pep_sp12

7/29/2019 pep_sp12

1/25

Important disclosures appear on the last page of this report.

April 9, 2012 Consumer Staples (Soft Drinks)

Henry Fund Research

PepsiCo (PEP) Investment Recommendation BuyPatrick [email protected]

Current Price $65.78

Target Price Range $73-78

Source: http://bigcharts.marketwatch.com/

Key Stock Statistics2

52-Week Price Range $58.50-71.89

Market Capitalization (B) $103.32

Shares Outstanding (M) 1.57

Institutional Ownership 68.2%

Beta 0.75

Dividend Yield 3.2%

Price/Earnings (ttm) 16.31

Price/Book 4.93

Price/Sales 1.54

ROA (ttm) 9.2%

ROE (ttm) 30.5%

Projected 5-Year Growth 6.15%

EPS ($)2

Year 2009 2010 2011 2012E 2013E 2014EEPS 3.81 3.97 4.08 4.11 4.36 4.77

All earnings represent earnings from operations and have been filteredfrom net nonrecurring gains.

Valuation Models ($)Discounted Cash Flow 79.63

Economic Profit 79.63

Relative P/E 73.26

Dividend Discount Model 77.72

INVESTMENT THESIS

(+) PepsiCo is increasing marketing andadvertising spending by five to six million dollarsto help stabilize the market share losses of itscore soft drink brand Pepsi, that has occurredover the past year.7 This initiative, coupled with

an increased focus and newfound sense ofurgency, should help the companys core brandregain momentum in the market.

(+) Embedded in PepsiCos culture is a strongcommitment to innovation. The companycontinues to increase research and developmentspending, which is up from $414 million in 2009 to$525 million in 2011.3 This innovation will helpPepsi stay ahead of its competitors and fend offfuture challenges.

(+) Improved sales growth internationally shouldcontinue to help offset slower growthdomestically. Many emerging market economiesare growing rapidly and contributing to anincrease in local living standards.

(+) Over the next five years companies at theupper and lower end of the industry will preformthe best, while companies in the middle are likelyto lose market share to private label brands andhealthier beverages. PepsiCo is well positionedas an industry leader because of its premiumbrand and loyal customer base.

(-) PepsiCo will likely experience decliningmargins in the near term. Commodity prices havebeen steadily rising over the last three years and

have now reached a level that will more seriouslyaffect profitability.

(-)Although per capita soft drink consumption wasdown in 2011, PepsiCos core soft drink brand,Pepsi, saw a greater decline in sales volume thanits chief competitor Coke.

4

(-) Pepsis core products, soft drinks and saltysnacks, will continue to face increasingchallenges from domestic health initiatives and ahealthier consumer base internationally.

7/29/2019 pep_sp12

2/25

Henry Fund ResearchTHE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

2

EXECUTIVE SUMMARY

During the 2009 recession, many consumer staplesstocks saw some of their largest declines in manyyears. Over the last two years many of these stockshave regained most of these declines and currentlytrade at levels near all-time highs. The impressive move

higher was helped by price increases, cost cutting, andan improvement in business fundamentals. Sales forPepsiCo, as well as many other companies in theindustry, remained stable throughout the 2009recession and have since recovered quickly.5 However,stocks in the industry were driven lower by shrinkingeconomic activity and investor psychology. Despite adecline in domestic per capita soft drink consumption,as many consumers look for healthier alternatives,Pepsi has experienced earnings per share growth of11.32% in 2010 and 6.54% in 2011.5 A crash incommodity prices during the most recent recessionhelped company profitability coming out of the

recession. However, many of the ingredients used inPepsiCos products have once again had powerfulmoves higher in price, which has and will continue toput a ceiling on profit margins and earnings per sharegrowth.

Given our projected target price from our model of$76.87, we have a buy recommendation on PepsiCo.We feel that Pepsi has one of the best risk rewardratios in an industry that is facing many challenges. Webelieve the company will take the steps needed toregain traction with their number one soft drink brandPepsi. The company will continue to lead the industry in

product innovation allowing it to overcome decliningdomestic per capita soft drink consumption. Moreover,PepsiCo and Coca-Cola are best positioned to dealwith rising input prices because of their pricing powerand economies of scale. Coca-Cola will continue tooffer tremendous competition, but we feel Pepsi hasmore upside due to the recent success of Coca-Cola.The Henry Fund currently has a 9.74% position in theconsumer staples sector. We feel this is an appropriateweighting given the economic outlook and thevaluations for different market sectors. We feel manycompanies in the consumer staples sector have limitedupside and downside prospects making PepsiCo agood fit for our portfolio.

COMPANY DESCRIPTION

PepsiCo was founded in 1898 and currently employs297,000 full time employees.2 The company is led byCEO Indra Nooyi.2 Headquartered in Purchase, NewYork, PepsiCo produces soft drink syrups and snackfoods internationally in over 200 countries and

territories.3 The company prides itself on becoming anenvironmentally friendly business leader.3 Thecompanys four business units consist of PepsiCoAmerican Foods, PepsiCo Americas Beverages,PepsiCo Europe, and PepsiCo Asia, Middle East, andAfrica.3 Some of PepsiCos most popular brandsinclude; Lays, Doritos, Cheetos, Tostitos, Ruffles,

Fritos, SunChips, Santitas, Quaker oatmeal, AuntJemima, Quaker granola bars, Capn Crunch, Life,Rice-A-Roni, Pasta Roni, Pepsi, Gatorade, MountainDew, Diet Pepsi, Aquafina, 7UP, Diet Mountain Dew,Tropicana, Sierra Mist, and Mirinda.3 The mainingredients used in Pepsis products are apples,oranges, pineapple juice, corn, corn sweeteners,flavorings, flour, sugar, and sucralose.3

Sales of PepsiCo products are divided across sixdifferent business segments including: Frito-Lay NorthAmerica, Quaker Foods North America, Latin AmericaFoods, PepsiCo Americas Beverages, Europe, and

Asia, Middle East & Africa.

3

Frito-Lay North America

The Frito-Lay North America division had a strong yearin 2011. Sales volume increased by three percent andnet revenue increased by six percent.3 The divisionsstrength can be attributed to pricing increases andgrowth in individual brands.3 The most successfulbrands during the year were Doritos, Cheetos, andRuffles, which all contributed growth in the mid-single-digit range.3 These results are encouraging, and we likethe fact that some of the companies core brands areheaded in the right direction. While results were mostlypositive for this division, we are concerned about thecontinued decline in sales volume for the SunChipsbrand.

3SunChips has had double-digit declines in sales

volumes in each of the last two years.3

We think thatsome of our other brands our cannibalizing sales fromSunChips, but increased attention to this brand shouldhelp partly reverse the negative trend in sales volumes.

Quaker Foods North America

Quaker Foods North America had the worst year of anyof the companys operating divisions.3 The division wasprimarily hurt by fierce competition and a decline insales of breakfast products.3 Volume declined fivepercent during 2011, led by a double-digit decline ingranola bars and ready-to-eat cereals.3The companysAunt Jemima brand also saw a mid-single-digit declinein sales volume.

3The decline in sales of breakfast

foods will be difficult to overcome because of thecontinued fast-paced lifestyles many people live todayand the longer hours many Americans are now required

7/29/2019 pep_sp12

3/25



3

to spend at work. If society continues to cut outbreakfast from the daily routine, the company should beable to capitalize on an increasing trend in snacking. Inthis division, granola bars seem like a perfect substitutethat will deliver a flexible and convenient alternative.

Latin America Foods

Helped by increasing sales volumes in Brazil, sales inthis division increased by five percent in 2011.3 Anincrease in prices led to a thirteen percent rise in netrevenue.3 We are encouraged by these results and feelthat Brazil represents one of the greatest opportunitiesfor future sales growth. We expect sales growth toaccelerate in the future.

PepsiCo Americas Beverages

The PepsiCo Americas Beverages division continued tobounce back slowly in 2011. Sales volume increased

two percent and net revenue increased ten percent.3

On the positive side, the companys Gatorade brandhad an impressive year. Volumes for Gatorade sportsdrinks were up double-digits in 2011 compared to2010.3 However, like many companies in the soft drinkindustry, PepsiCo was hurt by the decline in per capitadomestic soft drink consumption. Carbonated soft drinkvolumes were down two percent in 2011.

Europe

Recent acquisitions and expansions into new marketsassisted the European division in overcoming some of

the economic weaknesses in these markets.

3

In 2011,snack volume grew thirty-five percent and beveragevolume grew twenty-one percent.3 Political andeconomic restructuring will likely limit future growth inthis segment, but PepsiCo has been one of the mostsuccessful beverage companies to expand into Europe.

Asia, Middle East & Africa

Growth from the Asia, Middle East & Africa divisionshould lead the company going forward. Sales volumesfor snacks grew fifteen percent and beverage volumesgrew five percent year over year.3 One of the mostimportant developments for this division was thetwenty-five percent growth in operating profit in 2011.3As PepsiCo expands into emerging markets, they mustnot only be successful in growing sales, but also beable to charge the appropriate prices in order for theseventures to meet profitability expectations.

PepsiCo Sales Revenue Breakdown

Source: www.sec.gov6

Over the course of the last three years we have seen asignificant transition in the revenues from PepsiCos

different business divisions. Two divisions, Europe andPepsiCo Americas Beverages, have experiencedsuperior growth over all the other divisions over thistime period.

3,6Revenue for the European business

segment has increased by 111% and has increasedfrom 14.88% of revenues to 20.39% of companyrevenues.3,6 Revenue for the PepsiCo AmericasBeverages division has increased 105% and hasincreased from 25.29% of revenues to 33.71% ofcompany revenues.3,6 The biggest factor in the growthof these two segments is the entry into new markets.We believe these two divisions will continue growing inthe future, but at a slower rate. The division most likely

to see revenue growth similar to that of the Europeanand PepsiCo Americas Beverages over the last threeyears is the Asia, Middle East & Africa division. We areprojecting revenue growth of 7.5 percent for the Asia,Middle East & Africa business segment and expectsales revenues from this division to rise to 11.6 percentof total company revenues.


7/29/2019 pep_sp12

4/25



4

RECENT DEVELOPMENTS

On February ninth, Pepsi reported fourth quarterearnings per share of $1.15, which beat analystsexpectations of $1.13 per share.7 Revenues for thequarter were 20.16 billion versus analysts expectationsof 19.89 billion.7 Although investors remain concerned

about the performance of the core Pepsi soft drinkbrand and the prospects for splitting the company intotwo parts, the company has met or exceeded earningsexpectations in each of the four quarters in 2011.5

Source:http://bigcharts.marketwatch.com/Investors spent much of the last year rotating in and outof both PepsiCo and Coca-Cola stock as theyscrutinized the future prospects of these evenlymatched industry leaders. During the first half of 2011,PepsiCo outperformed Coca-Cola relative to analystsexpectations causing the stock to outperform Coca-

Colas for much of the first half of the year. Since thebeginning of 2012 we have seen an impressiveoutperformance by Coca-Cola of almost ten percent.1This performance has been largely driven by theoutperformance of Coca-Colas core soft drink brands,Coke and Diet Coke. During this time investorsentiment has turned negative towards Pepsi. Investorshave argued that PepsiCo has lost its way and thecompany needs to be split up into two differentbusinesses. We disagree and feel that the currentcompany will be able to use its brand strength andcompetitive position to grow more successfully in thefuture than it would as two separate companies. As the

company puts more emphasis on its Pepsi brand,investor sentiment will likely shift back in PepsiCosfavor. PepsiCos stock should soon start to play catchup to Coke, creating a better investment opportunity.

PepsiCos newest addition to their product portfolio isPepsi Next. Pepsi Next is scheduled to come to marketby the end of March.8 The drink will attempt to regaincustomers that have switched from carbonated softdrinks to healthier beverages. Pepsi Next will contain

sixty calories, which is roughly half the amount ofcalories in the companys traditional Pepsi brand.

8Despite the success of diet soda, many consumers justcan not stand the taste. Soft drink companies havebeen searching for ways to make diet soda tastier foryears. PepsiCo previously attempted to win over thissegment of the market with Pepsi Edge in 2004.8 This

product also attempted to win over this segment of themarket by offering a beverage with nearly half thecalories of traditionally carbonated soft drink, but waseventually taken off the market because of weak sales.8Skeptics will argue that making a great tasting healthysoft drink just isnt possible, but we feel the success ofdiet soda proves otherwise. We feel there are twofactors likely to make this product launch moresuccessful. First, the experience gained from the firstproduct launch will be important to the success of PepsiNext. The company can improve on the mistakes madefrom Pepsi Edge and it has a better idea of the tastesthat consumers are looking for. Secondly, PepsiCo now

truly understands the urgency needed to provideproducts to this segment of the market. After multipleyears of declining per capita soft drink consumptiondomestically, the company must acknowledge that thistrend appears permanent. The company must delivernew products to meet the changing tastes ofconsumers. We feel Pepsi Next will be a success,although sales will likely be small compared to some ofthe companys top selling brands.

Recently PepsiCo and Coca-Cola have come underattack for the presence of the chemical 4-Methylimidazole in their soft drinks.

9The chemical was

found to cause cancer in research studies done onrodents. After a petition from a U.S. watchdog group,the FDA stated that people would need to drink athousand cans of soda a day for the chemical to havethe same affect it had on rodents in the study. 9However, because the chemical is now covered underCalifornias Safe Drinking Water and Toxic EnforcementAct of 1986, the companies would have to put a labelon their products containing the chemical disclosing therisks.9 Pepsi and Coke have since decided to eliminatethe ingredient from their caramel coloring in order toavoid the California law. Both companies have claimedthe change in recipes will have no effect on the taste oftheir products. We are hesitant to immediately buy into

the companies claims, but because the ingredient isused for coloring and not flavor, we believe thecompanies will be able to find a similar substitute thatwill not have an affect on taste. The story has broughtabout a little minor negative publicity, but we do not feelit will have any affect on the companies permanentreputations. Similarly, because the taste will likelyremain the same, we dont foresee this event havingmuch of an impact on sales.

7/29/2019 pep_sp12

5/25



5

INDUSTRY TRENDS

Despite the success PepsiCo has had moving intoemerging markets, they have received heavy criticismfor their massive consumption of water required in thecompanys production process. In some of the newestinternational markets that soft drink companies operate

in, clean water is an extremely scarce resource. Asthese companies grow operations and increase usage,locals are becoming increasingly frustrated with thestrain being put on water supplies. In 2008 Coca-Colareported that it required 2.43 liters of water to make aone-liter beverage.

10A recent research report noted

that one billion people around the world do not haveaccess to clean drinking water and billions of others areconsuming dirty water making them susceptible todisease.10 Another factor contributing to the problem isthe record high temperatures popping up all over theworld. Abnormally long spans of warm weather and lackof rainfall are causing droughts in many areas with low

water levels. As Pepsi and Coke continue to use largeamounts of water for their production processes, localcitizens are becoming increasingly vocal about theirunhappiness. In some parts of the world we may havereached a point where political rules and regulationsmay soon be put into affect. In response to theseevents, PepsiCo has started an initiative in 2007 toreduce per unit water consumption by twenty percentby the year 2015.10 By 2010 Pepsi had reduced per unitwater consumption by fifteen percent and appears to bewell on their way to meeting their ultimate goal.10Regardless of the success of the companys initiative,the production process still consumes a large amount of

water supplies. PepsiCo is taking the necessary stepsto help alleviate the problem, but as water suppliescontinue to decline, the situation may be out of theircontrol. We think the company will soon have to spendmore money to help replenish the water supply in somecountries. This will likely lower margins slightly, but wethink the company will quickly adjust and the increasedcosts will not have a material effect on profitability.

Not only are the leaders in the soft drink industrybattling declining per capita consumptions, but they arealso facing stiff competition from private label brands.After years of excess consumer spending, domesticconsumption appears to be showing signs ofexhaustion. Strapped with high debt levels, Americanconsumers can no longer afford to spend frivolouslyand purchase everything they desire. These changeshave had a direct impact on the soft drink industry, asprivate label brands have grown in popularity and takenmarket share away from name brands. From 2008 to2011 private label brands have grown their marketshare from 14 to 16.5%.3&6 At the same time, PepsiCoand Coca-Colas market share has dropped by 2.6 and2.1% respectively.3&6 We are projecting private label

market share to peak at 17.5% in the next two to threeyears and then stabilize near these levels. We thinkthese gains will come at the expense of the entireindustry, including Pepsi and Coke. We feel the trendwill reverse itself in about five years when personalsavings levels are replenished and input priceseventually decline from falling commodity prices. The

majority of this information is already priced in toPepsiCo and Coca-Colas stocks, and we feel thestocks may get a boost in the intermediate term asinvestors begin to look forward and reward thesecompanies for their future business prospects.



Similar to many other companies that rely heavily oncommodities in their production process, companies inthe soft drink industry have had to decide whether ornot to try and pass along rising input prices toconsumers. Both PepsiCo and Coca-Cola havedetermined that input prices have become too high toabsorb and they must raise prices. In 2011 PepsiCoand Coca-Cola laid out plans to begin increasing pricesthree to five percent by July.11 In PepsiCos 2011annual report, the company noted that price increases

7/29/2019 pep_sp12

6/25



6

had helped sales revenues in many of its operatingsegments.3 The results of this strategic move havebeen a mixed bag as higher retail prices have helpedmaintain profitability, but some customers have beenlost to cheaper brands. We believe that companyexecutives and financial analysts do not believe theeconomy is strong enough to warrant these levels of

prices. However, prices should remain high as long ascommodities remain at elevated levels.

MARKETS AND COMPETITION

Carbonated Soft Drink Market Share

The carbonated soft drink industry is one of the mostcompetitive industries in the entire economy. Thedomestic market is highly saturated and the industry ison the decline. World-wide sales volumes ofcarbonated soft drinks continue to grow very slowly dueto population growth and the increased adoption of softdrinks in foreign countries.16 In 2010 globalconsumption increased four percent to over 550billion.16 Growth in India and China was 16% and 14%respectively in 2010.16 Global per capita consumptionaveraged around eighty units per year in 2010.16 Weproject global sales to grow between three to fivepercent in the future. PepsiCo will be one of the biggestbeneficiaries of this global growth because of theirinternational footprint. However, despite the positivenews internationally, domestic per capita consumptionof carbonated soft drinks has fallen from 50.6 gallons in

2006 to 46.9 gallons per year in 2011 in the UnitedStates.17 We feel this downward trend will stabilizesoon, but prospects for growth remain limited. Weproject domestic per capita consumption to average47.5 gallons over the next five years.

Source: www.ibisworld.com17

The top four companies in the soft drink industry rulethe market, controlling approximately 93.7% of themarket share.17 Coke remained the industrys topselling brand in 2011 with a market share of 16.7% in2011.17 Pepsi is the second leading brand, holding amarket share of 9.2%.17 Diet Coke, Mountain Dew, andDr Pepper hold market shares of 9.1%, 6.5%, and 6%

respectively.17

In 2011, Pepsi and Coke eachexperienced declines in market share, while DrPeppers sales rose five percent.

4Moving forward we

think PepsiCos increased focus and spending on itscore Pepsi brand will lead to market share gains at theexpense of Coke and other private label brands. Weproject markets shares to average 16.5%, 9.5%, and6.1% for Coke, Pepsi, and Dr Pepper over the next fiveyears. PepsiCos stock will likely trade at a higher P/Emultiple as investors reward the company for theincrease in market share.

U.S Savory Snacks Market Share


U.S. savory snacks include potato, tortilla, corn, pita,bagel and veggie chips, pretzels, fruit crisps andcheese puffs, snack nuts, seeds, meat snacks, crackers(excluding graham), popcorn, dips, trail mixes, ricecakes and soy crisps.

3 PepsiCo is the leader indomestic savory snack market share. The companycontrolled 38.3% of the market in 2011.3 Kraft is the

next largest single player with a market share of 9.4%.

3

Other leading producers include Kelloggs, Conagra,Campbell, and private label brands.3 Over the last year,PepsiCo, Kraft, and Kelloggs have all seen a slightdecline in market share as consumers switched over toprivate label and other cheaper name brands.3 Marketshare for PepsiCo and Kraft declined by 0.1% and 0.4%respectively.3 We feel this trend will reverse soon as theU.S. economic recovery gains momentum following the2009 recession. Increased hiring and a decline in theunemployment rate will be the catalyst for consumers

7/29/2019 pep_sp12

7/25



7

switching back to premium brands such as PepsiCo.We project PepsiCos market share in the savorysnacks segment to increase to an average of 38.7%over the next five years.

Threat of Substitute Products

The biggest challenge facing the industry in the nearterm is the abrupt shift towards healthier eating habitsin the U.S. Consumers spent much of the nineties andtwo thousands making terrible dietary choices.However, this trend appears finished, as consumershave begun purchasing alternatives such as bottledwater, sports drinks, energy drinks, tea, coffee, and fruitand vegetable based beverages in greater numbers. In2011, sales of bottled water increased 4.1% and salesof energy drinks grew 14.4%.4 Both PepsiCo and Coca-Cola are aware of this trend and are implementingstrategic initiatives to overcome this challenge. In 2011,Coca-Cola purchased Odwalla Inc., the maker of fruit

juices, smoothies, and food bars.

18

Similarly, in 2006PepsiCo bought the Naked Juice Company, whichproduces natural fruit juice beverages.19 Also, Pepsi willbe releasing their new half calorie soda, Pepsi Next, atthe end of March.

8PepsiCo is looking at many options

to make its products healthier. The company issearching for combinations of new and existingingredients to help increase the nutritional value of itsproduct portfolio. We feel that strategic initiatives andincreased research and development will help Pepsisproduct portfolio compete in the healthy food andbeverage markets moving forward. The effect from thehealth initiative will be relatively small due tostabilization in soft drink sales and the likelihood thatmany of the new healthy beverages will be Pepsiproducts.

Key Metrics

The three most dominant players in the soft drinkindustry are PepsiCo, Coca-Cola, and Dr Pepper.Coca-Cola is the largest company in the industry with amarket capitalization of $167.79 billion.2 PepsiCo andDry Pepper have market capitalizations of $104.82 and$8.61 billion respectively.2 Coca-Colas forward P/E is16.59, which is a slight premium to Pepsis forward P/Eof 15.03.2 We feel Coca-Colas superior operating

performance recently warrants the higher multiple, butwe believe this creates an opportunity for PepsiCosstock. We think that investors will reward Pepsisimproved operating performance over the next yearwith a forward P/E similar to Cokes around 16.5. Coca -Colas profit margin is nearly double PepsiCos at18.42% versus 9.69%.2 PepsiCos margins are lowerthan Cokes because of its salty snacks portfolio, whichgenerates lower margins than soft drinks. All threeindustry leaders will likely see margins fall this year as a

result of higher input prices. Pepsis 30.5% return onequity is a few percentage points higher than itscompetitors return on equity because it operates withmore debt.2 We are confident these numbers will besimilar after next years results. Although both PepsiCoand Coca-Cola have a payout ratio near fifty percent,Pepsis dividend yield is 3.10% versus 2.80% for Coke.

2

We believe both companies will continue raisingdividends annually and keep their payout ratios aroundfifty percent.

PEP KO DPS

Market Cap (B) 104.82 167.79 8.61

Price/Sales (ttm) 1.57 3.60 1.44

Price/Book (mrq) 5.01 5.29 3.77

Forward P/E 15.03 16.59 12.73

PEG Ratio (5 yr) 2.13 2.94 2.13

Return on Assets(ttm)

9.20 8.91 7.06

Return on Equity(ttm)

30.50 27.31 25.67

Profit Margin(ttm)

9.69 18.42 10.27

Operating Margin

(ttm)

15.60 23.41 17.35

Qtrly. Rev.Growth (%)

11.00 5.20 3.50

% Held byInstitutions

68.20 64.30 91.50

Payout Ratio (%) 50.00 51.00 44.00

Dividend Yield(%)

3.10 2.80 3.40

Source: www.finance.yahoo.com/2

ECONOMIC OUTLOOK

GDP

Gross Domestic Product in the U.S. remains stubornlyslow and inconsistent. Fourth quarter GDP growthcame in at 3.0%, which was slightly stronger thaninitially expected.12 This was a significant improvement

7/29/2019 pep_sp12

8/25



8

over the 1.8% increase in the third quarter.12 On a yearover year basis, GDP was up 1.6% in the fourthquarter.12 Improved consumer and businessconfidence, warm weather, and a rebuilding ofinventories all helped contribute to the increase infourth quarter GDP. In the third quarter of 2011,consumer and business sentiment moved lower as

fears over the European debt crisis domestic budgetnegotiations reached a climax. Following the resolutionof these issues, consumers began increasing spendingagain and business began rebuilding inventories.Unusually mild temperatures throughout much of thecountry during the fourth quarter also provided atailwind for the U.S. economy. The warm weatherprovided unusual opportunities for the constructionindustry to build homes and complete more projectsthan normal during this time of year. Also, manyretailers saw improved foot traffic and sales due to thepleasant weather.

Source: www.bloomberg.com12

Moving forward the team expects GDP in the range of2.5 to 3.0%. We acknowledge that the weak labormarket and the bountiful fiscal and monetary economicstimulus make GDP more vulnerable to economicshocks that may lead to erratic future growth numbers.However, with the Federal Reserve likely to keepinterest rates unchanged until late 2014 and thesteadily improving job market, we think all signs point toGDP in the two to three percent range for the next fewyears. PepsiCos business is somewhat dependent on

GDP, although to a lessor degree than many otherindustries. The company produces a baseline amountof sales each quarter because people require food tosurvive. However, they rely on economic growth forincremental sales from discretionary purchases. Weproject GDP between two and three percent will lead tosteady sales growth near four percent. We believePepsiCo would need GDP to be above 3.5% to see asizeable acceleration in sales growth.

Jobless Claims

New unemployemnt claims have been one of only a feweconomic indicators to remain consistently positive overthe last year. New jobless claims have fallen from fivehundred thousand at the end of 2009 to just over threehundred and fifty thousand in the first quarter of 2012.13

During the week of March 24, 2012, initialunemployment claims were 359,000, which was animprovement from the 364,000 the week before.13 Weexpect new jobless claims to continue trending lowerthroughout the year. We think initial weekly claims willbe near three hundred thousand by the end of the year.The decline in unemployment claims should lead toincreased consumer confidence and personalspending. As fewer and fewer Americans file newclaims, currently employed workers will begin to feelmore secure in their jobs, and likely increase theirspending levels. Similarly, the combination of increasedhiring and lower unemployment claims will drive the

unemployment rate lower. We think that PepsiCo willsee an important uptick in carbonated soft drinkdemand from restuarants as discretionary spendingincreases along with the improvement in the labormarket.

Source:www.bloomberg.com13Price of Sugar

Sugar is one of the most heavily used raw materials inPepsis production process. Similar to many othercommodities, the price of sugar has increased

significantly over the last couple of years.20 The price ofsugar averaged around 37.8 cents per pound in 2011.20This is up substantially compared to prices over the lastthirty years, which have remained near twenty cents perpound.20 Two key factors have caused the recent runup in sugar prices.20 First, a global sugar shortage wascasued by severe drought in India and flooding inBrazil.20 Secondly, the U.S. dollar declined due tonegative real interest rates and rising budget deficits.We believe sugar prices will pull back to around thirty

7/29/2019 pep_sp12

9/25



9

cents per pound in the next year or two as suppliesincrease. However, increased global demand will likelyput a floor under sugar prices at these levels. Risinginputs prices are threatening PepsiCos margins andprofitability. The companys cost of goods sold haveincreased from 45.95% of sales to 47.51% of sales inthe last year.3 Unfortunately, the decline in sugar prices

will be more than offset by the rise in other raw materialprices. Price increases implemented in the last fewyears will help profitability, but we feel margins will likelyfall in 2012.

Source: www.ibisworld.com20

Personal Income

Similar to many other economic indicators, domesticpersonal incomes continue to rise at a discouraginglyslow rate. Personal incomes rose 0.2% in January andFebruary.15 The 0.2% gain in February was below

analysts expectations of a 0.4% gain.15 The year overyear rise in personal incomes was 3.2% in February.15Although these statistics are encouraging, there are anumber of warning signs in the details. In May 2009,concurrent with the beginning of the economicrecovery, the year over year change in real disposableincomes jumped off of its lows for approximately a yearand a half.15 Nevertheless, since November 2010, realdisposable incomes have trended lower and fallen intonegative territory the last two months.15 We believe thistrend lower will soon stabilize because of an improvinglabor market and stabilization in the U.S. dollar. Weexpect real disposable incomes to grow at a modest

rate of 1.5% over the next year. Another troublingstatistic was the 0.8% increase in consumer spendingduring the month of February.15 Consumers have onceagain reverted back to their old spending habits,spending more than the earn. We feel that a sharp risein consumer sentiment is the main factor behind theincrease in spending. Consumer sentiment rose to 75.3in February.14 This was the highest reading since Marchof 2011.14 We think changes in consumer spending willquickly fall back in line with changes in personalincomes. This will provide a challenging operating

environment for carbonated soft drink producers, andlimit the upside on future sales growth.

Source:www.bloomberg.com15

CATALYSTS FOR GROWTH

PepsiCos greatest opportunity for accelerated growthlies in the Latin America and Asia, Middle East andAfrica business segments. The company gets aroundfifty percent of its revenue internationally and we projectthis number will be around fifty-two percent in fiveyears.3 The two percent increase will come mostly fromgrowth in Asia, Africa, and the Middle East. One ofPepsis biggest challenges is to create loyal customersin these new markets just as they have done in the U.S.We think Pepsi will be the most successful beveragecompany to gain significant brand loyalty in emergingmarkets because of their diverse product portfolio andtheir diligent efforts to gain new customers. PepsiCo willbe able to reach a greater number of customers morequickly by offering beverages and salty snacks in thesenew markets, leading to an acceleration in brandloyalty. Additionally, improving economies in emergingmarkets are leading to rising incomes for many peoplein these countries. Higher levels of discretionary incomewill contribute to a new era of casual dining, thoughlikely nowhere near the scope of casual diningdomestically. Casual dining will create another channelfor Pepsi to reach new customers in these new

markets, especially those who would otherwise nothave been drawn to PepsiCo products.

Research and development spending of $525, $488,and $414 million over the last three years has putPepsiCo in great position to successfully expand theirproduct portfolio.3 First, expanding into some emergingmarkets will be a tricky task. Companies will need tofind the right balance between pushing productspopular in the U.S. and catering to local tastes and

7/29/2019 pep_sp12

10/25



10

traditions. PepsiCo has spent lots of time and moneyanalyzing consumer preferences in many of thesemarkets. Additionally, the company has made aconcerted effort to test variations of products containingslightly different ingredients in order to be able to meetcustomer preferences. Secondly, research anddevelopment spending should help Pepsi make up

ground on companies offering healthier food andbeverage options. Pepsi is continuously testing newingredients in an attempt to find healthy substitutes thatwill be able to replace unhealthy existing ingredientswithout sacrificing the taste. In March 2012, thecompany is scheduled to launch its sixty-calorie softdrink, Pepsi Next.8 We think the new brand will be asuccess, and begin contributing new sales immediately.Finally, the race to offer increasingly health consciousconsumers more choices is moving full steam ahead.PepsiCo will look to continue to build upon recentsuccess growing the companys three healthiestbrands, Quaker, Tropicana, and Gatorade.3 Also, we

feel the company will be an industry leader bringinghealthier products to market through internaldevelopment or attractive acquisitions.

INVESTMENT POSITIVES

Coordinated bailout efforts and liquidity injectionsfrom the European Union and the InternationalMonetary Fund have stabilized economic conditionsin Europe. Sales in PepsiCos European divisionshould improve this year.

Traditional income generating investments such asbonds and money market funds are currentlyoffering investors extremely low returns relative tohistorical ranges. Many of these short-terminstruments are even producing negative realreturns when factoring in inflation. Pepsis 3.1%dividend yield is considerably higher than the 1.87%yield of the S&P 500.5

PepsiCos experience creating products that adaptto the tastes of different cultures will help thecompany grow internationally and maintain itsposition as an industry leader in new markets.Pepsis innovative spirit and diverse product portfoliowill drive the innovation needed to meet customersneeds in foreign countries.

INVESTMENT NEGATIVES

Volatile exchange rates have the potential to hurtprofitability as the company translates overseasprofits back into American dollars. The U.S. dollarhas had an immense decline over the last decade.

We think many of the imbalances causing thisdecline will soon be addressed, and Pepsi willexperience negative exchange rates as theyrecognize international profits.

Many Americans have begun to put extra emphasison adhering to healthier eating habits. The majority

of PepsiCos snacks and beverages are unhealthy.PepsiCo will continue to lose business to substituteproducts if it fails to build a robust portfolio ofhealthier choices.

The soft drink industry faces threats from state andfederal regulations. Multiple states have proposedtaxes on soft drinks because of the health problemsthey contribute to. Facing large deficits and angryconstituents, politicians across the country arelooking everywhere for places to put the blame.Pepsi will be forced to deal with any new laws orregulations that are put in place.

VALUATION

We have a buy recommendation on PepsiCo. Our pricetarget for PepsiCo over the next twelve months is$76.87. We produced this price target using ourdiscounted cash flow, dividend discount, and relativevaluation models. Our discounted cash flow model gaveus a price of $79.63. Our dividend discount model gaveus a price of $77.72. Our relative P/E valuation modelgave us a price of $73.26. We used equal weightings of

33.33% to come up with our price target of $76.87. Wefelt it was appropriate to equally weight the threemodels because their outputs were in such closeproximity. The growth rate used in our discounted cashflow model was two percent. The weighted averagecost of capital was 6.44%. The key assumptions usedin our growth models were sales growth rates and thecost of goods sold. We believe that rising input priceswill put pressure on the companys cost of goods sold.We have forecasted cost of goods sold to rise slightly inthe coming years. Pepsi is currently trading at $65.78.2Therefore, our model is forecasting 14.43% upside. Thefund already has a sizeable position in PepsiCo.

Therefore, no action is needed at this time. We expectto benefit from price appreciation and dividends overthe next year.

Our buy and sell disciplines revolve around economicand company specific factors. We would look to add toour position if the economy added 250,000 jobs for twoconsecutive months and the unemployment ratedropped below 7.6%. These events would lead tohigher personal income levels and a rise in consumer

7/29/2019 pep_sp12

11/25



11

spending. Also, if the price of Pepsis stock droppedbelow $62 without a material change in the companysfundamentals, we would look to purchase more shares.At these levels, valuations for the stock would becomevery attractive. We would look to reevaluate ourposition, and possibly sell the stock if PepsiCos pricerose above $80.Additionally, if the companys soft drink

market share were to fall below 8.9% we would likelysell the stock.

7/29/2019 pep_sp12

12/25



12

REFERENCES

1). http://bigcharts.marketwatch.com/

2). http://finance.yahoo.com/

3).PepsiCo-10K,2011

http://www.sec.gov/Archives/edgar/data/77476/000119312512081822/d269581d10k.htm

4). CNBC. Berk, Christina. Drop in Soda Sales Acceleratesas Healthier Options Grow.http://www.cnbc.com/id/46796332

5). http://www.cnbc.com/

6).PepsiCo-10k,2008http://www.sec.gov/Archives/edgar/data/77476/000119312509033126/d10k.htm

7). CNBC. PepsiCo to Cut 8,700 Jobs; Quarterly Earnings

Rise. http://www.cnbc.com/id/46314789

8).USA Today. Choi, Candice. Pepsis mid-calorie soda aimsto win back drinkers.http://www.usatoday.com/money/industries/food/story/2012-02-23/soda-wars-continue/53221210/1

9). USA Today. Choi, Candice. Coke, Pepsi make changesto avoid cancer warning.http://www.usatoday.com/money/industries/food/story/2012-03-08/coke-pepsi-cancer-warning/53416248/1

10). Triple Pundit. Donovan, William. Pepsi, Coke Report onWater Conservation.

http://www.triplepundit.com/2010/09/pepsi-coke-set-water-conservation-goals/

11). Seeking Alpha. Soft Drink Prices Rise, Following OtherFood and Beverage Hikes.http://seekingalpha.com/article/276629-soft-drink-prices-rise-following-other-food-and-beverage-hikes

12).Bloomberg.GDPhttp://www.bloomberg.com/markets/economic-calendar/

13).Bloomberg.JoblessClaimshttp://www.bloomberg.com/markets/economic-calendar/

14).Bloomberg.ConsumerSentimenthttp://www.bloomberg.com/markets/economic-calendar/

15).Bloomberg.Personal Income and Outlayshttp://www.bloomberg.com/markets/economic-calendar/

16). CEE Packaging. Globsl soft drinks consumptionincreases in 2010.http://www.ceepackaging.com/2011/08/09/global-soft-drinks-consumption-increases-in-2010/

17). IBISWorld. Kaczanowska, Agata. Soda Production in theUS.http://clients.ibisworld.com/industryus/productsandmarkets.aspx?indid=285

18). Wikipedia. Odwalla http://en.wikipedia.org/wiki/Odwalla

19).Wikipedia. Naked Juice.http://en.wikipedia.org/wiki/Naked_Juice

20).IBISWorld. World price of sugar.http://clients.ibisworld.com/bed/default.aspx?bedid=176

21).http://mergentonline.com.proxy.lib.uiowa.edu/compsearch.asp

22). http://www.finra.org/

IMPORTANT DISCLAIMER

This report was created by a student(s) enrolled in theApplied Securities Management (Henry Fund) program at theUniversity of Iowas Tippie School of Management. The intentof these reports is to provide potential employers and otherinterested parties an example of the analytical skills,investment knowledge, and communication abilities of HenryFund students. Henry Fund analysts are not registeredinvestment advisors, brokers or officially licensed financialprofessionals. The investment opinion contained in this reportdoes not represent an offer or solicitation to buy or sell any ofthe aforementioned securities. Unless otherwise noted, factsand figures included in this report are from publicly availablesources. This report is not a complete compilation of data,and its accuracy is not guaranteed. From time to time, the

University of Iowa, its faculty, staff, students, or the HenryFund may hold a financial interest in the companiesmentioned in this report.

7/29/2019 pep_sp12

13/25

PepsiCo, Inc.

RevenueDecompositionFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E Sales(Millions) 43,232 57838 66504 68532.16 71503.14 74623.80

PercentofRevenue 100% 100% 100% 100% 100% 100%

GrowthRates

0.04% 33.79% 14.98% 3.05% 4.34% 4.36%

FritoLayNorthAmerica 12421 12573 13322 13655.05 14146.63 14655.91

PercentofRevenue 28.73% 21.74% 20.03% 19.93% 19.78% 19.64%

GrowthRates 0.69% 1.22% 5.96% 2.50% 3.60% 3.60%

QuakerFoodsNorthAmerica 2687 2656 2656 2695.84 2763.24 2832.32


GrowthRates 41.27% 1.15% 0.00% 1.50% 2.50% 2.50%

LatinAmericaFoods 5703 6315 7156 7513.8 8039.77 8602.55


GrowthRates 3.26% 10.73% 13.32% 5.00% 7.00% 7.00%

PepsiCoAmericasBeverages 10116 20401 22418 22754.27 23550.67 24374.94


GrowthRates 7.51% 101.67% 9.89% 1.50% 3.50% 3.50%

Europe 7028 9602 13560 13966.80 14420.72 14889.39


GrowthRates 1.99% 36.62% 41.22% 3.00% 3.25% 3.25%

Asia,MiddleEast&Africa 5277 6291 7392 7946.40 8582.11 9268.68


GrowthRates 3.09% 19.22% 17.50% 7.50% 8.00% 8.00%

7/29/2019 pep_sp12

14/25

PepsiCo, Inc.

IncomeStatementFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E Net revenue 43,232 57,838 66,504 68532.16 71503.14 74623.80 7

Cost of sales 20,099 26,575 31,593 32998.24 34321.51 35670.17 3

Selling, general & administrative expenses 15,026 22,814 25,145 25596.76 26384.66 27685.43 2Amortization of intangible assets 63 117 133 137.06 143.01 149.25

Total operating profit 8,044 8,332 9,633 9800.10 10653.97 11118.95 1

Bottling equity income 365 735 0.00 0.00 0.00 0.00

Interest expense 397 903 856 925.18 1001.04 1007.42

Interest income & other 67 68 57 68.53 85.80 74.62

Income before income taxes 8,079 8,232 8,834 8 943 .4 5 9 73 8. 73 1 01 86 .1 5 1

Total current provision (benefit) for income taxes 1,835 1,797 1,617 1679.04 2073.59 2164.09

Total deferred provision (benefit) for income taxes 265 97 755 822.39 858.04 559.68

Provision for income taxes 2,100 1,894 2,372 2501.42 2931.63 2723.77

Net income 5,979 6,338 6,462 6442.02 6807.10 7462.38

Net income (loss) attributable to noncontrolling interests -33 -18 -19 -19.00 -21.00 -21.00

Net income attributable to PepsiCo, Inc. 5,946 6,320 6,443 6423.02 6786.10 7441.38

Preferred shares - dividends 1.00 1.00 1.00 1.00 1.00 1.00

Preferred shares - redemption premium 5.00 5.00 6.00 6.00 6.00 6.00

Net income available for common shareholders 5,940 6,314 6,436 6416.02 6779.10 7434.38

Weighted average shares outstanding - basic 1,558 1,590 1,576 1572.5 1562 1557.5

Year end shares outstanding 1,565 1,581 1,564 1560 1555 1558

Net income (loss) per share - basic 3.81 3.97 4.08 4.11 4.36 4.77

Dividends per common share 1.81 1.89 2.04 2.06 2.18 2.39

7/29/2019 pep_sp12

15/25

PepsiCo, Inc.

BalanceSheetFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ECash & cash equivalents 3,943 5,943 4,067 5 40 4. 09 89 6 60 7. 79 7 66 9. 24 9 09 1. 21 1 09 26 .3 8 1 26 08 .1 5

Short-term investments 192 426 358 376.93 378.97 485.05 505.75 541.64 560.72

Accounts & notes receivable, net 4,624 6,323 6,912 7195.88 7350.52 7686.25 8286.53 8569.25 8699.39

Inventories 2,618 3,372 3,827 3940.60 4182.93 4440.12 4559.54 4688.83 4724.88

Prepaid expenses & other current assets 1,194 1,505 2,277 2439.74 2545.51 2604.37 2723.27 2845.64 2927.28

Total current assets 12,571 17,569 17,441 1 93 57 .2 5 2 10 65 .7 2 2 28 85 .0 4 2 51 66 .2 9 2 75 71 .7 4 2 95 20 .4 2

Property, plant & equipment, gross 24,912 33,041 35,140 3 77 35 .8 7 4 02 75 .9 8 4 27 13 .8 6 4 50 81 .3 0 4 74 60 .3 8 4 97 20 .5 1

Less accumulated depreciation 12,241 13,983 15,442 1 61 05 .0 6 1 68 03 .2 4 1 75 36 .5 9 1 82 84 .8 3 1 89 97 .8 6 1 93 77 .7 9

Property, plant & equipment, net 12,671 19,058 19,698 2 16 30 .8 1 2 34 72 .7 4 2 51 77 .2 7 2 67 96 .4 7 2 84 62 .5 2 3 03 42 .7 2

Amortizable intangible assets, net 841 2,025 1,888 1884.22 1880.46 1876.69 1872.94 1869.20 1865.46

Goodwill 6,534 14,661 16,800 16,800 16,800 16,800 16,800 16,800 16,800

Nonamortizable intangible assets 10098 38227 45914 4 59 50 .7 3 4 59 87 .4 9 4 60 24 .2 8 4 60 61 .1 0 4 61 00 .2 5 4 61 39 .4 4

Non-current notes & accounts receivable 118 165 159 158.67 160.76 173.18 157.33 156.35 151.87

Deferred marketplace spending 182 203 186 191.58 197.33 195.36 203.17 211.30 219.75

Pension plans 64 121 65 65.00 62.00 60.50 65.00 67.30 68.40

Other investments 4627 2021 1566 1628.50 1544.00 1567.16 1658.00 1682.87 1763.89

Other assets 1423 2236 1543 1573.86 1559.51 1537.62 1625.80 1658.32 1691.48

Total assets 39,848 68,153 72,882 7 56 40 .6 2 7 91 30 .0 1 8 26 97 .1 0 8 68 06 .1 1 9 09 79 .8 5 9 49 63 .4 3

Current maturities of long-term debt 102 113 2,549 2315.75 2381.00 3150.18 2336.00 829.00 250.00

Amounts reclassified to long-term debt 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Short-term debt 826 9683 9861 8458.00 6783.23 4236.13 5995.90 8605.51 10012.69

Accounts payable 2,881 3,865 4,083 4325.48 4481.96 4716.90 4983.28 5160.06 5242.80

Accrued marketplace spending 1,656 1,841 1,915 2098.93 2163.54 2270.21 2386.21 2479.26 2535.60

Accrued compensation & benefits 1,291 1,779 1,771 2047.74 2110.77 2214.83 2328.01 2418.79 2473.76

Dividends payable 706 766 813 846.65 893.79 915.29 982.14 1010.52 1050.79

Other current liabilities 1,593 2,672 3,175 3255.28 3417.63 3595.35 3695.87 3724.94 3851.05

Accounts payable & other current liabilities 8,127 10,923 11,757 1 25 74 .0 8 1 30 67 .6 9 1 37 12 .5 7 1 43 75 .5 0 1 47 93 .5 8 1 51 54 .0 1

Income taxes payable 165 71 192 219.30 238.81 245.61 248.98 258.69 263.87

Total current liabilities 8,756 15,892 18,154 2 04 04 .7 3 2 15 76 .9 4 2 13 44 .4 9 2 29 56 .3 9 2 44 86 .7 8 2 56 80 .5 7

Long-term debt obligations 7,400 19,999 20,568 2 11 79 .3 7 2 21 56 .4 0 2 31 55 .1 9 2 43 05 .7 1 2 54 74 .3 6 2 65 89 .7 6

Other liabilities 5,591 6,729 8,266 8 90 9. 18 9 29 5. 41 9 95 6. 73 1 02 79 .6 4 1 06 13 .5 5 1 08 23 .8 9

Deferred income taxes 659 4,057 4,995 5139.91 5362.74 5512.36 5724.14 5975.32 6034.44

Total liabilities 22,406 46,677 51,983 5 56 33 .2 0 5 83 91 .4 9 5 99 68 .7 7 6 32 65 .8 8 6 65 50 .0 1 6 91 28 .6 6

Total stock 466 4749 4690 4714.98 4722.60 4769.83 4817.52 5540.15 6371.18

Retained earnings 33,805 37,090 40,316 4 38 89 .3 8 4 79 46 .9 5 5 19 33 .9 3 5 62 57 .8 3 6 04 26 .4 0 5 63 27 .7 3

Currency translation adjustment -1,513 -1,259 -2,857 2671.22 2964.00 2788.00 3618.00 2787.00 1854.00

Unamortized pension & retiree medical, net of tax -2,328 -2,442 -3,419 3042.91 2982.05 2922.41 4663.08 4569.82 1755.56

Accumulated other comprehensive income (loss) -3,747 -3,559 -6,182 4690.13 5890.13 7149.87 7067.59 10868.57 8762.14

Repurchased common stock, at cost 13,383 16,745 17,875 1 85 03 .6 8 2 04 05 .8 5 2 14 26 .1 4 2 24 97 .4 5 2 36 22 .3 2 2 48 03 .4 4

Total PepsiCo, Inc. common shareholders' equity 16,908 21,273 20,704 1 96 96 .4 2 2 04 27 .5 2 2 24 17 .3 3 2 32 29 .2 3 2 41 18 .8 4 2 55 23 .7 7

Noncontrolling interests 638 312 311 311.00 311.00 311.00 311.00 311.00 311.00

Total equity 17,442 21,476 20,899 2 00 07 .4 2 2 07 38 .5 2 2 27 28 .3 3 2 35 40 .2 3 2 44 29 .8 4 2 58 34 .7 7

7/29/2019 pep_sp12

16/25

PepsiCo, Inc.

CashFlowStatementFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ENet income 5,979 6,338 6,462 6 44 2. 02 6 80 7. 10 74 62 .3 8 77 02 .97 8 14 8. 87 8 20 4. 64

Depreciation & amortization 1,635 2,327 2,737 663.06 698.18 733.35 748.23 713.03 379.92

Stock-based compensation expense 227 299 326 332.52 339.17 345.95 352.87 359.93 367.13

Restructuring & impairment charges -159 657 304 237.00 259.00 351.00 316.00 283.00 255.00

Pension & retiree medical plan contributions -1,299 -1,734 -349350.00 382.00 461.00 395.00 326.00 155.00

Pension & retiree medical plan expenses 423 453 571 595.00 615.00 649.00 588.00 521.00 488.20

Bottling equity loss (income), net of dividends -235 -916 0.0 0.00 0.00 0.00 0.00 0.00 0.00

Deferred income taxes & other tax charges & credits 284 500 495 487.00 463.00 458.00 454.00 463.00 423.00

Accounts & notes receivable 188 -268 -666 283.88 154.65 335.73 600.28 282.72 130.14

Inventories 17 276 -331 113.60 242.33 257.18 119.42 129.30 36.05

Prepaid expenses & other current assets -127 144 -27 162.74 105.77 58.86 118.90 122.36 81.65

Accounts payable & other current liabilities -133 488 520 817.08 493.61 644.88 662.93 418.08 360.43

Income taxes payable 319 123 -340 27.30 19.51 6.80 3.37 9.71 5.17

Other operating activities, net -323 -239 -758 398.00 429.00 348.00 305.00 265.00 253.00

Net cash flows from operating activities 6,796 8,448 8,944 8 23 8. 16 83 41 .8 1 91 77 .0 0 9 28 3. 03 97 71 .82 98 17 .3 1

Capital spending -2,128 3,253 -3,339 2595.87 2540.11 2437.88 2367.44 2379.08 2260.13

Other acquisitions, divestitures & investments -328 -4186 -2329 1563.00 1348.00 1652.00 1499.00 1387.00 1269.00

Short-term investments 55 -229 50 68.00 39.00 35.00 46.00 37.00 41.00

Net cash flows from investing activities -2,401 -7,668 -5,618 4090.87 3849.11 4124.88 3820.44 3729.08 3488.13

Proceeds from issuances of long-term debt 1,057 6,451 3,000 3 57 9. 00 3 27 9. 00 28 79 .0 0 29 65 .00 3 20 2. 00 2 54 6. 00Payments of long-term debt -226 -59 -1,596 621.20 671.80 655.40 526.80 578.00 454.90

Debt repurchase 0.0 -500 -771 635.50 615.80 435.90 525.50 955.50 635.50

Short-term borrowings -1018 2482 303 375.23 401.40 388.63 367.64 359.00 381.65

Cash dividends paid -2,732 -2,978 -3,157 3233.72 3404.81 3716.00 3824.97 4036.06 4098.67

Share repurchases - common 0 -4,978 -2,489 2190 2300.00 2573.00 2406.00 2117.00 2281.00

Share repurchases - preferred -7 -5 -7 7 6.00 7.00 6.00 5.00 5.00

Other financing activities, net 429 973 -418 21 81.00 214.00 21.00 27.00 54.00

Net cash flows from financing activities -2,497 1,386 -5,135 2754.19 3237.01 3905.67 3977.63 4157.56 4601.42

Effect of exchange rate changes on cash & cash equivalents -19 -166 -67 56.00 52.00 85.00 63.00 50.00 46.00

Net increase (decrease) in cash & cash equivalents 1,879 2,000 -1,876 1 33 7. 09 89 1 20 3. 69 10 61 .4 5 14 21 .9 6 1 83 5. 17 1 68 1. 77

Cash & cash equivalents, beginning of year 2,064 3,943 5,943 4 ,0 67 54 04 .0 98 9 6 60 7. 79 7 66 9. 24 9 09 1. 21 1 09 26 .3 8

Cash & cash equivalents, end of year 3,943 5,943 4,067 5 40 4. 10 6 60 7. 79 7 66 9. 24 9 09 1. 21 1 09 26 .3 8 1 26 08 .1 5

7/29/2019 pep_sp12

17/25

PepsiCo, Inc.

CommonSizeIncomeStatementFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014ENet revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales 46.49% 45.95% 47.51% 48.15% 48.00% 47.80%

Selling, general & administrative expenses 34.76% 39.44% 37.81% 37.35% 36.90% 37.10%

Amortization of intangible assets 0.15% 0.20% 0.20% 0.20% 0.20% 0.20%

Total operating profit 18.61% 14.41% 14.48% 14.30% 14.90% 14.90%

Bottling equity income 0.84% 1.27% 0.00% 0.00% 0.00% 0.00%

Interest expense 0.92% 1.56% 1.29% 1.35% 1.40% 1.35%

Interest income & other 0.15% 0.12% 0.09% 0.10% 0.12% 0.10%

Income before income taxes 18.69% 14.23% 13.28% 13.05% 13.62% 13.65%

Total current provision (benefit) for income taxes 4.24% 3.11% 2.43% 2.45% 2.90% 2.90%

Total deferred provision (benefit) for income taxes 0.61% 0.17% 1.14% 1.20% 1.20% 0.75%

Provision for income taxes 4.86% 3.27% 3.57% 3.65% 4.10% 3.65%

Net income 13.83% 10.96% 9.72% 9.40% 9.52% 10.00%

7/29/2019 pep_sp12

18/25

PepsiCo, Inc.

CommonSizeBalanceSheetFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ECash & cash equivalents 9.12% 10.28% 6.12% 7.89% 9.24% 10.28% 11.68% 13.52% 15.29%

Short-term investments 0.44% 0.74% 0.54% 0.55% 0.53% 0.65% 0.65% 0.67% 0.68%

Accounts & notes receivable, net 10.70% 10.93% 10.39% 10.50% 10.28% 10.30% 10.65% 10.60% 10.55%

Inventories 6.06% 5.83% 5.75% 5.75% 5.85% 5.95% 5.86% 5.80% 5.73%

Prepaid expenses & other current assets 2.76% 2.60% 3.42% 3.56% 3.56% 3.49% 3.50% 3.52% 3.55%

Total current assets 29.08% 30.38% 26.23% 28.25% 29.46% 30.67% 32.34% 34.11% 35.80%

Property, plant & equipment, gross 57.62% 57.13% 52.84% 55.06% 56.33% 57.24% 57.94% 58.71% 60.30%

Less accumulated depreciation 28.31% 24.18% 23.22% 23.50% 23.50% 23.50% 23.50% 23.50% 23.50%

Property, plant & equipment, net 29.31% 32.95% 29.62% 31.56% 32.83% 33.74% 34.44% 35.21% 36.80%

Amortizable intangible assets, net 1.95% 3.50% 2.84% 2.75% 2.63% 2.51% 2.41% 2.31% 2.26%

Goodwill 15.11% 25.35% 25.26% 24.51% 23.50% 22.51% 21.59% 20.78% 20.37%

Nonamortizable intangible assets 23.36% 66.09% 69.04% 67.05% 64.32% 61.68% 59.20% 57.03% 55.95%

Non-current notes & accounts receivable 0.27% 0.29% 0.24% 0.23% 0.22% 0.23% 0.20% 0.19% 0.18%

Deferred marketplace spending 0.42% 0.35% 0.28% 0.28% 0.28% 0.26% 0.26% 0.26% 0.27%

Pension plans 0.15% 0.21% 0.10% 0.09% 0.09% 0.08% 0.08% 0.08% 0.08%

Other investments 10.70% 3.49% 2.35% 2.38% 2.16% 2.10% 2.13% 2.08% 2.14%

Other assets 3.29% 3.87% 2.32% 2.30% 2.18% 2.06% 2.09% 2.05% 2.05%

Total assets 92 .1 7% 11 7. 83 % 1 09 .5 9% 11 0. 37 % 11 0. 67% 1 10 .82 % 11 1. 56 % 1 12 .5 4% 11 5. 16 %

Current maturities of long-term debt 0.24% 0.20% 3.83% 3.38% 3.33% 4.22% 3.00% 1.03% 0.30%

Amounts reclassified to long-term debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Short-term obligations 1.91% 16.74% 14.83% 12.34% 9.49% 5.68% 7.71% 10.64% 12.14%

Accounts payable 6.66% 6.68% 6.14% 6.31% 6.27% 6.32% 6.40% 6.38% 6.36%

Accrued marketplace spending 3.83% 3.18% 2.88% 3.06% 3.03% 3.04% 3.07% 3.07% 3.08%

Accrued compensation & benefits 2.99% 3.08% 2.66% 2.99% 2.95% 2.97% 2.99% 2.99% 3.00%

Dividends payable 1.63% 1.32% 1.22% 1.24% 1.25% 1.23% 1.26% 1.25% 1.27%

Other current liabilities 3.68% 4.62% 4.77% 4.75% 4.78% 4.82% 4.75% 4.61% 4.67%

Accounts payable & other current liabilities 18.80% 18.89% 17.68% 18.35% 18.28% 18.38% 18.48% 18.30% 18.38%

Income taxes payable 0.38% 0.12% 0.29% 0.32% 0.33% 0.33% 0.32% 0.32% 0.32%

Total current liabilities 20.25% 27.48% 27.30% 29.77% 30.18% 28.60% 29.50% 30.29% 31.14%

Long-term debt obligations 17.12% 34.58% 30.93% 30.90% 30.99% 31.03% 31.24% 31.51% 32.25%

Other liabilities 12.93% 11.63% 12.43% 13.00% 13.00% 13.34% 13.21% 13.13% 13.13%

Deferred income taxes 1.52% 7.01% 7.51% 7.50% 7.50% 7.39% 7.36% 7.39% 7.32%

Total liabilities51.83% 80.70% 78.17% 81.18% 81.66% 80.36% 81.31% 82.32% 83.83%

Total stock 1.08% 8.21% 7.05% 6.88% 6.60% 6.39% 6.19% 6.85% 7.73%

Retained earnings 78.19% 64.13% 60.62% 64.04% 67.06% 69.59% 72.30% 74.75% 68.31%

Currency translation adjustment 3.50% 2.18% 4.30% 3.90% 4.15% 3.74% 4.65% 3.45% 2.25%

Unamortized pension & retiree medical, net of tax 5.38% 4.22% 5.14% 4.44% 4.17% 3.92% 5.99% 5.65% 2.13%

Accumulated other comprehensive income (loss) 8.67% 6.15% 9.30% 6.84% 8.24% 9.58% 9.08% 13.44% 10.63%

Repurchased common stock, at cost 30.96% 28.95% 26.88% 27.00% 28.54% 28.71% 28.91% 29.22% 30.08%

Total PepsiCo, Inc. common shareholders' equity 39.11% 36.78% 31.13% 28.74% 28.57% 30.04% 29.85% 29.83% 30.95%

Noncontrolling interests 1.48% 0.54% 0.47% 0.45% 0.43% 0.42% 0.40% 0.38% 0.38%

Total equity 40.35% 37.13% 31.43% 29.19% 29.00% 30.46% 30.25% 30.22% 31.33%

7/29/2019 pep_sp12

19/25

PepsiCo, Inc.

ValueDriverEstimationFiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ENOPLATComputation:

EBITA:

Revenues 43,232 57,838 66,504 68532.16 71503.14 74623.80 77807.77 80841.96 82458.66

(-)Cost of Goods Sold 20,099 26,575 31,593 32998.24 34321.51 35670.17 37036.50 38157.41 38920.49

(-) SG+A 15,026 22,814 25,145 25596.76 26384.66 27685.43 29100.11 30234.89 30922.00

(+) Interest on Leases 208 335 365 383.25 402.41 422.53 443.66 465.84 489.13

Amortization of intangible assets 63 117 133 137.06 143.01 149.25 155.62 161.68 164.92

EBITA 8252 8667 9998 10183.35 11056.38 11541.48 11959.21 12753.82 12940.39

Less:AdjustedTaxes:

Provision for Income Taxes (Expense) 2,100 1,894 2,372 2501.42 2931.63 2723.77 2801.08 3071.99 3133.43

(+) Tax Shield on Interest Expense 106 242 229 247.95 268.28 269.99 302.36 324.98 342.53

(+) Tax Shield on Lease Interest Expense 56 90 98 102.71 107.85 113.24 118.90 124.85 131.09

(-) Tax on Interest (or Investment) Income 18 18 15 18.37 23.00 20.00 31.28 39.00 44.20

TotalAdjustedTaxes 2244 2208 2684 2833.72 3284.76 3087.00 3191.06 3482.83 3562.85

Plus:ChangeinDeferredTaxLiabilities

Net DT Liabilities for Current 659 4,057 4,995 5139.91 5362.74 5512.36 5724.14 5975.32 6034.44

Net DT Liabilities for Prior 226 659 4,057 4,995 5139.91 5362.74 5512.36 5724.14 5975.32

NetChangeinDTLiabilities 433 3398 938 144.91 222.82 149.62 211.78 251.18 59.12

NOPLAT:EBITA

Adjusted

Taxes+Change

in

6441 9857 8252 7494.54 7994.44 8604.11 8979.93 9522.17 9436.66

InvestedCapitalComputation:

Operating Current Assets:

Normal Cash (lesser of actual or %) 865 1157 1330 1370.64 1430.06 1492.48 1556.16 1616.84 1649.17

Accounts Receivable, Net 4,624 6,323 6,912 7195.88 7350.52 7686.25 8286.53 8569.25 8699.39

Inventory 2,618 3,372 3,827 3940.60 4182.93 4440.12 4559.54 4688.83 4724.88

PPD Expenses & Other Current Assets 1,194 1,505 2,277 2439.74 2545.51 2604.37 2723.27 2845.64 2927.28

OperatingCurrentAssets 9301 123 57 1 4346 14946. 86 1550 9.03 16 223.21 1 7125.4 9 17720. 56 18000. 73

Operating Current Liabilities:

Accounts Payable 2,881 3,865 4,083 4325.48 4481.96 4716.90 4983.28 5160.06 5242.80

Accrued Marketplace Spending 1,656 1,841 1,915 2098.93 2163.54 2270.21 2386.21 2479.26 2535.60

Other Current Liabilities 1,593 2,672 3,175 3255.28 3417.63 3595.35 3695.87 3724.94 3851.05

Income Tax Payable 165 71 192 219.30 238.81 245.61 248.98 258.69 263.87

OperatingCurrentLiabilities 6295.00 8449.00 9365.00 9898.99 10301.94 10828.06 11314.34 11622.96 11893.33

NetOperatingWorkingCapital 3005.6 4 3907. 76 4981. 08 5047. 87 520 7.09 53 95.15 5811.1 5 6097. 60 6107. 40

Plus:NetPPE 12,671 19,058 19,698 21630.81 23472.74 25177.27 26796.47 28462.52 30342.72

Plus:PVofOperatingLeases 1426.8 2203.5 2395.5 2515.28 2641.04 2773.09 2911.75 3057.33 3210.20

Plus:OtherOperatingAssets: 1423 2236 1543 1573.86 1559.51 1537.62 1625.80 1658.32 1691.48

Less:OtherOperatingLiabilities 5,591 6,729 8,266 8909.18 9295.41 9956.73 10279.64 10613.55 10823.89

InvestedCapital 12935.44 20676.26 20351.58 21858.64 23584.97 24926.40 26865.53 28662.22 30527.91

2011ValueDrivers:

ROIC=NOPLAT/InvestedCapital

NOPLAT 6441 9857 8252 7494.54 7994.44 8604.11 8979.93 9522.17 9436.66

InvestedCapital 12935.44 20676.26 20351.58 21858.64 23584.97 24926.40 26865.53 28662.22 30527.91

ROIC 49.79% 47.68% 40.55% 34.29% 33.90% 34.52% 33.43% 33.22% 30.91%

EP=Beg.IC*(ROICWACC)

BeginningIC 12342.02 12935.44 20676.26 20351.58 21858.64 23584.97 24926.40 26865.53 28662.22

ROIC 49.79% 47.68% 40.55% 34.29% 33.90% 34.52% 33.43% 33.22% 30.91%

WACC 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44%

EP 5350.51 5333. 95 7052. 15 566 7.18 6 001.58 6622.20 6726.5 0 7195. 14 7014 .10

FCF=NOPLAT(ChangeinIC)

NOPLAT 6441 9857 8252 7494.54 7994.44 8604.11 8979.93 9522.17 9436.66

ChangeinIC 593.42 7740.82 324. 68 1507. 06 1726 .33 134 1.43 1 939.13 1796.6 9 1865. 69

FCF 5847 2117 8577 5987.48 6268.11 7262.68 7040.80 7725.49 7570.97

7/29/2019 pep_sp12

20/25

PepsiCo, Inc.

WeightedAverageCostofCapital(WACC)EstimationRiskFreeRate 3.50%

RiskPremium 4.80%

Beta 0.75CostofEquity 7.10%

TaxRate 26.80%

PreTaxCostofdebt 4.36%

CostofDebt 3.19%

Dividend 5.46

SharePrice 329.05

CostofPreffered 1.66%

MarketValueofDebt 20568000000.00

PVofOperatingLeases 2395.50

MarketValueofEquity 102521000000.00

MarketValueofPreffered 68000000

TotalEnterpriseValue 123157002395.50

%EquityCapital 83.24%

%DebtCapital 16.70%

%PrefferedCapital 0.06%

WACC 6.44%

7/29/2019 pep_sp12

21/25

PepsiCo, Inc.

DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModelsKeyInputs:

CVGrowth 2.00%

CVROIC 30.91%

WACC 6.44%

CostofEquity 7.10%

FiscalYearsEndingDec.31 2011 2012E 2013E 2014E 2015E 2016E 2017EDCFModel:GrowthRates 3.05% 4.34% 4.36% 4.27% 3.90% 2.00% 2.00%

NOPLAT 8252 7495 7994 8604 8980 9522 9437

InvestedCapital 20676 20352 21859 23585 24926 26866 28662

ROIC 0.399 0.368 0.366 0.365 0.360 0.354 0.329

NOPLAT 8252 7495 7994 8604 8980 9522 9437

()CapEx 3339 2596 2540 2438 2367 2379 2260

FCF 4913.05 4898.67 5454.33 6166.23 6612.49 7143.09 7176.53

CV 199626.5

CFtoDiscount 4913 4899 5454 6166 6612 7143 199626

PeriodstoDiscount 1 2 3 4 5 6 6

DiscountFactor 1.06 1.12 1.18 1.25 1.32 1.39 1.39

PV(CF) 4648.11 4384.59 4618.67 4939.92 5011.76 5121.96 143142.38

ValueofOperatingAssets 171867

(+)ExcessCash 10959

()PVOperatingLeases 3210

()UnderfundedPension 4963

()PostRetirementBenefits 1373

()Debt 41436

()PrefferedStock 6800

()EmployeeStockOptions 2747

ValueofEquity 122297

SharesOutstanding 1563

IntrinsicValueofStock 78PartialYearAdjustment 79.63EPModel:NOPLAT 8252 7495 7994 8604 8980 9522 9437

Beg.IC 20676 20352 21859 23585 24926 26866 28662

ROIC 0.399 0.368 0.366 0.365 0.360 0.354 0.329

WACC 6.44% 6.44% 6.44% 6.44% 6.44% 6.44% 6.44%

EP 6920.50 6183.90 6586.75 7085.23 7374.67 7792.03 7114.00

CV 162719.9

Discounting:

Beg.IC 20676

EP 6920.50 6183.90 6586.75 7085.23 7374.67 7792.03 162719.86

PeriodstoDiscount 1 2 3 4 5 6 6

DiscountFactor 1.06 1.12 1.18 1.25 1.32 1.39 1.39

PVofEP 6547.30 5534.94 5577.58 5676.16 5589.43 5587.29 116678.45

ValueofOperatingAssets 171867

(+)Excess

Cash 10959

()PVOperatingLeases 3210

()UnderfundedPension 4963

()PostRetirementBenefits 1373

()Debt 41436

()PrefferedStock 6800

()EmployeeStockOptions 2747

ValueofEquity 122297

SharesOutstanding 1563

IntrinsicValueofStock 78PartialYearAdjustment 79.63

7/29/2019 pep_sp12

22/25

PepsiCo, Inc.

DividendDiscountModel(DDM)orFundamentalP/EValuationModel

FiscalYearsEndingDec.31 2012E 2013E 2014E 2015E 2016E 2017EEPS 4.11$ 4.36$ 4.77$ 4.91$ 5.17$ 5.23$KeyAssumptions CVgrowth 2.00% CVROE 31.76% CostofEquity 7.10% DividendsPerShare 2.06 2.18 2.39 2.46 2.59 2.62 FutureCashFlows(Numerator) 4.90 (Denominator) 0.05Total 96.17

DiscountPeriods 1 2 3 4 5 5 DiscountedCashFlows 1.92 1.90 1.94 1.87 1.84 68.25IntrinsicValue 77.72$

7/29/2019 pep_sp12

23/25

PepsiCo, Inc.

DividendDiscountModel(DDM)orFundamentalP/EValuationModelEPS EPS Est.

Ticker Company Price 2012E 2013E P/E12 P/E13 5yrGr. PEG12 PEG13

KO TheCocaColaCompany 71.49$ $4.08 $4.47 17.5 16.0 6.37 2.75 2.51

DPS DrPepperSnapple 38.77$ $1.93 $2.31 20.1 16.8 15.00 1.34 1.12

KFT KraftFoods,

Inc. 38.25$

$2.52

$2.80

15.2

13.7

9.33 1.63

1.46

MNST MonsterBeverageCorp. 60.53$ $2.29 $2.59 26.4 23.4 9.17 2.88 2.55

GIS GeneralMills,Inc. 38.85$ $2.54 $2.76 15.3 14.1 7.44 2.06 1.89

CCE CocaColaEnterprisesIn 28.30$ $2.29 $2.54 12.4 11.1 8.07 1.53 1.38

Average 17.8 15.8 2.0 1.8PEP PepsiCo 65.30$ $4.11 $4.36 15.9 15.0 7.6 2.1 2.0

ImpliedValue: RelativeP/E(EPS12) $ 73.26RelativeP/E(EPS13) 69.05$PEGRatio(EPS12) 63.49$PEGRatio(EPS13) 60.27$

7/29/2019 pep_sp12

24/25

PepsiCo, Inc.

KeyManagementRatios

FiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017ELiquidityRatios

CurrentRatio 1.44 1.11 0.96 0.95 0.98 1.07 1.10 1.13 1.15

7/29/2019 pep_sp12

25/25

PepsiCo

Sensitivity Analysis

CV Growth

79.63$ 0.01 0.015 0.02 0.025 0.03

0.045 108.490 126.604 151.963 190.001 253.399

0.05 93.232 106.579 124.373 149.286 186.656WACC 0.055 81.365 91.560 104.667 122.143 146.610

0.06 71.871 79.878 89.887 102.755 119.913

0.065 64.104 70.533 78.391 88.214 100.843

CV Growth

79.63$ 0.01 0.015 0.02 0.025 0.03

0.06 83.587 88.413 97.056 120.657 132.839

0.065 79.529 85.386 94.589 102.451 117.852

Beta 0.075 76.421 80.612 89.636 97.483 112.457

0.08 70.643 77.651 87.563 96.593 105.248

0.085 64.819 72.136 79.915 86.569 101.540

CV Growth

79.63$ 0.01 0.015 0.02 0.025 0.03

0.035 82.479 91.286 101.452 116.945 134.738

0.04 78.351 87.884 98.352 106.653 124.389

0.045 75.622 84.614 95.287 102.644 121.979

MRP 0.05 71.489 79.632 86.741 98.465 112.493

0.055 63.621 74.823 84.196 96.323 108.057

pep_sp12

Documents