Analysts: Zachary Haller, Andrew Paley Brown and Sean Miller Washburn University Applied Portfolio Management Report Date: 4/18/2016 Market Cap (mm) $147,958 Annual Dividend $2.76 2‐Yr Beta (S&P 500 Index) 0.64 Pepsico, Inc. Return on Capital 26.6% Dividend Yield 2.7% Annualized Alpha 3.9% Compared With: EPS (ttm) $3.71 Price/Earnings (ttm) 27.2 Institutional Ownership 6.5% The Coca‐Cola Company Current Price $100.72 Economic Value‐Added (ttm) $5,979 Short Interest (% of Shares) 0.7% Dr Pepper Snapple Group, Inc. 12‐mo. Target Price $105.00 Free Cash Flow Margin 9.9% Days to Cover Short 2.1 and the S&P 500 Index Business Description Total Revenue ‐1.3% Free Cash Flow 1.1% EBIT 1.6% Total Invested Capital ‐0.2% NOPAT 1.2% Total Assets ‐2.3% Earnings Per Share ‐2.2% Economic Value‐Added 1.6% Dividends Per Share 9.1% Market Value‐Added 17.6% 2011 2012 2013 2014 2015 15.6% 14.6% 14.9% 15.1% 15.9% N/A 9.2% 8.8% 15.9% 9.9% 6.2% 5.8% 5.3% 4.4% 3.7% 3.1% 3.1% 2.7% 2.6% 2.7% 2011 2012 2013 2014 2015 4.09 3.97 4.37 4.32 3.71 2.03 2.13 2.24 2.53 2.76 4.82 4.59 4.89 5.00 5.05 N/A 3.86 3.81 7.01 4.24 Datasource: Capital IQ NOPAT Free Cash Flow Earnings Yield Dividend Yield Per Share Metrics Earnings Dividends Free Cash Flow Margin PepsiCo, Inc. operates as a food and beverage company worldwide. Its Frito‐Lay North America segment offers Lay’s and Ruffles potato chips; Doritos, Tostitos, and Santitas tortilla chips; and Cheetos cheese‐flavored snacks, branded dips, and Fritos corn chips. The company’s Quaker Foods North America segment provides Quaker oatmeal, grits, rice cakes, natural granola, and oat squares; and Aunt Jemima mixes and syrups, Quaker Chewy granola bars, Cap’n Crunch cereal, Life cereal, and Rice‐A‐Roni side dishes. Its North America Beverages segment offers beverage concentrates, fountain syrups, and finished goods under the Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain Dew, Tropicana Pure Premium, Sierra Mist, and Mug brands; and ready‐to‐ Investment Thesis PEP has increased net income even with decreases in total revenue, and this is due to being able to maintain the growth rates of their profit margins. With an ROIC to WACC spread of over 23%, PEP still creates value, even in a sluggish economy. Also, PEP does reduce the portfolio's beta, and has an expected 5‐year return of 3.7% on the dividend discount valuation model. We’ve seen increased penetration into emerging markets. The potential growths of these markets are among a highlight for PEP. The currency exchange rate fluctuation, and the strengthening of the U.S. Dollar still remains a concern. The strength of the company’s portfolio and brand names reduces a portion of that risk. In comparison to industry competitors, PEP is smaller yet maintains performance and relative valuation. With PEP’s low beta, expected future returns on dividends, and steady growth in intrinsic value, our recommendation is to hold. ANNUALIZED 3‐YEAR CAGR Margins and Yields Operating Margin PEP Pepsico, Inc. Sector: Consumer Staples HOLD ‐12% ‐10% ‐8% ‐6% ‐4% ‐2% 0% 2% 4% 6% 8% PEP ^SPX ‐10% ‐5% 0% 5% 10% 15% 20% 25% PEP KO DPS 0 5 10 15 20 25 30 2012 2013 2014 2015 Price/Earnings Price/Free Cash Flow $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 2011 2012 2013 2014 2015 EBIT Net Operating Profit After Tax $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $5,400 $5,500 $5,600 $5,700 $5,800 $5,900 $6,000 $6,100 $6,200 $6,300 2011 2012 2013 2014 2015 Economic Value‐Added Market Valued‐Added 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2011 2012 2013 2014 2015 ROA ROE ROIC
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Analysts: Zachary Haller,
Andrew Paley Brown and Sean MillerWashburn University
Applied Portfolio Management
Report Date: 4/18/2016
Market Cap (mm) $147,958 Annual Dividend $2.76 2‐Yr Beta (S&P 500 Index) 0.64 Pepsico, Inc.
Return on Capital 26.6% Dividend Yield 2.7% Annualized Alpha 3.9% Compared With:
EPS (ttm) $3.71 Price/Earnings (ttm) 27.2 Institutional Ownership 6.5% The Coca‐Cola Company
Current Price $100.72 Economic Value‐Added (ttm) $5,979 Short Interest (% of Shares) 0.7% Dr Pepper Snapple Group, Inc.
12‐mo. Target Price $105.00 Free Cash Flow Margin 9.9% Days to Cover Short 2.1 and the S&P 500 Index
Business Description
Total Revenue ‐1.3% Free Cash Flow 1.1%
EBIT 1.6% Total Invested Capital ‐0.2%
NOPAT 1.2% Total Assets ‐2.3%
Earnings Per Share ‐2.2% Economic Value‐Added 1.6%
Dividends Per Share 9.1% Market Value‐Added 17.6%
2011 2012 2013 2014 2015
15.6% 14.6% 14.9% 15.1% 15.9%
N/A 9.2% 8.8% 15.9% 9.9%
6.2% 5.8% 5.3% 4.4% 3.7%
3.1% 3.1% 2.7% 2.6% 2.7%
2011 2012 2013 2014 2015
4.09 3.97 4.37 4.32 3.71
2.03 2.13 2.24 2.53 2.76
4.82 4.59 4.89 5.00 5.05
N/A 3.86 3.81 7.01 4.24
Datasource: Capital IQ
NOPAT
Free Cash Flow
Earnings Yield
Dividend Yield
Per Share Metrics
Earnings
Dividends
Free Cash Flow Margin
PepsiCo, Inc. operates as a food and beverage company worldwide. Its Frito‐Lay
North America segment offers Lay’s and Ruffles potato chips; Doritos, Tostitos,
and Santitas tortilla chips; and Cheetos cheese‐flavored snacks, branded dips,
and Fritos corn chips. The company’s Quaker Foods North America segment
Analyst Comments: Gross Profit Margin: The gross profit margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with
producing the goods and services sold by a company. PEPs Gross profit margin increases steadily from 52.6 in 2011 to 55.0% in 2015, KO has seen a consolidation in their gross profit margin from 60.9% in 2011 to 60.5% in 2015. The important thing to note is that with PEP, we have seen a decrease in cost of goods sold by nearly $3 billion while seeing a decrease in total revenue which has helped increase their gross margin. Even when PEP saw a decline in revenue, they were still able to increase the gross profit margin. EBIT Margin (Operating profit margin): EBIT/Operating margin is a measurement of a company's operating profitability. This margin can provide an investor with a cleaner view of a company's core profitability. PEP sees a slight increase in operating profit margin from 15.6%% to 15.9%, which is a pretty moderate. KOs operating margin also sees a consolidation from 23.4% to 23.1% during the same period. We can
conclude that during this 5 year period PEP and KO have seen moderate to no growth in EBIT/Operating Profit Margin Net Profit Margin: Net profit margin, is the ratio of net profits
revenues, which shows how much of each revenue dollar earned is translated into bottom‐line profits. PEP’s net profit margin decreased from 9.7% in 2011 to 8.6% in 2015. KO has also seen a decrease in net profit margin, but at a greater margin, from 18.4% in 2011 to 16.6% in 2015. We concluded from this that PEP and KO have seen a decrease in their net profit margins, but KO still has double the net profit margin then PEP. Free Cash Flow Margin: Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. We want to make sure that accounting profits are backed up by tangible free cash flows. UNP has seen a slight increase of its free cash flow margin, from 9.2% in 2012 to 9.9% in 2015. KO has seen more of an increase in FCF, 13.0% in 2012 to 29.5% in 2015. Profit margin synthesis: Even though we saw decreases in total revenue in 2015, we saw
increases in total gross, operating, and net profit margins
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Free Cash Flow Margin PEP KO
1. Margins and Profitability PEP, Page 3 of 22 Copyright Robert A. Weigand, Ph.D., 2016
= Return on Equity 30.8% 27.6% 27.6% 37.1% 45.3% = Return on Equity 26.9% 27.2% 25.7% 23.2% 28.5%
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Return on Assets Return on Equity
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Total Asset Turnover PEP KO
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Return on Assets PEP KO
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Return on Equity PEP KO
Analyst Comments: Total asset turnover: The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.
PEP’s total asset turner has remained relatively constant from 2011 to 2015, at .9. KO has remained around .6 to .5 for the past 5 years. Total revenue and total assets are increasing at a similar rate, which is why asset turnover has remained constant. With a constant total asset turnover rate, any increase in net profit margin directly increases return on assets. Return on assets: ROA shows how efficient management is at using its assets to generate earnings. The decrease in 2015 on ROA is due to the decrease net profit margin from 2014 to 2015. KO’s ROA has decreased over the past 5 years from 10.7% in 2011 to 8.2% in 2015, due to a decreasing total asset turnover, and with a decrease in net profit margin. KO has an advantage on return on assets due to a higher net profit margin than PEP even with an inferior total asset turnover. Return on equity / equity multiplier: Return on equity (ROE) is the amount of net income returned as a percentage of shareholder’s equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. KO’s return on equity has increased in 2011, from 26.9% to 28.5% in 2015. PEP on the other hand has been able to increase their return on equity from 30.8% in 2011 to 45.3% in 2015; this is a direct result of an increase in equity multiplier. We can conclude that PEP is pushing out more profit with shareholder’s money.
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1. Margins and Profitability PEP, Page 4 of 22 Copyright Robert A. Weigand, Ph.D., 2016
PEP Pepsico, Inc. KO The Coca‐Cola Company
Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015
Analyst Comments: Price/Earnings: The P/ E ratio, or P/ E multiple, expresses a stock's price as a multiple of its earnings over the past 12 trailing months. As we can see in this chart, PEP’s
P/E ratio has increased from 16.2 in 2011, to a 5‐year high of 27.1 in 2015. It is important to note that PEP’s P/E ratio is above the reasonable range of 12‐18, this add concern that PEP is being overvalued. KO’s P/E ratio has also increased over this 5‐year period, from 18.6 in 2011, to 25.4 in 2015. PEP’s P/E ratio increased because the market is willing to pay more today than they were in 2011 based on their projected future earnings. Earnings Yield: Earnings yield expresses net income (ttm) as a percentage of the price investors are currently paying to buy a fractional claim on that net income. PEP’s earnings yield has steadily decreased from 2011 through 2015, from 6.2% to 3.7%. KO’s earnings yield has also decreased over the last 5 years, from 5.4% in 2011 to 3.9% in 2015. PEP’s earning yield decreased therefore indicating the market is pricing their stock more expensive relative to their earnings. Dividend Yield: Dividend yield indicates how much a company pays out in dividends each year relative to its share price. PEP’s dividend yield on a 5‐year basis has decreased ever so slightly from 3.1% to 2.7%. KO’s dividend yield has increased since 2011, from 2.7% to 3.1% in 2015. The decrease in dividend yield shows investors that PEP is potentially less confident in the future of the company.
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Price to Book PEP KO
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Price to Free Cash Flow PEP KO
2.3%2.4%2.5%2.6%2.7%2.8%2.9%3.0%3.1%3.2%
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Dividend Yield PEP KO
2. Relative Valuation and Debt PEP, Page 5 of 22 Copyright Robert A. Weigand, Ph.D., 2016
PEP Pepsico, Inc. KO The Coca‐Cola Company
Liquidity and Debt 2011 2012 2013 2014 2015 Liquidity and Debt 2011 2012 2013 2014 2015
Current Ratio 0.96 1.10 1.24 1.14 1.31 Current Ratio 1.05 1.09 1.13 1.02 1.24
Quick Ratio 0.75 0.89 1.05 0.97 1.16 Quick Ratio 0.92 0.97 1.01 0.92 1.13
Days Sales Outstanding 37.94 39.24 38.22 36.41 37.26 Days Sales Outstanding 38.58 36.18 37.96 35.44 32.48
Total Debt to Assets 33.2% 34.1% 35.4% 35.2% 43.3% Total Debt to Assets 33.2% 36.0% 40.0% 41.5% 46.4%
Long‐Term Debt to Equity 99.3% 105.0% 99.7% 135.5% 242.1% Long‐Term Debt to Equity 43.2% 45.0% 57.7% 63.0% 112.1%
Times Interest Earned 12.12 10.63 10.84 11.07 10.34 Times Interest Earned 26.17 28.25 23.98 22.50 11.96
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Current Ratio PEP KO
Analyst Comments: Current Ratio: The current ratio is simply current assets over current liabilities; a quick check to make sure liquid short‐term assets can cover the company’s short‐term
liabilities. PEP’s current ratio has increased from 2011 to 2015, from .96 in 2011 to 1.31 in 2015. KO’s current ratio has also increased over this 5‐year period, from 1.05 in 2011 to 1.24 in 2015. We found that PEP has a better likelihood of maintaining its short‐term liabilities in 2015 then they could in 2011. We can conclude PEP has adequate liquidity. Total Debt to Assets: Total debt to assets defines the total amount of debt relative to assets. PEP’s debt to assets increased from 2011 to 2015, from 33.2% to 43.3%. KO’s total debt to assets has also increased over this 5‐year period, from 33.2% to 46.4%. Based on this 5‐year period, PEP has been increasing their debt relative to their assets. Long‐Term Debt to Equity: Long‐term debt to equity is used to measure a company’s financial leverage; the ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in the shareholders equity. PEP’s long‐term debt to equity ratio has increased significantly from 2011 to 2015, from 99.3% to 242.1%. KO has also seen an increase in debt to equity over this 5‐year period, from 43.2% to 112.1%. As previously stated we concluded that PEP was financing capital expenditures with more debt, therefore this explains why long‐term debt to equity has also been increasing.
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Total Debt to Assets PEP KO
0.05.010.015.020.025.030.035.040.045.0
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Days Sales Outstanding Inventory Turnover
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Total Debt to Assets Long-Term Debt to Equity
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2. Relative Valuation and Debt PEP, Page 6 of 22 Copyright Robert A. Weigand, Ph.D., 2016
PEP Pepsico, Inc. KO The Coca‐Cola Company
Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2011 2012 2013 2014 2015
Total Cash and ST Investments 4,425 6,619 9,678 8,726 12,009 Total Cash and ST Investments 14,035 16,558 20,268 21,689 19,920
NOPAT per Share $4.82 $4.59 $4.89 $5.00 $5.05 NOPAT per Share $1.80 $1.92 $1.88 $1.89 $1.80
Free Cash Flow per Share N/A $3.86 $3.81 $7.01 $4.24 Free Cash Flow per Share N/A $1.39 $1.11 $1.70 $3.00
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Net Property, Plant & Equip. Total Invested Capital
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Analyst Comments: Net Property, Plant & Equipment: Net Property Plant and Equipment is the value of all buildings, land, furniture, and other physical capital that a business has purchased to
run its business. PEP has decreased their PPE each year, decreasing from $19.698 billion in 2011 to $16.317 billion in 2015. Net PPE makes up a large portion of PEP's total invested capital (They are a capital intensive firm), but as we can see PEP does utilize net operating working capital. We can see that the rate of depreciation exceeds the net gain of new assets or improvements to current assets. Net Operating Profit After Tax and Free Cash Flow: NOPAT is simply after tax EBIT. NOPAT is used by analysts and investors as a precise and accurate measurement of profitability to compare a company's financial results across its history and against competitors. PEP's NOPAT has constant from 2011 to 2015, slightly decreasing from $7.589 billion to $7.415 billion. Along with the slow decrease in NOPAT, PEP has seen an increase in free cash flow from $6.017 billion in 2012 to $6.225 billion in 2015. Note that both NOPAT and Free cash flow has seen a slight decline in 2015 from their previous 2014 high. Just to reiterate Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Due to the 2015 decline we had an inconclusive outlook but felt as though the past data indicated positive operating income efficiencies (note operating efficiency margin slightly increasing in the 5 year period).
3. Value Creation and DCF Model PEP, Page 7 of 22 Copyright Robert A. Weigand, Ph.D., 2016
PEP Pepsico, Inc. KO The Coca‐Cola Company
Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %
Analyst Comments: WACC (Weighted Average Cost of Capital)*: The WACC measures each investor's expected return in proportion to their contribution to financing the firm's assets. We did
not alter PEP 's or KO's beta as it should represent the risk the company endured during previous years. The same could be said for the the risk free rate as well. All else equal, an investor now receives less value per capital investment made by PEP when compared to KO.Return on Invested Capital: ROIC is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROIC decreased in the 5 year period from 28.2% in 2011 to 26.6% in 2015 for UTX. Note that PEP's WACC is at 5.157%, which is a positive indication for the investment since it is still well below ROIC. When we compare it to KO you will notice that they too had a declining ROIC. Both companies are equally creating value for their company, however in regards to this model PEP has always created less economic value than KO. Economic Value‐Added ‐Market Value‐added: EVA is a year‐by‐year measure of how much economic profit the firm has created. While PEP has been able to increase their economic profit consistently over this 5‐year period, we do see a KO increasing their EVA at a greater rate. From our model we can conclude that PEP grows in value more slowly than KO, but neither is truly outperforming the other, it is important to note that both are positively growing economic value. MVA is measured as the market value of all the firm's securities minus the book value of all the firm's securities and therefore is a basic measure of value creation. As was the case with many of the value creation metrics, PEP posted significantly lower MVA/shares than KO. In conclusion the market has fairly valued PEP stock from 2011‐2015 while undervaluing KO.
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3. Value Creation and DCF Model PEP, Page 8 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Long‐Term Growth Rate: Long‐Term Growth Rate:
PEP Pepsico, Inc. KO The Coca‐Cola Company
Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015
PV of Future FCFs 123,934 124,309 124,853 120,715 120,715 PV of Future FCFs 238,413 244,278 251,774 257,118 257,118
+ Value of Non‐Oper. Assets 4,425 6,619 9,678 8,726 12,009 + Value of Non‐Oper. Assets 14,035 16,551 20,268 21,675 19,900
= Total Intrinsic Firm Value 128,359 130,928 134,531 129,441 132,724 = Total Intrinsic Firm Value 252,448 260,829 272,042 278,793 277,018
− Total Debt 24,224 25,458 27,415 24,801 30,175 − Total Debt 26,527 31,039 36,058 38,230 41,768
= Intrinsic Value of Equity 104,135 105,470 107,116 104,640 102,549 = Intrinsic Value of Equity 225,921 229,790 235,984 240,563 235,250
÷ Total Weighted Shares 1,576 1,557 1,541 1,509 1,469 ÷ Total Weighted Shares 4,568 4,504 4,434 4,387 4,352
= Per Share Intrinsic Value $66.08 $67.74 $69.51 $69.34 $69.81 = Per Share Intrinsic Value $49.46 $51.02 $53.22 $54.84 $54.06
vs. Year‐End Stock Price $66.35 $68.02 $82.71 $97.05 $100.54 vs. Year‐End Stock Price $34.99 $36.25 $41.31 $42.22 $42.96
Over (Under) Valuation/Share $0.27 $0.28 $13.20 $27.71 $30.73 Over (Under) Valuation/Share ($14.47) ($14.77) ($11.91) ($12.62) ($11.10)
% Over (Under) Valued 0.4% 0.4% 19.0% 40.0% 44.0% % Over (Under) Valued ‐29.3% ‐28.9% ‐22.4% ‐23.0% ‐20.5%
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Analyst Comments: Intrinsic Value: When both firms are given a long term growth rate of 1% you can see they both created intrinsic value for the past 5 years. It is important to note that KO
has been under valued every year, whereas PEP has been fairly valued. Bankruptcy Score: Both companies are in a solid financial position, and according to the Altman probability of bankruptcy show no recent indications of financial trouble.
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Return on Invested Capital WACC
3. Value Creation and DCF Model PEP, Page 9 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23
3. Value Creation and DCF Model PEP, Page 10 of 22 Copyright Robert A. Weigand, Ph.D., 2016
% of sales 5.8% 5.5% 5.1% 4.7% 4.3% 5.1% % of sales 4.3% 4.3% 4.2% 4.1% 4.1%
Net PPE 19,698 19,136 18,575 17,244 16,317 Net PPE 19,352 20,476 21,749 22,744 23,647
% of sales 29.6% 29.2% 28.0% 25.9% 25.9% 27.7% % of sales 31.0% 32.0% 33.0% 34.0% 35.0%
Total Assets 72,882 74,638 77,478 70,509 69,667 Total Assets 71,789 72,304 74,473 75,590 76,346
% of sales 109.6% 114.0% 116.7% 105.7% 110.5% 111.3% % of sales 115.0% 113.0% 113.0% 113.0% 113.0%
Payables and Accruals 7,959 8,343 8,908 9,095 9,624 Payables and Accruals 9,676 9,854 10,149 10,302 10,405
% of sales 12.0% 12.7% 13.4% 13.6% 15.3% 13.4% % of sales 15.5% 15.4% 15.4% 15.4% 15.4%
ST Debt plus LT Debt 24,224 25,458 27,415 24,801 30,175 ST Debt plus LT Debt 31,213 32,633 33,612 34,116 34,457
% of sales 36.4% 38.9% 41.3% 37.2% 47.9% 40.3% % of sales 50.0% 51.0% 51.0% 51.0% 51.0%
Total Equity 20,899 22,399 24,389 17,548 12,030 Total Equity 11,861 11,837 11,863 11,706 11,486
% of sales 31.4% 34.2% 36.7% 26.3% 19.1% 29.5% % of sales 19.0% 18.5% 18.0% 17.5% 17.0%
April 18, 2016
Forecasted Income Statement Drivers
Forecasted Balance Sheet Drivers
Historical Income Statement Drivers
Historical Balance Sheet Drivers
Analyst Comments: Total Revenue: We expect total revenues to continue increase into the future. Capital IQ and management expect modest long‐term growth, due to the expectation that the U.S economy will continue to improve at a
modest pace, we do recognize that there will be currency risk associated with total revenue. Some markets outperforming others (We expect strong results from Frito‐Lay North America and growth in international market to translate to positive earnings surprises over the next two years). This is based on the reports and from the 10‐K. We remained moderately pessimistic because of the currency risk. Gross Profit and Operating Income: We had slow growth for both gross profit and growth in operating income. We based this off of our historical data up to 2015 and according to the 10‐K, In the current environment, we expect continued margin improvement driven by ongoing productivity initiatives. (We expect cost cutting to continued to benefit earnings. The company has implemented a $5 billion, five‐year productivity improvement program, in 2016 we expect PEP to achieve its goal of $1 billion in annual cost savings and productivity gains.) –Argus Tax‐Rate: We saw no information about future Tax‐Rates in the 10K or the reports. We decided to implemented the historical tax rate. Net Income: Based off of Capital IQ’s forecast and management's desire to decrease costs, we expect net income to continue to grow slowly from 8.8% in 2016 to 9.6% in 2020. Management mentions in the 10‐k that they focus on utilizing their global scale, eliminating duplication, deploying new technologies and capitalizing on everyday opportunities to lower their cost base. Total Common Shares: Pep implemented a $10 billion repurchase program that began in 2013 and ended in February of 2016. However, they initiated another repurchase program in 2015 for $12 billion, which is set to expire in 2018. Based on this information that we found in PEP’s 10‐k, we implemented a ‐2% growth rate through 2018. Since there was no other information on future repurchase programs, we matched the historical rate of ‐1.7% through 2020. Dividend Per Share: Based off the Argus report PEP is estimated to have dividends of $2.96 in 2016 and $3.24 in 2017. The remaining years we tapered it down and finished 2020 with a perpetual growth rate of 2%. BALANCE SHEET: We maintained a 19% Cash + ST Investmentsgrowth rate from 2015 through 2020. This is due to management’s interests having acquisitions in emerging markets, in order to father their diversification. We left the historical average growth rate for Total Receivables. We see an initial reduction in Inventory in 2016. This is because in 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are evaluating the timing for adoption of this guidance. After the implementation of this reduction, we maintain inventory at a relatively constant level. In 2016 we see a sudden spike in Net PPE, this is due to managements desire to invest $3 billion into capital expenditures and, they are expecting to continue investing 5% of revenues into future capital. Because of this we continue to slowly grow Net PPE from 2017
4. Forecasting and Valuation PEP, Page 11 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Pepsico, Inc. Pepsico, Inc.
Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E
Cash and ST Investments 4,425 6,619 9,678 8,726 12,009 Cash and ST Investments 11,861 12,157 12,522 12,710 12,837
NOPAT per Share $4.82 $4.59 $4.89 $5.00 $5.05 NOPAT per Share $5.18 $5.48 $5.83 $6.10 $6.34
Free Cash Flow per Share N/A $3.86 $3.81 $7.01 $4.24 Free Cash Flow per Share $3.19 $4.44 $4.70 $5.28 $5.57
Historical Performance Forecasted Performance
Historical Performance Forecasted Performance
Analyst Comments: Total Invested Capital, Net Fixed Assets and Net Operating Working Capital:We forecasted PEP to continue growing their total invested capital, from 2016 through 2020. PEP
utilizes both net fixed assets and net operating working capital. When projecting the future, PEP is expected to grow invested capital at a higher rate than net working capital. The higher rate of growth in invested capital, compared to working capital, is due to management's wishes to increase their investments by $3 billion in 2016 and continued growth of 5% of revenue in the future. This steady growth supports management’s investment strategy.
Analyst Comments: NOPAT: With projected revenues continuously growing through 2020, and PEP demonstrating their ability to grow their operating margin; we see NOPAT slowly growing. PEP is
forecasted to see an increase in bottom line profits. Free Cash Flow: Management is purposely holding higher free cash flows in order to have the ability to acquire companies and continue to diversify. As mentioned in the 10K, and also potentially reducing their future debt levels. EVA and MVA: We forecasted that PEP will continue to see both economic and market value added. EVA will grow
steadily, while MVA sluggishly grows decreases through 2020.
ROIC and WACC: WACC saw an increase in their risk‐free rate to the current 10‐year treasury note, as well as a reduction in the beta down to .504. Generating a WACC of 5.159%. With a low WACC of
5.159%, PEP is earning an ROIC that far exceeds it WACC. This is creating value for the firm.
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
NOPAT Free Cash Flow
$0
$1
$2
$3
$4
$5
$6
$7
$8
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
NOPAT per Share Free Cash Flow per Share
4. Forecasting and Valuation PEP, Page 13 of 22 Copyright Robert A. Weigand, Ph.D., 2016
Analyst Comments: Price to Earnings: PEP’s projected P/E decreases in our forecast, this large P/E ratio can be attributed to the increase in growth and the decrease in shares. Dividend Yield:We
projected that dividends will increase in 2016 according to Argus, then slowly taper back down. We don't see PEP as a dividend play. Earning Yield:We have projected that earnings yield will continue to grow. This is caused by a reduction in the amount of shares outstanding. The trajectory of PEP’s pro forma relative valuation shows that our model is slightly conservative.