentiation. The companies
compete on the basis of price, quality, and timeliness. The industry is highly
competitive because retailers want to pay the lowest possible price for a given
product or brand in order to maximize profit.
Large retailers tend to favor large wholesalers because they can provide the
logistics support across multiple locations. Wholesalers compete based on the
access to high quality products. Higher quality products attract higher prices
and, as a result, higher profit margins as well.
Barriers to Entry
Grocery wholesalers have relatively low barriers to entry due to the fact that
there are a lot of small firms currently operating in the industry. It is preferable
for the firms to have a strong relationship with supermarket chains. In order to
compete and enter the industry, firms would need to discount products and
spend funds on product promotion.
Industry Globalization
As world‘s food production and distribution globalizes, the industry will be
exposed to larger global operations and integration. Domestic operations will
seek to expand abroad which will result in increased product range.
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Technology and Systems
The level of technology change is medium. The most recent technological
advancement is the computerized inventory system. This system records
inventories, selects products, determines minimum order quantities, assesses
customer credit ratings, generates invoices and produces real time reports.
One of the most beneficial developments is Radio Frequency Identification
(RFID). It allows for noncontact readings and lasts longer in difficult conditions
where bar codes cannot read or identify quickly.
Revenue Volatility
The level of volatility is Medium. According to IBIS data, consumption patterns
for grocery products have been increasing at a low, but constant rate over the
past couple of years. The staple food items are subject to moderate price
volatility.
Regulation &Policy
The level of regulation is Medium. The industry regulations enforce that grocery
products are stored and distributed safely. Some of the regulations include The
Federal Food Drug, Cosmetic Act regarding the receipt, storage and
distribution of food, the Occupational Health and Safety Act of 1970, National
Labor Relations Act and etc.
Management and Employee Relations
Indra K. Nooyi Chairman and Chief Executive Officer, PepsiCo Inc.
Indra Nooyi was named President and CEO on October 1, 2006 and assumed the
role of Chairman on May 2, 2007. Previously she has worked with the company
by directing the PepsiCo‘s global strategy for more than a decade and led its
restructuring.
Prior to becoming CEO, Indra Nooyi served as President and Chief Financial
Officer. Starting in 2001, she was among to PepsiCo‘s Board of Directors.
Between February 2000 and April 2001, Mrs. Nooyi was Senior Vice President
and Chief Financial Officer for PepsiCo. Between 1996 and 1999, Mrs. Nooyi
was Senior Vice President of Corporate Strategy and Development.
Between 1986 and 1990, Mrs. Nooyi worked for Motorola, where she was Vice
President and Director of Corporate Strategy and Planning. Prior to Motorola,
she spent six years directing international corporate strategy projects at The
Boston Consulting Group.
In addition to being a member of the PepsiCo Board of Directors, Mrs. Nooyi
serves as a member of the boards of U.S.-China Business Council, U.S.-India
Business Council, She is also a Successor Fellow of Yale Corporation and was
appointed to the U.S.-India CEO Forum by the Obama Administration.
She holds a BS from Madras Christian College, an MBA from the Indian
Institute of Management in Calcutta and a Master of Public and Private
Management from Yale University.
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John Compton Chief Executive Officer, PepsiCo Americas Foods & Global
Snacks Group
John Compton is chief executive officer of PepsiCo Americas Foods & Global
Snacks Group.
Compton assumed this role in November 2007, and is responsible for overseeing
PepsiCo Americas Foods (PAF).
Compton joined PepsiCo in 1983. He served as a chief executive officer for
PepsiCo North America and, prior, held a position as president and chief
executive officer, Quaker Tropicana Gatorade.
He also worked in Frito-Lay for 22 years in various sales, marketing, operations
and general management assignments, including vice chairman and president of
Frito-Lay‘s North American Salty Snacks Division, chief marketing officer and
senior vice president, Sales.
Compton holds Bachelor of Science in Finance from University of Tennessee.
Albert P. Carey Chief Executive Officer, PepsiCo Americas Beverages
Carey assumed the role in September 2011 and is responsible for overseeing all
aspects of PepsiCo‘s Beverage business across North, South and Central
America.
Carey joined PepsiCo in 1981, and has served in a variety of positions, including
director, Trade Development, Frito-Lay North America (FLNA) and vice
president, National Sales, FLNA.
Prior to PepsiCo, Carey worked at Procter & Gamble. Carey holds a Bachelor of
Science in Government and Politics from University of Maryland.
Zein Abdalla Chief Executive Officer, PepsiCo Europe
Zein Abdalla assumed the role in September 2008, and is responsible for
PepsiCo‘s European sector - a business unit comprised of the company‘s food
and beverage businesses that span from Russia west to Portugal and from
Turkey north to Norway.
Separate form Continental Europe, the sector also includes the United Kingdom,
Central Asia as well as sub-Sahara Africa, and generates more than $12 billion
in annual revenues.
As of January 2011, Abdalla also oversees PepsiCo‘s sub-Saharan Africa region
where he leads the company‘s foods initiative that will ―help develop a holistic,
seed-to- shelf strategy for building its business in this important and vast
geography‖.
Having joined PepsiCo in 1995, Abdalla has served in a variety of positions,
including general manager, Europe beverage business unit; general manager,
Tropicana Europe; and Franchise vice president, Pakistan and Gulf region.
Before joining PepsiCo, Abdalla worked for Mars, Inc. He holds a Bachelor of
Science degree (Honors and Electrical Engineering) from Imperial College,
London University.
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Saad Abdul-Latif, Chief Executive Officer of PepsiCo's Asia, Middle East and
Africa
As CEO of the AMEA Division, Mr. Abdul-Latif is responsible for a territory
that spans more than 100+ countries. Working at PepsiCo for 28 years, he has
held a wide range of international roles in the corporation's food and beverage
businesses since joining the company.
He has served as General Manager for PepsiCo beverages in the Middle East,
North Africa and Pakistan, Area Vice President for the Saudi Arabia and Gulf
region, Group Vice President for Frito-Lay Middle East and General Manager
for the Middle East region.
Mr. Abdul-Latif holds an MBA from the American Graduate School of
International Management in Arizona and a BA in Public Administration from
the American University of Beirut.
Management Guidance
Management sees increased demand for its products in the next couple of years.
Its main strategies for sustainable long-term growth will include ―Performance
with Purpose‖ Commitment and international growth prospects:
“Performance with Purpose” Commitment
This commitment addresses the areas of performance such as global nutrition,
environment, and workplace goals. Performance with Purpose means delivering
sustainable growth by investing in a healthier future for people and the planet.
PepsiCo plans to continue ―building a portfolio of enjoyable and healthier foods
and beverages, find innovative ways to reduce the use of energy, water and
packaging, and provide a great workplace for our associates.‖
Human Sustainability/Health and Wellness
One of the main goals for PepsiCo is to encourage people to live healthier lives;
that is why, PepsiCo is committed to achieve industry-leading nutrition goals,
such as:
 Increasing the whole grains, fruits and vegetables, nuts, seeds and low-fat
dairy in its product portfolio
 Reducing the average sodium per serving in key global food brands in key
markets by 25 percent by 2015
 Reducing the average saturated fat per serving in key global food brands in
key markets by 15 percent by 2020
 Reducing the average added sugar per serving in key global beverage brands
in key markets by 25 percent by 2020
By 2020, PepsiCo is committed to triple its portfolio of wholesome offerings,
while staying committed to the great taste and convenience for its brands.
Management strongly believes that the expansion of PepsiCo‘s Good- for-You
(for more information on PepsiCo‘s product portfolio breakdown, please see
Appendix 5) portfolio will help attain a competitive advantage in a global
packaged-nutrition market.
As of right now, Fun-and-Better-for-You products incoporate about 80% the
business, while Good-For-You is at 20% level. The main goal is to increase the
percentage share for Good-for-You division.
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Environmental Sustainability
PepsiCo plans to invest in research, systems and facilities improvements. This
technological advancement is going to ―decrease waste to landfills, create more
sustainable packaging, reduce ocarbon footprint, lower our energy and water
use and improve the efficiency of our operations‖.
PepsiCo is among 10 leading food and beverage companies to sign the "Global
Commitment to Action on the Global Strategy on Diet, Physical Activity and
Health," a commitment addressed to the World Health Organization in 2008.
The company's new global goals are action steps that directly address the key
WHO commitments. That is why, PepsiCo works closely with many global
non-governmental organizations, national governments, local farmers and
agronomists to pursue more sustainable growing practices, improve crop yields
and support local growing collaboratives.
PepsiCo is committed to achieve industry-leading sustainability goals, such as:
 Providing access to safe water to three million people in developing
countries by the end of 2015
 Reducing packaging weight by 350 million pounds — avoiding the creation
of 1 billion pounds of landfill waste by 2012
 Working to eliminate all solid waste to landfills from PepsiCo's production
facilities
 Committing to an absolute reduction in GHG emissions across global
operations
Talent Sustainability
PepsiCo highlights that investing in people helps PepsiCo with its long-term
growth. Indra Nooyi highlights company‘s performance based culture, saying
that ―if we lose that competitive spirit, then we‘ve lost our edge‖.
Helping associates succeed and acquire the skills that enable growth also will
help to sustain PepsiCo‘s success.
Among many goals for talent sustainability are:
 Ensuring a safe workplace by continuing to reduce lost time injury rates,
while striving to improve other occupational health and safety metrics through
best practices
 Encouraging associates to lead healthier lives by offering workplace wellness
programs globally
 Matching eligible associate charitable contributions globally, dollar for
dollar, through the PepsiCo Foundation
International Growth Prospects
According to Reuters, PepsiCo plans to increase its operations in emerging
markets. The management realizes a high potential in such countries as Russia,
Brazil, China, Vietnam, Jordan, Nigeria, Columbia, Venezuela, and many
others.
PepsiCo believes that as GDP per capita increases, the consumption for the
products will also grow. The management noted that as long as the income level
is growing, PepsiCo will have a great success in these markets.
PepsiCo mentioned that it will continue to operate effectively in developed
markets, but at a decreased rate.
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PepsiCo expects to benefit from synergies in the emerging markets. One of the
examples is the recent acquisition of Russian Wimm-Bill-Dann Foods (WBD).
Improved Marketing Campaigns
Management expects to restructure its strategies in pricing the products. The
main goal is to keep this figure at a competitive level compared to the industry
competitors. Restructuring the pricing for Gatorade and Frito Lay and in some
regions internationally will be one of the main priorities for PepsiCo. It also
plans to improve the overall marketing campaign for its juice and cereal line in
order to bring more attention for Good-for-You products and to fit consumers‘
preferences in various countries.
Innovation
As PepsiCo restructures its product portfolio and concentrates more on its Goodfor-You divisoion, its R&D expenses will increase. Increasing innovation and
keeping it well-supported is among many goals for PepsiCo.
Recent News
PepsiCo Gives 7UP a New Look
The Economic Times, January 11, 2012
NEW DELHI: With an eye on strengthening consumer base in smaller towns
besides penetrating deeper into cities, PepsiCo is giving its lemon flavored drink
'7UP' an image makeover with a new packaging, logo and marketing
communication.
The product will now have a new tagline 'Dil Bole I Feel Up'. The firm said the
"new brand philosophy will celebrate India's optimism and positive attitude".
Britvic and Pepsico Brands Join Forces for „Transform Your Patch‟
Campaign
Reuters, January 10, 2012
Britvic and Pepsico have joined forces with environmental regeneration charity
Groundwork to release its multi-million pound ‗Transform Your Patch‘
campaign across the UK.
PepsiCo Expands Aggressively Into Emerging Markets
InvestorGuide, January 6th, 2012
Recently, beverage giant PepsiCo, which has often played second fiddle to its
larger rival, Coca-Cola, stoked investor interest with its recent moves to expand
into emerging markets in Latin America, Eastern Europe and Asia.
Analysts believe that PepsiCo‘s recent moves will aid the company in the longterm, by shifting its focus on emerging markets in preparation for weak sales in
North America and Western Europe. The company also plans to leave the
acquired brands alone, expanding across local tastes with as little interruption to
the brands as possible.
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Catalysts
Upside
Growth in Emerging Markets
According to IBIS World, aggregate per capita consumption is growing slowly
in the USA. As a result, PepsiCo‘s shift to emerging markets will have a
positive effect on its financial performance. Due to this expansion, management
expects its earnings to grow in the next couple of years.
Value-added Products
Demand for value added products (such as low-calorie fruit juices and energy
drinks) has demonstrated steady marginal growth through internal shifts. As
society shifts towards healthier lifestyles, the demand for baked goods decreases
while the cereal consumption increases.
Demand for tea (Brisk Tea) is expected to increase. It has experienced a high
growth among other wholesaling products even during the recession.
R&D Investment
Due to the fact that PepsiCo plans to promote innovation, it is going to invest in
technology that will assure that the products are delivered in the best possible
state for the retails sale and consumption.
Environment Friendly Practices
With an increasing trend towards sustainable practices, PepsiCo‘ sustainability
commitment will have a positive effect on its stock price. By adopting
environment friendly processes, PepsiCo can save on toxic waste disposal costs.
Research analysts claim that 15% of the customers are willing to pay more for
green and healthy products.
Downside
Image and Reputation
Recent incident with orange juce production, organizatonal restructuring may
pose a risk towards PepsiCo‘s image and reputation. The Food and Drug
Administration announced that it would temporarily stop orange juice imports.
Fluctuation in Foreign Exchange Rates
PepsiCo‘s operations outside of the U.S. generate more than 45% of net revenue
(Mexico, Canada, Russia, and United Kingdom make up 20%). As a result,
currency declines against the US dollar can have an effect on financial
performance.
Commodity Prices
PepsiCo is the subject to commodity prices risk which underlies in its fixed
price purchase orders, pricing agreements, and geographic diversity. Price
fluctuations in commodity purchases for natural gas, diesel fuel and aluminum
can have an impact on PepsiCo‘s performance.
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Comparable Companies Analysis
I performed an extensive comparable companies analysis for PepsiCo. In my
analysis, I first understood the target market for PepsiCo. I found out more
information about PepsiCo‘s sector, competitors, products, customers,
distribution channels, and financial performance.
I identified the direct competitors by performing an industry research on IBIS,
Lexis Nexis, SEC filings, press releases and etc. I calculated the trading
multiples based on Enterprise Value because this metric ignores individual
countries‘ taxation policies. As a result, I found out such as multiples as
EV/Revenue, EV/EBITDA, and EV/Gross Profit. I decided to use the following
comparable companies and metrics for the following reasons:
Coca-Cola Company (KO): 45%
The company was founded in 1986. The product itself was invented by
pharmacist John Stith Pemberton in Columbus, Georgia. Nowadays, The CocaCola Company‘s headquarters are located in Atlanta, GA. It operates in the
beverages industry worldwide.
KO owns more than 500 brands of refreshments that are distributed worldwide.
Among company‘s many brands are Coca-Cola, Diet Coke, Fanta, Sprite and
etc. KO operates in more than 200 countries. The company sells its finished
beverage products primarily to its distributors.
The main reason why I chose KO as my comparable is the fact that KO operates
in the same industry and is one of the direct competitors to PEP. The
geographical distribution for KO (200 countries) is similar to the number of
countries that PEP operates in. I decided to weigh Coca-Cola at 45% primarily
because its Enterprise value is within the same range with PEP. Moreover,
EBITDA metrics are also similar for both companies.
Kraft Foods, Inc (KFT) : 30%
Kraft Foods, Inc. sells and manufactures packaged food worldwide. Among
many products are biscuits, confectionery products, and beverages. Its primary
brand portfolio includes Oreo, Nabisco, Milka, Maxwell House, and many more.
KFT was founded in 2000 and is based in Northfirld, IL.
The main reason why I decided to choose KFT is the industry that they operate
in and growth strategies. I decided to weigh KFT at 30% due to its EV/Revenue
and EV/Gross Profit metrics.
Dr Pepper Snapple Group, Inc. (DPS) : 25%
Dr Pepper Snapple Group operates in manufacturing and distribution of nonalcoholic beverages in the United States, Canada, and Mexico. Some of the most
known brands are Dr Pepper, Canada Dry, Diet Rite, and many others. The
company was founded in 2007 and is based in Plano, Texas.
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The main reasons why I valued DPS at 25% is the fact that its EV/Revenue
metrics are within the same range as for PEP. Due to the smaller EV value for
DPS, its EV/EBITDA is not as high as for PEP.
The scope of operations for DPS is not as high as for PEP either; however, DPS
has already established some international presence. Moreover, there is a high
potential that DPS will expand its operations to more countries and will
diversify its product portfolio.
EV/EBITDA
EBITDA measures profits and is independent of capital structure, taxes, and any
differences in Depreciation and Amortization among various companies.
PEP has spent a lot of funds on new technology such as advanced machinery
and equipment; that is why, its depreciation and amortization costs will increase
for the current and future years. Moreover, PepsiCo has been growing mainly
through acquisitions and expanding its operations abroad. Since the comparable
companies such as KFT and DPS did not perform many acquisitions in the
recent years, EV/EBITDA will give me a fair ―apple-to-apple‖ comparison. As a
result, EV/EBITDA is the standard multiple to use in this case.
EV/EBITDA for PEP, KFT, DPS, and KO are all within the reasonable range
for this metric (6x to 18x).
EV/Revenue
I chose EV/Revenue since sales may provide an indication of size, but not
necessarily the profitability or cash flow generation. As a result, in order to get a
better idea of how big and comparable the companies are, I calculated the
EV/Revenue Metric.
Due to the fact that DPS is smaller in size, EV/Revenue gives me a better picture
in terms of trading multiples and how DPS can be compared to PEP.
EV/Revenue for PEP, KFT, DPS, and KO are all within the reasonable range for
this metric (1.00x to 3.00x).
EV/Gross Profit
I chose EV/Gross Profit because it is a good indicator of operational efficiency
and pricing power for the company. It helps me understand how efficiently the
management uses labor and supplies in the production process.
As PepsiCo expands its operations into emerging markets, it needs to use the
given resources efficiently due to the high competition and limited time. As a
result, from this metric I can compare the current performance for PEP to its
competitors.
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Discounted Cash Flow Analysis
Beta
I calculated Vasicek and Hamada 5 year monthly and 1 year weekly betas for
PepsiCo. I regressed the data against S&P 500. I got the following values for:
Vasicek Beta 5 Year Monthly: .55
Vasicek Beta 1 Year Weekly: .43
Hamada Beta 5 Year Monthly: .61
Hamada Beta 1 Year Weekly: .50
I then weigh Betas based on their Standard Deviations and came up with the
Beta that equals .52. This Beta means that PEP has a lower systematic risk than
the market.
Comparable companies for PEP have similar Betas:
Coca-Cola Company: .50
Dr Pepper Snapple Group: .54
Kraft Foods: .49
Revenue
Management expects revenue to grow in the next couple of years. As PEP did
not specify exact growth rate past 2016, I projected revenue figures to grow at a
long-term growth rate of 3-4%.
I projected the revenue growth for PepsiCo‘s main business segments such as
(FLNA), Quaker Foods North America (QFNA), all Latin American food and
snack businesses (LAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe,
and PepsiCo Asia, Middle East and Africa (AMEA).
Capital Expenditures
Historically, Capital Expenditures were growing at 4-6% as a percentage of
revenue. This figure increases to 7% in 2013 because PEP will increase the
scope of its operations by expanding its business into emerging markets.
Cost of Goods Sold
In projection of COGS, I relied upon historical COGS (which is at around 4045% as a percentage of revenue). I projected the COGS to increase as a
percentage of revenue until 2015 and then to slightly decrease to meet the longterm growth rate.
Research and Development
I projected R&D to increase as a percentage of revenue in the next couple of
years. As I have mentioned earlier, PepsiCo will expand its Good-for-You line of
business by increasing the whole grains, fruits and vegetables, nuts, seeds and
low-fat dairy in its product portfolio.
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Selling, General & Administrative Expense
I projected SG&A based on the historical figures. SG&A Expense has varied
between 35-39% as a percentage of revenue. As a result, I expect SG&A
expense to be within 36.5% range. SG&A expenses for PEP include
development and distribution costs, advertising expenses, restructuring and
impairment charges.
Depreciation & Amortization
In projection of SG&A, I relied on the historical data as well. I also took into
consideration the growth potential for PepsiCo. As the company grows its
business in the emerging markets, it is going to purchase more assets. That is
why, I projected D&A to grow as a percentage of revenue.
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Recommendation
I tend to think that PepsiCo will demonstrate strong growth in the
future. Its expansion into emerging markets will help PepsiCo diversify
its operations and geographical presence. This movement will enable
PepsiCo to have a greater access to capital and establish its brands in the
new markets.
PepsiCo will see an increased demand in its products by developing its
nutrition business. This particular approach will attract more customers
and diversify its product portfolio.
PepsiCo‘s sustainable practices will decrease waste and create more
sustainable packaging. As a result, this action will help PepsiCo
decrease some costs and increase its brand reputation.
I recommend a BUY.
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Appendix 1 – Comparable Companies Analysis
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Appendix 2 – Discounted Cash Flows Analysis
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Appendix 3 – Revenue Model
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Appendix 4– Discounted Cash Flows Analysis Assumptions
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Appendix 5- PepsiCo’s Product Portfolio Breakdown
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Appendix 6– Sources
Sources:
SEC Filings
PepsiCo Investor Relations page
PepsiCo Press Releases
PepsiCo Earnings Call Transcript
Inside ownership
IBIS World
Factset
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