Running head: PEPSICO ANALYSIS 1
PepsiCo Analysis
Lynn University PEPSICO ANALYSIS 2
PepsiCo Analysis
Short description of the company background.
Pepsi-Cola was founded in the late 1890s by Caleb Bradham, and Frito-Company was created in 1932 by Elmer Doolin. In 1961, Frito Company merged with Lay Company. Pepsi was established in 1965 when Frito-Lays and Pepsi-Cola merged (PepsiCo. 2018). In 1964 Diet Pepsi was created and in 1974 Pepsi was the first American product to be sold in the Soviet Union
(PepsiCo. 2018). In 1985 Pepsi was available in over one-hundred and fifty countries and had become the largest company in the soft beverage industry (PepsiCo. 2018). In the early nineties,
Pepsi partners with Starbucks and Unilever to develop teas and coffee drinks. In the early two- thousands, South Beach Beverage Co. is acquired by Pepsi, and Sierra Mist is launched
(PepsiCo. 2018).
Pepsi becomes one of the first companies to incorporate Corporate Social Responsibility by introducing an initiative of independence between society and large corporations (PepsiCo.
2018). A performance with purpose focuses on delivering long-term growth while helping the environment and society. This program saved over six-hundred million people and had helped gear the company towards a healthier product line by cutting down sugars and improving the nutrition. Today, Pepsi is the second largest competitor in the soft drink industry, and their products are sold in over two-hundred countries.
Industry analysis on the Strength / Weakness / Opportunities / Threats of the company.
Strengths:
Massive portfolio: PepsiCo manages a big portfolio of more than a hundred different brands. The company manages the beverage industry food, and snacks. PEPSICO ANALYSIS 3
Brand recognition: PepsiCo is a globally recognized brand in which each brand is worth millions of dollars.
Endorsements and sponsorships: PepsiCo are strongly tied to sporting events and music concerts as well as using music idols in their publicity. This helps PepsiCo to attract a younger audience which also is their target market.
Weaknesses:
Coca Cola rivalry: Coca Cola has always been the main rival for PepsiCo. Because of this reason it is difficult for other companies to enter the market due to not having enough funds and sources as Coca Cola and PepsiCo.
The health crowds: PepsiCo faces problems with the health industry due to the products offered with high sugars and calories. Sodas are connected to the growing obesity rates and health problems like diabetes. Also, people are starting to go green and trying to reach a healthier life style. Even dough PepsiCo has incorporated healthier products like diet Pepsi they continue to sell their unhealthy food to the public.
In only one industry: Even dough PepsiCo has a hundred brand of products they are all in the food industry. If for example Coca Cola decide to expand their industry in to another markets, PepsiCo will be left behind.
Failed products: Even dough it is normal to fail with some products along the way, it is not a good thing when this product harm the brand image. This was the case for PepsiCo with the
Crystal Pepsi product.
Opportunities:
Health product diversity: PepsiCo can start offering healthier products, by doing this they can diversify in the beverage and food industry. PEPSICO ANALYSIS 4
Move into other industries: PepsiCo has everything the need to expand into another industries, and it is a huge opportunity to do it before other brands like Coca cola decide to do it first.
Lack of drink flavors: PepsiCo can focus more in adding new flavors to their drinks.
Even dough they have worked on flavors like Pepsi Cherry or Pepsi Blue they can add drinks like mango or strawberries.
Threats:
Nestle as a competitor: Off course every brand main threat is their main competitors, in this case for PepsiCo is Coca Cola and Nestle. In 2017 Nestle they beat PepsiCo’s earnings.
Not enough health alternatives: As said before if PepsiCo continue to sell drinks with high content of sugar and calories, they will continue to see a decrease in their sales.
Bad economy: Economy will always be a thread to PepsiCo and any industry since when the economy is bad people tend to save their dollars. When this happens most of PepsiCo products fall into the no necessary products list.
Strengths Massive portfolio, brand recognition, endorsements and sponsorships. Weaknesses Coca Cola rivalry, the health crowd, one industry, failed products. Opportunities Health product diversity, move into other industries, lack of drink flavors. Threats Nestle as a competitor, a bad economy, not enough health alternatives.
Overview of the company financials
PepsiCo’s financial statements have shown that it is a large sized company with revenues in the range of $60 and $65 million dollars in the past five years. The company’s profits since 2014 have been fluctuating, but they did very well in the past 2018 when they showed an outstanding increase to $12 million; which was approximately a 19% margin. By the other hand, PepsiCo’s free PEPSICO ANALYSIS 5 cash flow had a less fluctuating performance than profits. FCFs for the past five years were found in the same range between the $6 and $7 million brackets.
In the past five years, PepsiCo’s stock prices remained at an increasing trend. Despite a slight decrease in the 2015 closing price, the upcoming years it showed a positive change of $70.85 from 2014 to the end of 2018, meaning that the company’s earnings per share and dividends paid also increased. Thus, it can be seen that the stock of the company performed well in the past 5 years.
2014-12 2015-12 2016-12 2017-12 2018-12 Total assets 70,509.00 69,667.00 74,129.00 79,804.00 77,648.00 Total liabilities 53,071.00 57,744.00 63,034.00 68,915.00 63,130.00 Total equity 17,438.00 11,923.00 11,095.00 10,889.00 14,518.00 Revenue 66,683.00 63,056.00 62,799.00 63,525.00 64,661.00 Net income 6,513.00 5,452.00 6,329.00 4,857.00 12,515.00 Free cash flow 7,647.00 7,822.00 7,364.00 7,025.00 6,133.00 Price 97.03 93.57 118.14 121.72 167.88 Total return -29.87 -9.2 -23.23 28.56 10.65
The company is of large size and is profitable. Its margins remained around 10% or more in the past 5 years. PepsiCo generate positive free cash flow to investors and the market return reflected a negative performance of the company compared to the rest of its industry; it might be because of diverse reasons outside of PepsiCo’s control. However, they increased that performance until it turned positive in 2017 and 2018, so it can be said that it was a regular performance with some fluctuations throughout the years.
From owners’ perspective
The company’s management has shown a correct utilization of PepsiCo’s assets by keeping the return on these in the positive side. As the last year (2018) showed, it can be PEPSICO ANALYSIS 6 expected a significant increase in such return on assets if they keep performing as well as they have in the previous years.
The return on equity for PepsiCo has performed very well. They have shown a significant increase from 2014 until 2018 and have also left room for more growth. This also denotes a well management performance by making efficient practices to save money and repay debts with shareholders.
2014-12 2015-12 2016-12 2017-12 2018-12 Return on 9.24% 7.83% 8.54% 6.09% 16.12% Assets Return on 37.35% 45.73% 57.04% 44.6% 86.2% Equity
The company has shown to be profitable in the past 5 years. Profitability has shown an increasing trend, and it may be due to several factors. The decreasing trend of short-term debt has allowed the company to increase their profits during this 5-year period.
Cash flow analysis
2014-12 2015-12 2016-12 2017-12 2018-12 Cash flow from $10,506.00 $10,580.00 $10,404.00 $9,994.00 $9,415.00 operating Cash flow from $(4,937.00) $(3,569.00) $(7,148.00) $(4,403.00) $4,564.00 investing Cash flow from $(8,264.00) $(3,828.00) $(2,942.00) $(4,186.00) $(13,769.00) financing Net change in Cash $(3,241.00) $2,962.00 $62.00 $1,452.00 $112.00 CAPEX $(2,859.00) $(2,758.00) $(3,040.00) $(2,969.00) $(3,282.00) Free cash flow $7,647.00 $7,822.00 $7,364.00 $7,025.00 $6,133.00
The company’s cash from operations remain positive and thus, more bound to profitability.
There is not really any financing need, but the company could do better in cash flow from investing.
The management could try to change their strategy in order to have a more positive trend in this PEPSICO ANALYSIS 7 segment. The most significant investment expense in the companyis related to property, plant, and equipment.The company does provide positive cash flows, and it has done it for the past 5 years.
The correlation between cash flows and stock prices is very close. There are slight flutuations but in the overall trend both have a similar performance.
From Manager’s perspective
DuPont Identity
2014-12 2015-12 2016-12 2017-12 2018-12
Net profit margin 9.77% 8.65% 10.08% 7.65% 19.35%
Total asset turnover 0.95 0.91 0.85 0.80 0.83
Equity multiplier 4.04 5.84 6.68 7.33 5.35
Return on Equity 37.35% 45.73% 57.04% 44.60% 86.20%
The profit margin of PepsiCo has maintained around 10%, which is outstanding regarding its industry average. The profits can be considered high enough if compared to the rest of the company’s competitors in this industry. The asset turnover does not reflect a good performance. It shows that for every dollar in assets there is less than a dollar in revenues, which demonstrates inefficient management and a leak in depreciation and debt that has to be fixed. The financial leverage of the company is low enough to be considered between low and medium risk. However, it did not have a significant influence on the return on equity because it is more than enough to finance the company’s assets, which causes less struggle to cover liabilities. Profitability can be considered as the main driver for a positive change in the return on equity. Also, as the financial leverage is partially low, then the company avoids liabilities that affect negatively the generation of profits and PEPSICO ANALYSIS 8 thus, ROE can also have room to increase. Therefore, it is a mix of both the profitability and the well management of equity multiplier what has allowed ROE to perform well.
Management efficiency
2014-12 2015-12 2016-12 2017-12 2018-12
Account collection period 31.84 31.82 3.18 34.22 34.31
Inventory holding period 37.15 34.98 35.23 37.37 38.86
The accounts receivable is coming in at the right pace, for most businesses it is around 30 days, and this is the case of PepsiCo. On the other hand, the inventories are also just right but it could be decreased because the company sells several products that are perishable, which could lead to unnecessary losses.
Cost-volume analysis for EBDAT breakeven
2014-12 2015-12 2016-12 2017-12 2018-12
R: revenue $66,683.00 $63,056.00 $62,799.00 $63,525.00 $64,661.00
VC: cost of revenues $30,884.00 $28,384.00 $28,209.00 $28,785.00 $29,381.00
FC: fixed cost $27,127.00 $25,930.00 $,147.00 $25,382.00 $26,695.00
SR: Survival Revenue, FC /
(1-VCRR) $50,529.62 $47,157.42 $47,470.52 $46,413.11 $48,926.46
Ratio: R / SR 1.32 1.34 1.32 1.37 1.32
PepsiCo operates achieving profits. The ratio has fluctuated slightly in the past five years, but it has remained in the same range between 1.32 and 1.37. What the ratio of revenue towards survival revenue implicates is that the company is achieving profits as a matter of fact. However, it stagnated at the same range and if PepsiCo wants to remain competitive in the upcoming years, then PEPSICO ANALYSIS 9 they have to develop strategies to anticipate factors like inflation and increases in interest rates that can affect their profitability in the future, along with the coverage of liabilities and equity.
Short-term Creditors
2014-12 2015-12 2016-12 2017-12 2018-12
Current ratio 1.14 1.31 1.28 1.51 0.99
Quick ratio 0.97 1.16 1.15 1.37 0.85
PepsiCo is showing issues with liquidity because the ratios are kept near one and even below it. This situation has changed slightly in the past five years, with a notable increase between
2015 and 2017, but it fell off again in 2018 to less than $1 of assets towards every $1 of current liabilities.
Long-term creditors
2014-12 2015-12 2016-12 2017-12 2018-12
Debt / Equity ratio 3.04 4.84 5.68 6.33 4.35
Time Interest Earned 10.58 8.62 7.34 9.30 7.00
Debt financing is considerably heavy, and it has become (gradually) in even more in the past five years. PepsiCo’s liabilities are covered mostly by debt instead of stockholders’ equity. This could be damaging in the long term for the company’s sustainability and profitability.
According to the time-interest earned ratio, the company is able to cover its interests comfortably, and thus, it can repay their principals without much inconvenience. Therefore, the company’s earnings and cash flows are sufficient to cover its debt, including interests.
PEPSICO ANALYSIS 10
Market
2014-12 2015-12 2016-12 2017-12 2018-12
Price per share $97.03 $93.57 $118.14 $121.72 $167.88
Book value per share 0 9.27 8.8 9.33 7.3
Earnings per shares 0 3.67 4.36 3.38 8.78
Dividend per share 0 2.76 2.96 3.17 3.59
Price-book ratio 0.00 10.09 13.43 13.05 23.00
Price / earnings ratio 0.00 25.50 27.10 36.01 19.12
Dividend yield 0.00% 2.95% 2.51% 2.60% 2.14%
Overall, the financial health of the company has performed well if looked from the stock’s perspective. The price per share has increased significantly in the past five years and the company has been able to pay dividends to their shareholders too. Hence, PepsiCo’s financial health has improved in the past five years, from a stockholder’s point of view. It has been how the market has reacted favorably to the company’s performance in the past five years as the price per share has increased and also, despite some fluctuations, the earnings per share have done it too.
Market value added
2014-12 2015-12 2016-12 2017-12 2018-12
Price per share $97.03 $93.57 $118.14 $121.72 $167.88
Book value per share 0 9.27 8.8 9.33 7.3
# of shares 0 1485 1452 1438 1425
Market value added 0.00 125,185.50 158,761.68 161,616.82 228,826.50 PEPSICO ANALYSIS 11
Potential investors
PepsiCo has initiated investments to expand their product lines and add healthier products, meaning foods and beverages that are low in sugars and sodium in order to approach a wider consumer basis. Another initiative has been e-commerce. The company already has channels in this technological segment, but its initiative is to expand these in order to keep the pace with the rapid-changing market. Both initiatives are innovative and almost a necessity for modern businesses. There is a high chance of success for PepsiCo by investing in these segments because these are ways to expand their customer awareness and accessibility. Therefore, the company could generate more revenues and increase their market value.
Investing in healthier foods and beverages imply a higher expense in research and development, and the same thing happens with the enhancement of their e-commerce channels.
Increasing expenses is considered a risk for profits, but in the long-term the results are much better. Investors have to be aware that when a company stars investing in research, development, and expansion of their product lines, there are going to be times where the returns are not as significant as in previous times. However, PepsiCo is still a large multinational that generates significant profits in its activities worldwide and thus, investors can be sure that their resources will be used wisely by an expert corporate management.
PEPSICO ANALYSIS 12
Cost of capital
Amount % Before tax cost After tax cost Cost component
Debt $ 32,321.00 27.91% 2.78% 2.20% 0.61%
Equity $ 83,490.00 72.09% 9.28% 9.28% 6.69%
Preferred 0.00 0.00% 0.00% 0.00% 0.00%
Tax rate 21%
Total Capital $ 115,811.00
WACC 7.30%
Economic value added
The business needs to make higher return than the WACC to be profitable. The wacc is the opportunity cost of the capital from the capital providers. The dollar amount business can achieve beyond the opportunity cost of capital is called economic value added.
Tax rate 21%
EBIT 22,138.00
EBIT * (1- T) 17,489.02
WACC 7.30%
Investor supplied capital 115,811.00
Economic value added 9,032.30
PEPSICO ANALYSIS 13
The economic value added is a positive value. A positive EVA means that the company succeeds in the generation of income that overcomes what is needed to cover financing costs. What this implies for PepsiCo is basically that this company is earning enough to cover and leave profits after the payment of all investment dues along with interests related to such expansion of balance sheet items.
Summary
PepsiCo is a widely recognized multinational corporation. Such presence automatically gives this company a significant source of revenue in multi-million figures. Of course, it is important to emphasize that a company like this has an extensive balance sheet which gives significant liabilities to cover, but it has demonstrated that through their equity and revenue,
PepsiCo is able to cover these expenses and still give returns to their investors. The company shows a healthy financial status in overall. They cover their expenses, have a well management of their debt, and after all that still can count with profits for the best interest of shareholders.
Most of the financial ratios reflect the good health of the company, and despite the existence of narrowed ratios like the current and quick ones (which are below 1 because of the company’s type of accounts payable/receivable system) most of their leverage and profitability ratios can work as an evidence to support that premise. Hence, the financial ratios accurately describe the majority of the overall financial status of the company. However, it is important to highlight the significant debt-financed liabilities of PepsiCo. The company’s debt-financing overcomes approximately by 4 times the equity-financed ones, and this only shows on plain sight that the company has significant debt; but what the debt-equity ratio really expresses is that because of the type of goods that the company sells they usually provide their clients extended accounts receivable and payable periods. In terms of statistics, the company is almost drowning in debt, PEPSICO ANALYSIS 14 but it does not necessarily mean that they cannot cover it and even generate profits within a determined period.
On the other hand, the company’s stocks also showed a positive performance in the past 5 years. PepsiCo had earnings per share ranging from $3 to $8 in a four-year period, which denotes an attractive potential investment. However, the stock seems overpriced, if guided by the pure statistical reasoning because of what was mentioned earlier about significant debt-financed liabilities. Of course, if the company gains the ability to cover for debt by backing themselves up with equity, this could change substantially. However, PepsiCo can be shown as a good investment candidate because of their increasing trend of closing price, the fact that they pay dividends recurrently, and also because if their plans to expand their product lines and investment plans in technological innovation and the penetration to the e-market. Therefore, PEP is one of the buy shares that can be found in the American market.
PEPSICO ANALYSIS 15
References
Keyes, D. (2018, February 14). PepsiCo is investing in e-commerce. Retrieved April 12, 2019,
from https://www.businessinsider.com/pepsico-is-investing-in-e-commerce-2018-2
PepsiCo. (n.d). Our History. Retrieved from http://www.pepsico.com/About/Our-History
Sharma, A. (2018, December 04). Will PepsiCo's New CEO Radically Alter Its Strategy?
Retrieved April 12, 2019, from https://www.fool.com/investing/2018/12/03/will-
pepsicos-new-ceo-radically-alter-its-strategy.aspx