Pepsico Evaluation

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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…show more content…
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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