Analysis PepsiCo.In 2010 终稿

PepsiCo, Incorporated is a Fortune 500 American global corporation headquartered in Purchase, Harrison, New York, which was founded on June 8, 1965 and reincorporated in North Carolina in 1986. It mainly focuses on manufacturing, marketing of grain-based snack foods, beverages and other foodstuff. The structure of PepsiCo global operations has shifted multiple times in its history as a result of international expansion, and as of 2010 it is separated into four main divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. PepsiCo is a company full of strong team management with highly teamwork spirit. They are divided into 3 levels, Senior Leadership, Board of Directors and Corporate Officers. And each level is responsible for particular obligation clearly. Indra Krishnamurthy Nooyi has been the CEO of PepsiCo since 2006. With her leadership and excellent team work of all the stuffs, the corporation has achieved a great performance by profiting in the recent 3 years. And the number of employment has achieved approximately 285000 worldwide till 2010. As we can imagine, since it has achieved a high level in foods market, it is supposed to face fierce competition. In history, Coca-Cola has been considered publicly the main competitor in beverage market. In 2009, both of them have taken measures to maintain and pursue a higher share in different ranges. For PepsiCo, their main revenues no longer just come from the sales of carbonated soft drinks, and it holds a critical share of the US. Snack food market. As for 2009, 71 percent of the company’s

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net revenues came from North and South America, 16 percent from Europe and 13 percent from Asia, the Middle East and Africa. What I’d like to mention more is the promise of PepsiCo. Performance with purpose aimed at providing substantial service for the customer and promoting the growth of environment. In recent 3 years, some basic data really prove this point, which will be mentioned in next parts. Though it may be faced with lots of risk in various fields, the strategy with multiple investment in food industry will push it to go though the challenge.

2. Analyst Coverage

a. Analyst coverage – Having one or more analysts actively tracking and publishing opinions on a company and its stock is called analyst coverage. Some investors believe that a company with analyst coverage benefits from more investment activities than a company without analyst coverage.

On April 14th, the stock price of PEP in NYSE has achieved to $63.95, and the market value has achieved to $105billion, which takes the lead part of Coca-Cola.

b. Analyst Opinion – It gives you a wealth of professional, targeted information about the stock you are researching. Analyst opinions are intended to help investors better understand the potential for a company’s stock to increase or decrease in its value and determine if it maybe investment-worthy by evaluating its financial conditions, business environment, management and so on.

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Mean recommendation is a index which determines whether you can buy or sell the stocks. Usually it’s from 1.0 to 5.0, from strongly buy to sell. From the recommendation summary, we know that recent 2 weeks MR is 2.2 and keeps unchanging, which means it has a strong power to attract the investors.

c. Analyst Estimates

It estimates the future trends of performance based on the recent contribution with

data provided.

（http://finance.yahoo.com/q/ao?s=PEP+Analyst+Opinion）

Lots of analysts have released their works of analyzing the contribution of PepsiCo. I think PepsiCo has achieved a great level in food market, which is tightly associated with various investments in food industry.

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3. Financial Statement Analysis

Balance sheet analysis

Net Working Capital = Current Assets- Current Liabilities: In 2010, 17,569,000- 15,2,000 = 1,677,000 In 2009, 12,571,000- 8,756,000 = 3,815,000

In 2008, 10,806,000- 8,787,000 = 2,019,000 (2009>2008>2010)

In 2009, the corporation’s capital is much more available than in 2008 and 2010 in the short term to run the business.

Market-to-Book Ratio = Market Value of Equity/ Book Value of Equity: In 2010, (21,476,000×4.55)/ 21,273,000 = 8.4100 In 2009, (17,442,000×4.76)/ 16,908,000 = 4.9103 In 2008, (12,203,000×8.41)/ 12,203,000 = 4.5934 (2010>2009>2008)

The statistics show that the possibility of the corporation making profits is high. And in 2010, the possibility of the corporation making profits is larger than in 2009 and 2008.

Debt-Equity Ratio = Total Debt/ Total Equity: In 2010, 24,7,000/ 21,273,000 = 1.1704 In 2009, 7,8,000/ 16,908,000 = 0.4651

In 2008, 8,227,000/ 12,203,000 = 0.6742(2009<2008<2010)

In 2009, the shareholders’ benefits can be guaranteed better than in 2008 and 2010.

Enterprise Value = Market Value of Equity+ Debt- Cash: In 2010, (21,476,000×4.55+ 24,7,000+ 12,227,000- 5,943,000) = 28,729,800 In 2009, (17,442,000×4.76+ 2,476,000+ 7,8,000- 3,943,000) = 86,944,920 In 2008, (12,203,000×8.41+ 2,400,000+ 8,227,000- 2,0,000) = 108,790,230 (2008>2009>2010)

In 2008 the corporation value is larger than in 2010 and 2009.

Current Ratio = Current Assets/ Current Liabilities: In 2010, 17,569,000/ 15,2,000 = 1.1055 In 2009, 12,571,000/ 8,756,000 = 1.4357 In 2008, 10,806,000/ 8,787,000 = 1.2298 (2009 > 2008 > 2010)

The higher the current ratio the better, it means that the firm has more liquidity in 2009 than in 2008 and 2010.

Quick Ratio = (Current Assets- Inventory)/ Current Liabilities: In 2010, 14,197,000/ 15,2,000 = 0.3 In 2009, 9,953,000/ 8,756,000 = 1.1367 In 2008, 8,284,000/ 8,787,000 = 0.9428 (2009>2008>2010)

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In 2009, the corporation has more money to satisfy the corporation’s short term demand than in 2008 and 2010.

From the balance sheet, we can find that all the three years the corporation operates very well. But in 2009 the corporation’s operating performance is the best in the three years.

Income statement analysis

Earnings per Share =Net Income/Shares Outstanding: In 2010: 6,320,000/21,476,000 = 0.2943 In 2009: 5,946,000/ 17,442,000 = 0.3409 In 2008: 5,142,000/ 12,203,000 = 0.4214

The earnings per share show us the earning capacity of the company. In 2008, the capacity is stronger than in 2009 and 2010.

Gross Margin = Gross Profit/Sales:

In 2010: 31,263,000/ 57,838,000 = 0.05 In 2009: 23,133,000/ 43,232,000 = 0.5351 In 2008: 22,900,000/ 43,251,000 = 0.5295

Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. Larger gross margins are generally considered ideal for most companies. The Pepsi. Co is getting more efficiency from 2008 to 2010.

Operating Margin =Operating Income/Sales: In 2010: 8.332, 000/ 57,838,000 = 0.1441 In 2009: 8.044, 000/ 43,232,000 = 0.1861 In 2008: 6,935, 000/ 43,251,000 = 0.1603

From 2008 to 2010, the operating margin is getting lower. The low operating margin means that the company has high financial risk.

Net Profit Margin = Net Income/Sales: In 2010: 6,320,000/57,838,000 = 0.1093 In 2009: 5,946,000/43,232,000 = 0.1375 In 2008: 5,142,000/43,251,000 = 0.11

The net profit margin of 2010 is lower than that in 2008. A low net profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss, or a negative margin.

Accounts Receivable Days= Accounts Receivable/Average Daily Sales: In 2010: 6,323,000/365 =17,323.2877 In 2009: 4,624,000/365 = 12,668.4922 In 2008: 4,683,000/365 = 12,830.1370

It may be necessary for a company which wants to expand market to have a higher accounts receivable day. The account receivable days of 2010 is higher than that in

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2008. It means that the company’s operation will have a high cost and risk.

EBITDA = EBIT+ Depreciation+ Amortization: In 2010: 9,135,000+ 0+0 = 9,135,000 In 2009: 8,476,000+0+0 = 8,476,000 In 2008: 7,350,000+0+0 = 7,350,000

When comparing businesses with non profits, their potential to make profit is more important than their Net Loss. Since taxes on losses will be misleading in this context, taxes can be ignored. Capital expenditures and their related debt result in fixed costs.

Return on Assets = Net Income/Total Asset: In 2010: 6,320,000/68,153,000 = 0.0927 In 2009: 5,946,000/39,848,000 = 0.1492 In 2008: 5,142,000/35,994,000 = 0.1429

The higher ROA number the better, because the company is earning more money on less investment, so in 2009, it did best.

Return on Equity = Net Income/Book Value of Equity: In 2010: 6,320,000/21,273,000 = 0.2971 In 2009: 5,946,000/16,908,000 = 0.3517 In 2008: 5,142,000/12,203,000 = 0.4214

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The company did well in 2010.

Price-Earnings Ratio = Market Capitalization/Net Income =share price/earnings per

share:

In 2010: 4.55/ 0.2943 = 15.4604 In 2009: 4.76/ 0.3409 = 13.9630 In 2008: 8.41/ 0.4214 = 19.9573

A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. P/E ratio is greater than the average P/E ratio. The company did well.

Cash flow of PepsiCo Operating Activity:

Cash flow: 2010: 8,448,000, 2009: 6,796,000, 2008: 6,999,000. These show that in 2010 the corporation’s operating activity generates more money than in 2008 and 2009.

Investment Activity:

Cash flow: 2010: 7,668,000, 2009: 2,401,000, 2008: 2,667,000. These show that in 2010 the corporation puts more money in investment activity than in 2009 and 2008.

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Financing Activity:

Cash flow: 2010: 1,386,000, 2009: 2,497,000, 2008: 3,025,000. These show that in 2008 the corporation puts more money in financing activity than in 2009 and 2010.

4. Analyze Challenges of PepsiCo Inc According to 10K, 10Q Report

From 10K and 10Q report, we can conclude that PepsiCo. Inc really got a great profit and performed so well, even though the market is so competitive. However from the histogram, we can tell that its operation wasn't very good in 2008 and 2009. And most of them had negative increase on net revenue from 2008 to 2010. Why? Because the financial crisis happened. After two years, the global economy has become recovered from the crisis. Therefore, Pepsi did so good last year. It's the first important challenge to the company. We must focus on the economic environment, which always has great impact on a company's financial conditions.

Now let's look at some statistics. We can see the different proportions of different countries in Net Revenue. And this is 2010, 2008 and 2009. From the pie diagram, we can see that other countries almost made half of the whole revenue. So we should consider them seriously. However, there are some difficulties in front of us. Let's look at how their contributions changed last 3 years. Some of them were stable, e.g.: Canada. And some of them changed frequently, e.g.: Russia. What reasons? Foreign currency exchange rate. You see, the exchange rate between USD and CAD was relatively stable in one year. So do the Mexican Peso and the Euro. But Russian rouble changed a lot. That’s reason of it's changed the contribution. This is the second important challenge to the company. Other divisions. And it's affected by the currency exchange rate.

Pepsi once was blacklisted by IPE(Institution of Public and Environment) for water pollution. This is the third challenge of the company. However, after that, the company started to focus on the environment protection. Pepsi has developed a bottle made from plant-based, renewable resources that is fully recyclable, and will start using it in a test program next year. It's one of several steps PepsiCo has taken recently to reduce its environmental impact.

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Part B: Stock Price Analysis

Stock Price of PEPSICO

When we see the company’s stock price in the last 3years, we can find that from October 2008 to November 2008 PEPSICO stock price fall 20% obviously because of the financial crisis in 2008. After the financial crisis, the stock price remains about 60 dollar per share. As a whole, the price is stable. These months the stock price trends to go up.

In the Balance Sheet and P/B chart, we can know the Book Value of Equity and Market-to-Book Ratio. According to the formula, we can know the Market Value of Equity: In 2008 is $102,627.23million. In2009 is $83,023.92million. In 2010 is $97,715.8 million. According to the formula ‘P/E Ratio=Market Capitalization/Net Income’, we can also know the Price-earnings Ratio from the income statement, In 2008 is 19.96. In 2009 is 13.88, In 2010 is 15.42.

The market capitalization is significantly higher than PepsiCo’s book value of equity in the last 3 years. The PepsiCo’s Market-to-Book Ratio is a lot more than one. It means the company’s value of assets put into use is higher than the liquidation

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value. The PepsiCo’s market value of equity is higher than that among beverage companies. So we can see it is a growth stock and is very promising. First, let’s see PepsiCo’s P/E ratio.

As we know that P/E ratio= Market Capitalization/Net Income

From the research and calculation we can achieve its P/E ratio as following:

P/E ratio in 29th April 2011= 18.47 P/E ratio in March 2011= 17.27 P/E ratio in December 2010= 16.65 P/E ratio in September 2010= 16.78 P/E ratio in June 2010= 15.79 P/E ratio in 2009= 13.88

P/E is an important valuation tool when comparing companies in the same

industry. A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower P/E ratio. From the P/E ratio of PepsiCo we easily find that it increases from 15.79 to 18.47 within one year in general.

Moreover, from the graph below which shows the stock price of PepsiCo in one year, we can see that its stock price has gone up from 65.25 to 69.73.

All in all, it demonstrates that stockholders are expecting the stock price of PepsiCo to keep increasing. Thus, I think the current stock price of Pepsi is overvalued.

However, as we know using just the PE ratio makes high-growth companies look overvalued relative to others. Here I’d like to use the PEG ratio (Price/Earnings To Growth ratio) which illustrates the relationship between stock price, earning per share, and the company's expected growth rate to check my answer. By dividing the PE ratio by the earnings growth rate, the PEG ratio allows investors to accurately compare companies with different PE ratios and growth rates.

Through the Internet I get the PEG ratio of PepsiCo as following: PEG ratio in December 2010= 4.48 PEG ratio in September 2010= 0.90 PEG ratio in June 2010= 0.83

As we know company with a PEG ratio below 1 is considered undervalued. A company with a PEG ratio around 1 is considered fairly valued. A company with a PEG ratio greater than 1 is considered overvalued. As a result, we can say that Pepsico is quite overvalued.

According to the income statement in 2010, we can work out the Operating Margin, Net Profit Margin and the Enterprise Value and we can use it to compare Coco-Cola with Pepsi. Coco-Cola had an Operating Margin of 8,449/35,119=24.06%, a Net Profit Margin of 11,809/35,119=33.63% and a P/E ratio of 35,119/11,809=2.97. It’s Enterprise Value=139,209.6+23,417-8,517=$1,109.6million, which has a ratio of 1,109.6/8449=18.24 and 1,109/11,809=13.05. PepsiCo had an Operating

Margin of 8,332/57,838=14.41%, a Net Profit Margin of 6,338/57,838=10.96% and a P/E ratio of 17.442 /6,338=2.75197. It’s Enterprise Value = 79,361.1 + 24,7 -5,943 = $98,315.1million, which has a ratio of 98,315.1/8,332= 11.80 and 98,315.1/6,338

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=15.51

Coco-Cola and PepsiCo are all the biggest beverage company in the world.

Coco-Cola’s operating margin, net profit margin and enterprise value are much higher than PepsiCo’s. Coco-Cola and PepsiCo’s P/E ratio, enterprise value to operating

income and enterprise value to sales ratios were rather similar. As a whole, we can see the profitability of Coco-Cola is more than PepsiCo.

By researching on the Internet, the beta of PepsiCo Company is known as 0.53. As 0.53 is less than 1, it demonstrates that the risk of investing PepsiCo Company is lower than the average risk of investing the whole market portfolio. Moreover, his positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together.

Meanwhile, the beta of its competitor, the Coca-Cola Company, is 0.59. Though the two data is close to each other, it reflects that the risk of investing both of them are lower than the average risk of investing the whole market portfolio while investing the Coca-Cola Company has a little bit more risk.

（http://finance.sina.com.cn/stock/usstock/US100_PEP.shtml）

Part C: Summary

1. The 2 major developments

Due to the acquisition of the biggest two bottles supply enterprise, PepsiCo’s net earnings growth is fast and strong in the first quarter of this fiscal year. By March 20th, the first quarter net revenue of PepsiCo increased 27%, reached 11.9 billion dollars, and its total operating profit reached $1.72billion dollars, increased 105%, they all more than the figures analysts expected.

Each enterprise should be care for about the whole social interests during seek interests for themselves. The two major developments is that

a. The acquisition of the biggest two bottles supply enterprise, after this purchase, PepsiCo can reduce the material cost, and ensure their products will not have large price increases in a certain period. It protected the social normal economic order in a sense.

b. Beijing time March 16 evening news, Pepsi (PEP) released a new water bottles, this kind of beverage bottles is composed entirely of plant material, it is a completely circulating PET plastic bottles.( http://www.pepsico.com/Media/Press-Releases.html) This innovation will vigorously promote PepsiCo and even the entire drinks industry to realize the environmental transition.

2 The Summary:

PepsiCo is a global corporation positioned in Fortune 500, aimed at profiting in multiple snack-foods, which is all reflected from the overview, key statistics and analyst coverage. We can find that there are many challenges in the developments by analyzing all kinds of ratios from the financial statement, nonetheless the company is good and trying their best to be better by facing and withstanding the competition and

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risks. Then, we can see the company’s stock is a growth stock and is very promising. But after working out E/P and EPG, we find the current stock is overvalued, the profitability of PepsiCo is less than Coco-Cola and the risk of investing Pepsi Company is lower than the average risk of investing the whole market portfolio. So, PepsiCo must find a way to rising its profitability.

3 About the stocks

1) If you are a speculator, I will not recommend you buy the stocks of PepsiCo. Because the stock price is very stable, It is almost impossible to get high return to you in the short term.

2) But if you are an investor, I will recommend it to you. Because: a. Stability: The stock price is very stable among the two years. b. Potential Stock: The stock price tends to go up.

c. Higher enterprise value. Its’ enterprise value is higher than most of beverage companies.

d. Overvalue: Enterprise value to operating income and enterprise value to sales ratios are very high and the current stock price is overvalue. （ PepsiCo’s P/E ratio）

e. Low risk: The risk of investing Pepsi Company is lower than the average risk of investing the whole market portfolio.

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Appendix

1.Key statistics

2.Balance sheet of PepsiCo

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（http://finance.yahoo.com/q/is?s=PEP+Income+Statement&annual）

3.Income statement of PepsiCo

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（http://finance.yahoo.com/q/bs?s=PEP+Balance+Sheet&annual）

4. Cash flow of PepsiCo

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（http://finance.yahoo.com/q/cf?s=PEP+Cash+Flow&annual）

5. PepsiCo stock price in the last 3 years:

6. P/B Ratio of PepsiCo:

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7. Coco-Cola’s Balance Sheet:

8. Coco-Cola’s Income Statement:

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9. Stock Price of PepsiCo from 2010 to 2011:

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10.summary

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