Pepsico Evaluation

4695 Words Jun 12th, 2008 19 Pages
VALUATION AND RECOMMENDATION:
After reviewing all available data, we recommended BUY rating on PepsiCo, Inc.
By applying full information forecast, PepsiCo, Inc as of December 31, 2007 was $110.99. The stock market price on the same date was $75.49. We believe PepsiCo stock is undervalued.
Three evaluation methods are used in evaluation process – ReOI , AOIG, and DCF. We get same result on all three methods. Simple valuation method is also used, we reached a comparable result of $110.62.

KEY DRIVER’S FORECAST
WACC is forecasted at 7.32 using CAPM. In the last 5 years, PepsiCo maintained sales growth rate above 7.5% annually. We expect the growth rate will gradually reduce from 9.8% in 2008 to 4.5% after 2013. Asset turnover will be
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1.5 Five Year Operating Performance
Exhibit 1 and 2 show the revenue and net income growth of PepsiCo during the last five years as reported on company’s 10-K. The company has delivered solid performance growth in both categories, and the management is very optimistic with the company’s future.
Exhibit 1.1 – PepsiCo Five Year Financials 2003 2004 2005 2006 2007
Revenue $26,971 $29,261 $32,562 $35,137 $39,474
Revenue Growth % 8% 11% 8% 12%
Net Income $3,568 $4,212 $4,078 $5,642 $5,658
Net Income Growth % 18% -3% 38% 0%
EPS-Diluted $2.04 $2.44 $2.39 $3.34 $3.41
EPS Growth % 20% -2% 40% 2%

Exhibit 1.2 – PepsiCo Five Year Stock Performance (1/2/03 – 12/31/07) 2. Estimate WACC
Bloomberg gives PepsiCo’s cost of capital as 7.47%. We will use the weighted average of Bloomberg’s and CAPM’s estimate. Since Bloomberg data considered more factors than CAPM, we assign 70% weight to Bloomberg’s number. First, calculate cost of capital using CAPM. As of December 31, 2007, PepsiCo Inc. had the following data:
Exhibit 2.1: Estimate WACC Factors
Market value of operations ( )
19,755 millions Tax Rate ( )
35.9%
Market value of equity ( )
17,927 millions Risk-Free Rate1 ( )
3.92%
Net financial obligations ( )
1,828 millions Market return2 ( )
11.95%
Cost of capital for debt 3 6.05% Beta4 ( )
0.27

PepsiCo’s cost of capital for debt

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