Sandip Gokhale

1
Sandip Gokhale Gabriel Molinar Thomas
Jackson Francisco Maldonado
2
What is PepsiCo?

• PepsiCo, Inc. is a global snack and beverage
  company. It manufactures, markets and sells a
  variety of salty, convenient, sweet and
  grain-based snacks, carbonated and non-carbonated
  beverages, and foods.
• The Company is organized into four divisions
  Frito-Lay North America (FLNA), PepsiCo Beverages
  North America (PBNA), PepsiCo International (PI)
  and Quaker Foods North America (QFNA).
• Its North American divisions operate in the
  United States and Canada. Its international
  divisions operate in over 200 countries, with its
  largest operations in Mexico and the United
  Kingdom.
• PepsiCo is a world leader in convenient foods and
  beverages, with 2004 revenues of more than 29
  billion and 153,000 employees.

3
The Mission Statement

• To be the world's premier consumer products
  company focused on convenient foods and
  beverages.  We seek to produce healthy financial
  rewards to investors as we provide opportunities
  for growth and enrichment to our employees, our
  business partners and the communities in which we
  operate.  And in everything we do, we strive for
  honesty, fairness and integrity.

4
History

• 1898 - Pepsi-Cola was created in the late 1890s
  by Caleb Bradham, a New Bern, N.C. pharmacist.
• 1961 - Frito-Lay, Inc. was formed by the merger
  of the Frito Company, founded by Elmer Doolin in
  1932, and the H. W. Lay Company, founded by
  Herman W.Lay
• 1965 - PepsiCo was founded in 1965 through the
  merger of Pepsi-Cola and Frito-Lay.
• 1966 - Doritos brand tortilla chips are
  introduced. They are destined to become the most
  popular snack chip in the U.S.  
• 1975 - PepsiCo acquires Pizza Hut, Inc.
• 1978 - PepsiCo acquires Taco Bell.
• 1985 - PepsiCo is now the largest company in the
  beverage industry. The company has revenues of
  more than 7.5 billion, more than 137,000
  employees.

5
History

• 1986 - Chester Cheetah makes his prime-time
  television debut for Frito-Lay with a fully
  animated commercial for Cheeotos cheese flavored
  snacks.
• PepsiCo purchases 7-Up International, the third
  largest franchise soft drink operation outside
  the United States.
• PepsiCo purchases Kentucky Fried Chicken.
• 1989 - PepsiCo enters top 25 of Fortune 500
  ranking with sales of 15.4 billion, it is number
  23. The company has more than 300,000 employees.
• 1995 - Pepsi-Cola is top ad scorer in Super Bowl.

• 2001 -  On August 2, PepsiCo merges with The
  Quaker Oats Company, creating a 25 billion food
  and beverage company focused on the rapidly
  growing consumer demand for convenience.
• 2002 - Beyonce Knowles has joined the Pepsi
  family and will collaborate with Pepsi two new TV
  commercials, radio, and Internet ads.

6
Products
US Beverage Leaders 1 Water Aquafina 1
Sports Drink Gatorade 1 Chilled Juices
Tropicana and Dole 1 Fitness Water Propel 2
Carbonated Soft Drinks Pepsi 1 Ready to Drink
Teas Lipton 2 Energy Drink Sobe 1 Ready to
Drink Coffee Starbucks Frappacino
US Meal Leaders 1 Grits Quaker Oats Instant
Grits 1 Oatmeal Quaker Oats 1 Rice Sides
Rice-A-Roni 1 Pancake Syrup Aunt Jemima 2
Pancake Mix Aunt Jemima
US Snack Food Leaders 1 Tortilla Chips
Doritos 1 Potato Chips Lays 1 Extruded Snacks
Cheetos 1 Pretzels Rold Gold 1 Corn Chips
Fritos 1 Multi-Grain Chips Sun Chips
7
Total Revenue by Company Divisions
Describing PepsiCo as being in the Beverage
Industry is slightly inaccurate, as one-third of
all Revenue comes for Frito-Lay Chip division for
North America.
8
Major Competitors

• The Coca-Cola Company engages in manufacturing,
  distributing, and marketing nonalcoholic beverage
  concentrates and syrups worldwide. The company
  also produces, markets, and distributes juices
  and juice drinks, as well as water products. In
  addition, The Coca-Cola Company markets and
  distributes sports drinks, teas, coffees, and
  other beverage products. The company was
  organized in 1886 and is headquartered in
  Atlanta, Georgia.
• Cadbury Schweppes Public Limited Company operates
  as a beverage and confectionary company
  worldwide. The companys beverage products
  include carbonated soft drinks, mineral water,
  still drinks, fruit flavoured drinks, teas, and
  flavoured milk under Dr.Pepper, Schweppes,
  Snapple, Orangina, Mott's, Hawaiian Punch,
  Clamato, Nantucket Nectars, Canada Dry, AW,
  Oasis, Yoo-Hoo and others. Cadbury Schweppes was
  incorporated in 1897 and is headquartered in
  London.
• Kraft Foods, Inc., through its subsidiaries,
  engages in the manufacture and sale of branded
  foods and beverages in the United States, Canada,
  Europe, Latin America, Asia Pacific, and the
  Middle East and Africa. The company manufactures
  and markets packaged food products, consisting
  primarily of snacks, such as cookies, crackers,
  salted snacks, and confectionery beverages,
  including coffee, aseptic juice drinks, and
  powdered beverages and cheese and dairy,
  comprising natural, process, and cream cheeses.
  Kraft Foods was incorporated in 2000 and is
  headquartered in Northfield, Illinois.

9
TTM Sales

• PepsiCo ranks number one in Beverage Industry
  Sales.
• Major competitor is Coca-Cola Company.
• Has nearly 1/3 of total Sales in the Industry.

10
Market Capitalization

• PepsiCo ranks 2nd.
• The Coca-Cola Company is PepsiCos largest
  competitor.
• Combined they make up 77 of Total Mkt. Cap.

11
Board of Directors
Steven S Reinemund

• Chairman of the Board and Chief Executive Officer
• Salary of 5.5 mil 8.3 mil in options
• served as President and Chief Operating Officer
  from September 1999 until May 2001

12
Board of Directors

• Indra K. Nooyi

• President and Chief Financial Officer
• Salary of 2.6 (mil)2.8 (mil) in options
• was elected to PepsiCo's Board and became
  President and Chief Financial Officer in May 2001

13
Financial RatiosGrowth Rates
3 of 5 rating for strength in growth ratios.
14
Financial RatiosPrice Ratios
5 out 5 rating for strength in price ratios.
15
Financial RatiosProfit Margins
5 out 5 rating for profit margins
16
Financial RatiosFinancial Condition
3 out of 5 rating for financial condition
17
Financial RatiosInvestment Returns
5 out 5 rating for investment returns
18
Financial RatiosManagement Efficiency
3 out 5 rating on management efficiency.
19
Overall Ratio Conclusion
Overall the Ratios are Good!
20
Market Efficiency
Non-Company Specific News
Bad News OPEC agrees to cut oil output. Weak
Form
21
Market Efficiency
Company Specific News
Good News - PepsiCo Boosts Annual Dividend Rate
by 13 Percent to 1.04 Per Share. Weak Form
22
Holding Period Return
The Holding Period Return for PepsiCo has shown
in increase from 11.91 in 2003 to 13.79 in
2004. The expected HPR is 20.40 which is another
increase since it started to show an increase in
2002. Also they nearly doubled there dividend
from 0.59 in 2002 to 1.04 in 2005.
23
Free Cash Flow
By using net income, depreciation, capital
expenditures, working capital, and long-term debt
for the years 2001 through 2004, we calculated
PepsiCos Free Cash Flow and Cost of Equity. Net
income increased in 2004 which increased
PepsiCos FCFE in 2004 compared to previous
years. However, a large increase in Long Term
Debt in 2004 relative to previous years affected
FCFE negatively in 2004. We have estimated the
FCFE for 2005 at 3,902(Mil).
24
Cost of Equity
The backed out estimate of the discount rates is
unrealistic because the discounted cash flow
model requires the growth rates and Ke to remain
the same over the year. However, as we know
these rates are not constant.
25
Risk Analysis
Currently, PepsiCo has the lowest beta it has had
in the past 5 years in which it had its highest
beta in 2002, which could possibly be attributed
to the big health concerns about obesity in 2001
and 2002. The company is currently underpriced
because the Ke of the DCF model is greater than
the Ke of the CAPM model( .1717gt.0297)
26
Cost of Capital
For PepsiCo. the capital structure for 2004 was
48.41 Equity and 51.59 Debt. The cost of equity
for PepsiCo in 2004 was 24.78 (using DCF Model)
and the cost of debt was 6.42. This fact is
important since this means the cost of debt was
much cheaper than the cost of equity, therefore
making debt the better financing option. One
negative point is the fact that Ke increased from
5.71 in 2003 to 24.78 in 2004 which caused the
WACC to increase likewise. The reason for this
was because the growth rates in the DCF model was
only 2.15 in 2003. Yet in 2004, the growth rate
expanded to 20.88.
27
Capital Structure
28
Capital Structure
29
MM Model
Model 2 With Tax MM
D/TA Increases as Ka decreases
Firm value maximized when debt high
30
Strengths
Weaknesses

• HPR(02- 11.91,03- 13.79,04- 20.40 )
• Dividend Growth
• (02-.63, 03-.85, 04-1.04)
• Low Beta(0.3015)
• ROE(30.9), ROA (15.1) and ROC (26.4)
• Net Income and FCF (Up Past 3 yrs)

• Current Sales (Low)
• Unstable WACC
• Low Ownership of Stock by the Board
• Govt Target for Obesity

31
Buy or Sell?
32
Group Recommendation
Overall the Stock is a Strong Buy!

• Based on the following
• Under priced stock Ke(DCF Model) gt Ke (CAPM)
• 0.1717 gt 0.0297
• Low Beta 0.3015
• Positive Analysts Opinions
• Strong ROE, ROA, ROC
• Low Debt

Pepsi Commercial