brianne powers february 21, 2003. financial snapshot of pepsico smip’s current position company...

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Brianne PowersFebruary 21, 2003

• Financial Snapshot of PepsiCo• SMIP’s Current Position• Company Overview• Recent News• Stock Performance• Financial Statements• Ratio Comparison• Valuation• CAPM• RiskGrades Analysis

• Analyst Opinions

• Conclusions


are needed to see this picture.Presentation Overview


are needed to see this picture.Financial Snapshot

Ticker: PEP (NYSE)

Sector: Consumer Staples/Non-Cyclical

Industry: Beverages (Non-Alcoholic)

Market Cap.: $68.8 Billion

52 Week High: $53.50

52 Week Low: $34.00

Last Traded: $40.20 (as of 2/18/03)


are needed to see this picture.SMIP’s Current Position

35 Shares of PEP

Purchased on December 2, 2002

Cost Basis: $1,470

Current Market Value: $1,407


are needed to see this picture.Company Overview

PepsiCo, Inc. is a leading manufacturer, marketer, andseller of snack foods, soft drinks and concentrates, and branded juices. During the summer of 2001, the Companyacquired the Quaker Oats Company in an effort to grow andmature into the world’s premier convenient food and beverage provider.

Operates two business segments: Worldwide Snacks &Worldwide Beverages


are needed to see this picture.Recent News

PepsiCo will no longer provide quarterly, annual guidance

PepsiCo net rises 21% on price increases

Riese Restaurants switches to Pepsi

Scuffle with rapper Ludacris over contract

War Over Obesity


are needed to see this picture.Stock Performance (3-year)




are needed to see this picture.Stock Performance (1-year)




are needed to see this picture.Competitors


are needed to see this picture.PEP vs. Competitors




are needed to see this picture.Financial Statements


are needed to see this picture.Ratio Comparison

Valuation Ratios Company Industry Sector S&P 500P/E Ratio 21.51 23.98 20.50 21.93Beta 0.73 0.54 0.35 1.00Prices to Sales 2.84 3.83 2.41 2.80Price to Book 7.53 7.58 6.85 4.13

Dividends Company Industry Sector S&P 500Dividend Yield 1.51 1.66 2.54 2.31Payout Ratio 23.71 30.07 36.43 26.51

Financial Strength Company Industry Sector S&P 500Quick Ratio 0.31 0.50 0.53 1.15Current Ratio 1.06 1.02 1.17 1.67LT Debt to Equity 0.24 0.53 1.19 0.74Total Debt to Equity 0.30 0.70 1.48 0.96Interest Coverage 26.57 26.65 16.12 11.22

Profitability Ratios (%) Company Industry Sector S&P 500Operating Margin (TTM) 18.84 22.43 18.06 18.03Net Profit Margin (TTM) 13.19 15.83 11.28 10.88Asset Turnover (TTM) 1.09 0.92 1.14 0.95Inventory Turnover 9.95 8.07 7.24 11.01

Management Effectiveness (%)Company Industry Sector S&P 500ROA (TTM) 14.31 14.14 11.24 6.27ROI (TTM) 19.13 20.38 16.32 10.18


are needed to see this picture.EVA and MVACALCULATION OF EVA AND MVA

Name of Company PepsiCo, Inc. Year 2001

Short-Term Debt $354.00

Long-Term Debt $3,005.00Preferred

Dividend $Preferred

Stock Price

Preferred Stock $0.00 $0.00 $0.00

Common Stock $30.00

Paid-In Capital $13.00

Retained Earnings $11,519.00

Total Invested Capital $14,921.00

Price of Stock $48.69

Number of Shares Outstanding 1,756.00

EBIT $4,868.00

Tax Rate 33.90%

Less: Taxes $1,650.25Equals NOPAT $3,217.75

Rate on Short-Term Debt 6.00%

Rate on Long-Term Debt 7.50%

Market Risk Premium 5.50%

Risk-Free Rate 4.75%

Debt to Equity Ratio 29.05%

Beta of Stock 0.73

Cost of Preferred Stock 0.00%Cost of Equity Capital 8.765% % S-T Debt % L-T Debt % Equity % Preferred StockWACC 8.44% 2.37% 20.14% 77.49% 0.00%

Analysis is Computer GeneratedCALCULATION OF EVA - ECONOMIC VALUE ADDED

EBIT Less: Taxes

Equals: NOPAT (Net

Operating Profit After

Tax) Invested Capital WACC

Capital Charge

EVA (NOPAT *

Capital Charge)

$4,868.00 $1,650.25 $3,217.75 $14,921.00 8.44% $1,260.02 $1,957.72Firm is Creating Shareholder Wealth

CALCULATION OF MVA - MARKET VALUE ADDED

Market Value of Equity

Plus: Market Value of Debt

Equals: Market Value

of Firm

Minus: Total Invested Capital

Equals: MVA

$85,499.64 $3,359.00 $88,858.64 $14,921.00 $73,937.64Firm is Creating Shareholder Wealth


are needed to see this picture.Basic Stock ValuationLAST YEAR 2002 YearNUMBER OF SHARES OUTSTANDING (Mil.) 1,756.00 Millions of SharesMARKET PRICE OF STOCK / SHARE $38.96 Dollars Per Share $47.00 Price of StockNET INCOME AFTER TAXES $3,313.00 Millions of Dollars Expected inTOTAL SALES OR REVENUES $25,112.00 Millions of Dollars 5 yearsBOOK VALUE OF EQUITY (FROM BALANCE SHEET) $9,298.00 Millions of DollarsRISK FREE RATE (T- Bill) 4.75% Annual Percentage RateDIVIDENDS PAID (TOTAL AMOUNT PAID) $1,041.00 Millions of DollarsSTOCK REPURCHASES (TOTAL AMOUNT PAID) $1,734.00 Millions of DollarsREQUIRED INFORMATION FOR CALCULATION OF REQUIRED RATE OF RETURNBETA OF STOCK 0.73MARKET RISK PREMIUM (5%-6% Historically) 5.50% Expected Market Risk Premium %REQUIRED INFORMATION FOR VARIABLE GROWTH RATE VALUATIONSEXPECTED GROWTH RATE (EARNINGS OR DIVIDENDS & STOCK REPURCHASES) 5.0000% 5.0000% 4.0000% 3.0000% 1.0000%

COMPUTER-GENERATED CALCULATIONS

EARNINGS PER SHARE $1.89LAST CASH DIVIDEND & STOCK REPURCHASE PAYMENT PER SHARE $1.58

EXPECTED ANNUAL GROWTH RATE (EARNINGS OR DIVIDENDS & STOCK REPURCHASES) 3.13% Geometric Mean of Annual Rates

EXPECTED EARNINGS PER SHARE IN 5 YEARS $1.92SUSTAINABLE RATE OF GROWTH 5.79% (ROE * (1-Payout Ratio))

REQUIRED RATE OF RETURN (k) 8.77% CAPMREQUIRED RATE OF RETURN (k) 7.31% Dividend Discount ModelREQUIRED RATE OF RETURN (k) 8.04% Average of CAPM and DDM

COMPUTER-GENERATED CALCULATIONS

STOCK VALUE - ZERO GROWTH MODEL $19.66 Not applicable for most stocksSTOCK VALUE - CONSTANT GROWTH MODEL $33.20STOCK VALUE - VARIABLE GROWTH MODEL $25.49STOCK VALUE - DIVIDEND & EARNINGS MODEL $38.82STOCK VALUE - PRICE / EARNINGS MODEL $37.55

AVERAGE PRICE EXCLUDING ZERO GROWTH $33.76

Must be positive values in each cell

All Data Required

Required Data


are needed to see this picture.Free Cash Flow Model

Name of Company PepsiCo, Inc. Estimate Free Cash Flow Estimate Weighted Average Cost of CapitalCurrent Sales ($) $25,112.00 8.765% Cost of Equity Capital

Insert Initial Free Cash Flow (Computer) $5,454.55 Computer Calculates EBIT Margin (%) 19.39% 7.000% Before Tax Cost of DebtInsert Initial Growth Rate 5.00% See Note 1 EBIT $4,869.22 5.500% Market Risk Premium (RM-RF)Insert Terminal Growth Rate 1.00% See Note 2 Plus - Depreciation $1,112.00 11.700% Debt Ratio (Total Debt/Total Assets)Insert Weighted Average Cost of Capital 8.28% Computer Calculates Less - Capital Expenditures ($1,437.00) 0.730 BetaHow Many Years is Growth Projected 10 Years 0 Up to 20 Less - Net Change in Working Capital $313.00 4.750% Risk-free Rate (Use L-T Treasury Rate)Number of Shares of Common Stock 1,756.00 Equals Operating Cash Flow $7,105.22 8.281% = Weighted Average Cost of CapitalTax Rate 33.90% Less Taxes $1,650.66 See Note 3

Total Debt Outstanding $2,749.00 Equals Free Cash Flow $5,454.55

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Free Cash

Flow$0 $5,727 $6,014 $6,314 $6,630 $6,962 $7,310 $7,675 $8,059 $8,462 $8,885 $0 $0 $0 $0 $0 $0

Terminal Value

$123,251 $0 $0 $0 $0 $0 $0

Total FCF $0 $5,727 $6,014 $6,314 $6,630 $6,962 $7,310 $7,675 $8,059 $8,462 $132,136 $0 $0 $0 $0 $0 $0Discounted

FCF $0 $5,289 $5,129 $4,974 $4,823 $4,677 $4,535 $4,398 $4,264 $4,135 $59,635 $0 $0 $0 $0 $0 $0

Net Present Value of FCF

$101,859

Net Present Value of FCF Minus Debt

$99,110

Per Share Value $56.44

Note: Terminal Growth Rate Must be less than WACC for projections of 1 or more years; for valuations based on 0 years of projections, WACC must be > Growth Rate

FREE CASH FLOW VALUATION MODEL


are needed to see this picture.Intrinsic Value

Constant Growth Model $33.20Variable Growth Model $25.49Dividend and Earnings Model $38.82Price/Earnings Model $37.55Free Cash Flows $56.44Valuepro.net $33.66

Intrinsic Value $37.53


are needed to see this picture.Capital Asset Pricing Model

K = Rf + (Rm * Beta)

Rf = 4.75

Rm = 5.5

Beta = .73

SO, K = 8.77%

This calculation shows that an 8.77% Return on Investment should be expected from an investment in PepsiCo, Inc.


are needed to see this picture.RiskGrades Analysis





Less Risky than 71% of the market

Current RiskGrade: 147


are needed to see this picture.Analyst Opinions

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are needed to see this picture.Conclusions

Bad Press-Potential for Future Lawsuits

PEP does not fit with SMIP’s new Investment Theory

Less than Par Stock Performance (vs. Competitors)

Trading at Intrinsic Value


are needed to see this picture.Recommendation

SELL 35 shares of PepsiCo, Inc.

brianne powers february 21, 2003. financial snapshot of pepsico smip’s current position company...

Documents

year slide

mva slide

obesity slide

intrinsic value slide

ratio comparison slide

basic stock valuation

free cash flow model

company overview pepsico