nicholas m theodore economic analysis

Illinois State UniversityEducational Investment Fund

Spring 2016

Nicholas M. Theodore

Stock Market Indices

DOW JONES

NASDAQ S&P 500 FTSE 100

NIKKEI 225

NEW 5/3/16 17,773.51 4,764.91 2,016.11 6,185.59 16,147.38

OLD 1/26/16 16,167.23 4,467.67 1,903.63 5,911.46 17,189.06

3 Months

6 Months

10/26/15 17,623.05 5,034.70 2,071.18 6,417.02 18,947.12

7/26/15 17,568.53 5,039.78 2,067.64 6,505.13 20,350.10

1 Year 1/26/15 17,678.70 4,771.76 2,057.09 6,852.40 17,768.30

3 Year 1/26/13 13,954.42 3,153.66 1,507.84 6,339.13 10,866.72

5 Year 1/26/2011 11,989.83 2,755.28 1,299.54 5,965.08 10,478.66

10 Year 1/26/2006 10,907.21 2,304.23 1,283.72 5,786.84 16,460.80

Returns:

DOW JONES NASDAQ S&P 500 FTSE 100 NIKKEI 225

NEW-OLD 9.93% 6.65% 5.91% 4.64% -6.06%

CURRENT - 3 MTHS -8.26 -11.26% -8.09% -7.88% -9.28%

CURRENT - 6 MTHS -7.98% -11.35% -7.93% -9.13% -15.53%

6 MTHS – 1 YEAR -0.62% 6.96% 0.51% -5.07% 14.53%

1 YEAR – 3 YEARS 26.69% 49.41% 36.43% 8.10% 63.51%

3 YEARS – 5 YEARS 16.39% 14.46% 16.03% 6.29% 3.70%

5 YEARS – 10 YEARS 9.93% 19.57% 1.23% 3.06% -36.34%

The Dow Jones is an index based in the US, and holds 30 large-cap blue chip companies.

The Dow Jones divides up each sector into their own weight, which is a different setup than

many of the other indices.. The S&P 500 is one the leading indicators in the US, and is a market-

weighted index. As for the NASDAQ, it is made up mostly of Internet and technology based

companies. The FTSE is a European index that contains the top 100 highest market capitalization

companies on the London Stock Exchange. Lastly, the Nikkei 225 is a stock market index for the

Tokyo Stock Exchange.

The US markets since 2006 have gotten progressively better on a year after year basis, up

until this most recent year. Increasing concerns in China regarding their currency as well as their

ability to maintain their growth rate have put pressure on the United State economy. Not only has

this been transparent in US stock indices, but also the FTSE 100. Worldwide, the markets

worries in China, with OPEC, and the issues with Greece and their economy have taken a toll.

The European Union has intervened and some peace has been brought to the Greece worries, but

still lingering is the question of the state of the European economy. Over the past year, all 5 of

the indices have seen negative returns.

Being one of our major trade partners, the state of China’s economy is positively

correlated with that of the US. Although irrelevant to some, many companies do business with

China and are dependent on their growth and success. Heading into 2016, China is one of the

major topics of discussion and will continue to be until light is brought to the subject. Starting

the year, the markets in China, the US, and around the world dropped by more than 10% causing

a global sell-off. Many analysts are predicting somewhat of a recession into the coming year, but

only time will tell if that deems to be true.

Interest Rates:

Interest rates are one of the most important factors that affect our nation’s economy. An

interest rate is the cost of borrowing or the price paid for the rental of funds. These rates are

important in many ways. As a consumer, high interest rates may prevent you from purchasing a

house or car because the cost of financing would be high. On the contrary, high interest rates

may encourage you to save because you can earn more interest income while saving your money.

Interest rates impact the overall health of the economy because they affect how consumers

spend, but also affect business’ investment decisions. A high interest rate could influence a

company from building a new facility that would provide additional jobs to society. Aside from

consumers and corporations, interest rates affect banks, investment banks, and other financial

institutions.

There are several different interest rates that can be analyzed to determine the state of our

economy. The first, U.S. Treasury bills and notes, are debt securities that pay a fixed rate of

interest until its maturity date. Once the maturity date is met, the Treasury pays back the initial

par value of the security. Treasury bills are short-term securities with maturities less than one

year, while Treasury notes can have 2, 5, or 10 year maturity dates. Interest rates affect these

securities by modifying their price. If interest rates rise, then the price of the security decreases.

In addition, the longer the maturity of the security, the greater chance of interest rate risk it has

which, historically has had an impact on the purchase of these particular securities.

The second interest rate that can be examined is the Moody’s Corporate Aaa Bond Yield.

Corporate bonds pay the holder an interest payment usually twice a year, and like the Treasury

securities, are affected by interest rates. The third type of interest rates included are the federal

fund rate and discount rate, which are very vital to our economy and the monetary system. The

federal funds rate is the interest rate that banks charge each other for overnight loans. The

discount rate is the interest rate that Federal Reserve Banks charge other banks for overnight

collateralized loans. These rates are important because they ultimately decide how banks lend to

each other and handle their reserve requirements. These rates are tools that control our nation’s

monetary supply. A fall in the money supply results in a rise in interest rates eventually raising

the reserve requirements leading to higher interest rates. The final interest rate we analyzed in the

prime rate. The prime rate is the selective interest rate the commercial banks charge their

customers that have excellent credit

Treasury Bills:

CURRENT 6 MONTHS 1 YEAR

3 YEARS

5 YEARS

10 YEARS

5/3/16 10/26/15

7/30/15

4/30/15

12/31/15

12/31/13 12/31/11 12/26/06

4 WKS

BANK DISCOUNT

0.14 0.01 0.05 -0.01 0.14 0.01 0.01 4.65

COUPON EQUIVALENT

0.21 0.01 0.05 -0.01 0.14 0.01 0.01 4.73

BANK DISCOUNT

0.29 0.02 0.07 0.01 0.16 0.07 0.02 4.89

COUPON EQUIVALENT

0.31 0.02 0.07 0.01 0.16 0.07 0.02 5.02

26 WKS

BANK DISCOUNT

0.44 0.16 0.15 0.06 0.48 0.10 0.06 4.90

COUPON EQUIVALENT

0.45 0.16 0.15 0.06 0.49 0.10 0.06 5.09

52 WKS

BANK DISCOUNT

0.45 0.23 0.34 0.23 0.61 0.12 0.11 N/A

COUPON EQUIVALENT

0.46 0.23 0.35 0.23 0.62 0.12 0.11 N/A

Treasury 10-Year Note:

CURRENT 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS

5/3/2016 10/25/2015 7/30/2015 4/2/2015 12/31/2014 12/31/2012 12/31/2010 12/31/2006

1.79 2.23 2.27 1.90 2.17 1.78 3.30 4.71

Moody’s Seasoned Aaa Corporate Bond Yield:

CURRENT 6 MONTHS

1 YEAR 3 YEARS 5 YEARS 10 YEARS

5/3/2016 7/30/2015 12/31/2014 12/31/2012 12/31/2010 12/31/2006

3.62 4.05 3.46 3.65 5.02 6.48

Federal Fund Rates:


5/3/2016 10/23/2015 7/30/2015 4/2/2015 12/31/2014 12/31/2012 12/31/2010 12/31/2006

0.30 0.12 0.14 0.12 0.06 0.09 0.13 5.24

Discount Rate:


5/3/2016 10/1/2015 7/1/2015 4/1/2015 12/01/2014 12/01/2012 12/01/2010 12/01/2006

1.00 0.75 0.75 0.75 0.75 0.75 0.75 6.25

Primary Credit Rate:


5/3/16 9/3/2014 5/30/2014 6/3/2014 12/31/2014 12/31/2012 12/31/2010 12/31/2006

1.00 0.75 0.75 0.75 0.75 0.75 0.75 8.25

Aaa Corporate Bond Yield:

Exchange Rates

As one of the most prominent currencies worldwide, the U.S. dollar has always been a

worldwide leader in market exchange rates. Since the housing market bubble burst in 2008 that

caused a crash in the US market as well as the USD, there has been a continual rise in value of

the USD relative to other currencies as markets attempt to regain strength in these turbulent

times. Although in theory a strong currency is representative of a strong economy, it may not be

as simple as that in real-life terms. With the current concerns in China, there is question to

whether or not the USD can hold its value in the coming months.

A currency increasing in strength can have both good and bad outcomes. With a weaker

currency, there is a decrease in imports and an increase in exports. This can be noted in the case

of China. Recently, the Chinese government was accused of artificially suppressing the value of

the Yuan to increase exports. This has resulted in sort of “currency war” between nations who

are battling for exports.

CURRENT 6 MONTHS 1 YEAR 3 YEARS 5 10

YEARS YEARS

5/3/16 12/26/15

10/26/15

7/26/15

1/26/15 1/26/13 1/26/11 1/26/06

EURO 0.86 0.91 .90 .91 0.89 0.74 0.73 0.82

BRITISH POUND

0.68 0.67 .65 0.64 0.66 0.63 0.63 0.56

SWISS FRANC

0.95 0.99 0.98 0.96 0.90 0.93 0.94 1.27

JAPANESE YEN

106.45 120.25 120.92 123.79 118.39 90.88 82.29 116.28

CANADIAN

DOLLAR

1.27 1.38 1.31 1.30 1.24 1.00 0.99 1.15

CHINESE YUAN

7.21 6.46 6.35 6.20 6.25 6.22 6.59 8.06

Commodities:

NEW CURRENT 6 MONTHS 1 YEAR

3 YEARS

5 YEARS 10 YEARS

5/3/16 1/26/16 12/26/15

10/26/15

7/26/15

1/26/15 1/26/13 1/26/11 1/26/06

CRUDE OIL ($/BARREL)

43.71 31.45 39.11 46.42 51.57 58.56 88.26 101.43 40.38

GOLD ($/OZ) 1.288.30 1,125.20 1,075.50

1135.30 1088.51

1275.37 1709.70 1425.40 655.98

Commodities, especially crude oil, play a very important role in the world economy. As

the price per barrel of oil fluctuates, so do many of the costs of incurred by businesses and

individuals. While we as individuals may enjoy the low cost of oil at the pump, the US economy

and markets may not see it in the same light. The falling price of oil has been a key talking point

in the economy of the past year, and will continue to be until it reaches prices seen in the past. As

the supply of oil increases, demand has been stagnant and as a result we have seen the lowest oil

prices in over 10 years. Gold however, has been increasing in the time that oil has been

decreasing. Many see it as a hedge against other investments, as it is a precious metal that has

real value. Going into 2016, it is unknown whether or not oil prices will continue to fall or will

regain momentum and reach the highs seen in the past.

% Change in consumer price index:

Real Gross Domestic Product

Year Real GDP (Trillions)

US Real GDP Growth Rate

2015 $16.30 0.06%

2014 $16.29 6.54%

2013 $15.29 -0.91%

2012 $15.43 1.58%

2011 $15.19 1.67%

2010 $14.94 2.75%

2009 $14.54 -0.27%

2008 $14.58 -2.74%

2007 $14.99 1.83%

2006 $14.72 2.44%

2005 $14.37 N/A

Shown above is the Real Gross Domestic Product in the US over the past 10 years.

Overall during the time posted, there has been an increase in real GDP. However, there have

been a few that posted a decrease on a year-to-year basis. As shown, there was a steep increase

of 6.54% between the years of 2013 and 2014. Between the years of 2014 and 2015, however,

the increase of 0.06% is reflective of the economic issues that the US has been enduring.

Industry Analysis:Beverages-Soft Drinks

Industry Classification

Life Cycle Position

Classification: Mature

Companies in the Soda Production industry manufacture soft drinks by blending various

ingredients with artificially carbonated water. This industry also includes energy beverages.

Producers of bottled water, ready-to-drink teas and coffees, as well as juice manufacturers are

excluded from this industry. Falling per capita soft drink consumption significantly dampened

the Soda Production industry's performance. Demand for both regular and diet carbonated soft

drinks has declined as more consumers turned to healthier beverages to quench their thirst.

However, robust growth of energy drinks brands kept the industry from completely going flat.

Over the five years to 2020, the industry's soda segment will experience a difficult operating

environment, as government campaigns promoting healthier habits cause consumers to purchase

less soda, despite improving consumer spending. Even with the introduction of healthier soda

made with all-natural ingredients, volume consumption is anticipated to further decline as taxes

and bans on soda are implemented at the state and city levels of government. Health concerns are

also expected to curb demand for energy drinks, causing this product segment to grow more

conservatively than during the previous period. In the next five years to 2020, the Soda

Production industry is expected to decline at an average annual rate of 1.1% to $40.7 billion.

Business Cycle

Revenue Growth

Year Revenue $ million Growth %2002 42,004.1 0.02003 42,726.6 1.72004 46,597.6 9.12005 49,818.0 6.92006 47,048.3 -5.62007 49,779.7 5.82008 48,958.6 -1.72009 46,049.1 -6.02010 45,758.1 -0.62011 49,037.8 7.22012 45,113.8 -8.02013 44,923.2 -0.42014 44,307.7 -1.42015 43,056.6 -2.8

External Factors

As per capita soft drink consumption declines, demand from downstream markets, such

as wholesalers and retailers, will decline and negatively impact industry revenue. Furthermore,

price-based competition intensifies in response to weakened demand, which can negatively affect

producers' revenue and profitability.

Healthy eating index

As a growing number of consumers become more health conscious, indicated by a rise in

the healthy eating index, demand for regular, calorie-laden soda, energy drinks and sports drinks

is expected to decline. Furthermore, consumers have become more aware of the negative health

consequences of drinking both regular and diet beverages in recent years.

Per capita disposable income

While some consumers drink soda, energy drinks and sports drinks regularly, these

beverages represent discretionary items for most consumers. Consequently, as disposable income

levels decline, consumers are likely to turn to more affordable options, such as bottled and tap

water.

Per capita sugar and sweetener consumption

As per capita sugar and sweetener consumption declines, demand from consumers who consume

products with sugar and sweeteners will decline causing a drop in demand from downstream

markets, such as retailers. Sugar and sweetener consumption moves inversely with the Healthy

eating index, thus the per capita sugar and sweetener consumption is expected to stagnate in

2015.

Price of corn

High fructose corn syrup is a key ingredient used to produce regular soda. A rise in the

price of corn causes producers to either pass along the cost increase to downstream markets in

the form of higher prices or absorb the cost to the detriment of profitability. The price of corn is

expected to decline in 2015, presenting an opportunity for the industry.

Demand Analysis

Products

As it can be seen above the beverage industry, more specifically the soft drinks sector is

mainly focused on regular soft drinks taking up just over 50% of the products and services sector

as opposed to the 25% each for diet soft drinks and energy drinks. Also, grocery stores at just

above 40% take up the majority of the major market segmentation with gas stations, warehouse

clubs and super centers, vending machines, and others all about the same between 10% and 20%.

Supply Analysis

Degree of Concentration

The Soda Production industry exhibits a high level of concentration. IBIS World

estimates that the four largest producers account for a combined 71.0% of industry revenue in

2015. Market share has increased significantly over the past five years as the leading producers,

The Coca-Cola Company and PepsiCo, have undergone major structural changes. These

companies previously partnered with many bottlers to produce finished beverages under their

brand names but have recently acquired these bottling operations to obtain greater control of the

production process. They also engage in significant marketing and brand promotion activities to

generate brand loyalty. Finally, the leading soda manufacturers have historically purchased

regional brands to expand their presence in the market and diversify their product portfolios,

which have raised the level of concentration in this industry.

Ease of Entry

The barriers to entry in this industry are high and steady. There are significant barriers to

entry into the Soda Production industry including the high initial capital investments, market

saturation, industry concentration and the declining demand for soda. However, as energy drinks

are still in the growth stage of its life cycle, there are greater opportunities for new entrants to

succeed by entering this niche market segment. Nevertheless, significant capital investments are

required to either purchase or lease facilities and acquire expensive machinery and equipment to

produce soda. Additionally, new entrants must be able to offer differentiated products that either

taste significantly better than the existing products in the market or invest heavily in marketing to

position and promote their brand.

Profitability

38,000.00

40,000.00

42,000.00

44,000.00

46,000.00

48,000.00

50,000.00

52,000.00Revenue $ Million

Revenue $ Million

20022003200420052006200720082009201020112012201320142015

-10

-5

0

5

10

15

Growth %

Growth %

Demand Analysis

Demand for industry products depends on many factors including price levels, consumers' health

concerns and product innovation. Generally, higher prices for soda will place downward pressure

on all varieties of CSDs. Due to the homogeneous nature of soda, when the price of branded

products increases at the retail level, many consumers opt for more affordable branded products

or trade down to generic brands. However, many soda drinkers are also brand-loyal and will

purchase their favorite brand despite higher prices. Additionally, higher per capita disposable

income enables consumers to purchase more soda. Growing health and nutrition concerns have

negatively impacted demand for soda in recent years. Although producers introduced a greater

variety of low-calorie and naturally sweetened soda, Americans still perceive CSDs as unhealthy

when compared with bottled water, iced tea and a variety of juice beverages. The healthy eating

index has increased from 65.6% in 2013 to 67.8% in 2015 showing that Americans have been

opting for healthier choices, and furthermore, is forecast to continue rising in the next few years.

Marketing is another significant driver of demand for industry goods. In particular, energy drink

producers invest a great deal of their revenue to promote their products on college campuses and

in major cities. All companies in this industry also partner with popular athletes, musicians and

celebrities to send targeted messages to teens and young adults.

Capital Intensity

The Soda Production industry exhibits a high level of capital intensity. Using wages as a

proxy for labor and depreciation as a proxy for capital, IBIS World estimates that for every

dollar spent on labor in the industry, $0.37 will be spent on capital in 2015. Capital expenditure

is required in this industry to purchase and maintain machinery and equipment that operators rely

on to produce a high volume of soda and functional beverages on a daily basis. Capital intensity

has fallen slightly over the past five years due to falling demand for traditional soda brands and

dull industry profitability. In turn, operators have begun their investments in new machinery, and

in some cases, opting instead to shutter their factories. Depreciation's share of revenue has also

declined as revenue has grown at a faster annualized rate than capital expenditure.

Profit

The industry's average profit, defined as earnings before interest and taxes, accounted for

an estimated 6.2% of industry revenue in 2015. This figure represents a decline from 6.1% in

2010. While the leading manufacturers experience higher earnings than the industry average,

regional soft drink and private label producers are much less profitable due to the lower price

point of their products. As competition intensified and demand for soda declined over the past

five years, many producers were pressured to lower the prices they charge downstream

customers while investing in advertising and promotional campaigns to drive demand for their

drinks.

Purchases

Although the markup for soda, energy and sports drinks over the cost of raw materials is

high, purchases of raw material account for the largest expense for soda producers.

Manufacturers purchase ingredients such as carbon dioxide gas, sugar, artificial sweeteners, high

fructose corn syrup, caffeine, flavorings and food color. The fluctuating costs of key ingredients

caused purchases' share of revenue to increase over the past five years.

Depreciation, Wages, and other Costs

The industry's cost structure is based on estimates for total enterprises. Thus, primary

costs such as purchases and wages vary from producer to producer. While changes in demand

can significantly impact smaller operators' earnings, multinational companies with greater

resources are able to adjust quickly to market conditions. Labor costs comprise about 6.0% of

revenue in 2015, which represents a slight increase from 5.7% in 2010. The rise in wage costs

can be attributed to producers raising wages as the overall economy recovered. This increase is

also due to rising demand for energy drink products; this segment has performed much better

than traditional CSD sales over the past five years. Employment is estimated to have increased as

well at an annualized rate of 0.8% over the five years to 2015 due to this trend.

Pricing

Price levels are important, many consumers are loyal to specific brands and are willing to

pay a premium for their brand of choice. The leading soda, energy drinks and sports drink

producers invest heavily in marketing and promotions to further drive brand loyalty among

consumers. The range of products that a manufacturer produces is also an important basis of

competition

International Competition and Markets

Exports in this industry are low and increasing. Imports in this industry are medium and

increasing. Carbonated soft drink and energy drink producers engage in a limited amount of

international trade because the value of packaged beverages is low when compared with the cost

of transporting and distributing industry goods. The major export markets are Canada, Mexico,

Taiwan and Vietnam. Canada and Mexico experience close proximity to the United States and

benefit from favorable trade conditions through the North American Free Trade

Agreement. Imports of industry goods have increased in recent years. Switzerland, Austria,

Mexico and Thailand represent the leading sources of industry imports. Switzerland and Austria

remain the leading sources of imports, driven by popular energy drink brands, such as Red Bull.

Over the five years to 2015, imports are expected to increase an annualized 10.3% to $2.6

billion. As demand for imported beverages grows in the upcoming years, imports' share of

domestic demand is anticipated to increase.

Porter’s Five Forces

Threat of New Entrants

Barriers to entry in this industry are high and steady. There are significant barriers to








position and promote their brand. A high degree of market saturation also acts as a barrier to

entry. Not only is the market saturated, but demand for soda is also declining in the United

States. While niche producers that target specific regions and consumer groups have appeared in

recent years, they have not been able to obtain significant market share. However, many private

label brands were introduced during the recession when consumers sought more affordable

alternatives at retail stores.

Competitive Rivalry within the Industry

While larger manufacturers like PepsiCo and The Coca-Cola Company also produce

noncarbonated beverages, the emergence of companies that specialize in these smaller beverage

categories continue to threaten the position of the major soda producers.

Due to changing consumer tastes and growing health concerns, producers have

introduced a variety of brand extensions that are made with healthier sweeteners and contain

fewer calories. To capitalize on the growing popularity of natural zero-calorie sweeteners and

low-calorie beverages, soda producers have competed to be the first to introduce alternative low-

calorie soda beverages in recent years.

Bargaining Power of the Buyer

While large retailers, such as Walmart and Safeway, have lots of shelf space to offer a

variety of soda brands, smaller downstream markets usually carry a limited number of products.

Many convenience stores, vending machines and food service operators limit their soda offerings

to one manufacturer. For instance, many vending machines carry only Pepsi or Coca-Cola

products, which makes it even more difficult for smaller competitors to obtain contracts with

downstream markets

Bargaining Power of the Suppliers

Industry operators produce a variety of soda products in different flavors, container types,

container sizes and caloric content. Offering a range of products gives producers a competitive

advantage when negotiating with retailers, boosts brand loyalty among consumers and enables

producers to tap into new markets and consumer groups. Additionally, wholesalers and large

retailers prefer to source a variety of goods from one producer rather than several producers to

reduce transaction costs, further incentivizing manufacturers to expand their product portfolios.

Threat of Substitutes

Competition with producers of other ready-to-drink beverages has intensified over the

five years to 2015. Mainly the growths of the bottled water and juice production industry have

declined revenue growth for soda producers. Products that are manufactured by juice producers

such as sparkling fruit drinks have experienced growth in recent years.

PepsiCo Company Analysis

Industry: Beverage- Soft Drinks

Sector: Consumer Defensive

Ticker: PEP

Stock Exchange: NYSE

Headquarters: Purchase, New York

Company Description

PepsiCo, Inc. operates as a food and beverage company worldwide. Its Frito-Lay North

America segment offers Lays and Ruffles potato chips; Doritos, Tostitos, and Santitas tortilla

chips; and Cheetos cheese-flavored snacks, branded dips, and Fritos corn chips. The company’s

Quaker Foods North America segment provides Quaker oatmeal, grits, rice cakes, natural

granola, and oat squares; and Aunt Jemima mixes and syrups, Quaker Chewy granola bars,

Captain Crunch cereal, Life cereal, and Rice-A-Roni side dishes.

Its North America Beverages segment offers beverage concentrates, fountain syrups, and

finished goods under the Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain

Dew, Tropicana Pure Premium, Sierra Mist, and Mug brands. The company was founded in 1898

and is headquartered in Purchase, New York.

Corporate Strategy

PepsiCo mission statement is ‘Performance with Purpose’ and this principle is closely

incorporated with the strategic direction chosen for the company. The most prominent aspects of

PepsiCo strategy given by CEO Indra Nooyi are based on the following seven principles.

First: international market expansion strategy through mergers and

acquisitions. Mergers and acquisitions can offer the advantages of gaining access to

competencies and infrastructure, reducing direct costs and overheads and achieving organic

growth.

Second: formation of strategic alliances in global scale. Specifically, strategic

partnerships have been formed with Tingyi in China in order to claim a share in growing

beverage market in China. Also, formation of a joint venture with Tata in India to enhance

drinking water manufacturing capabilities.

Third: focus on emerging markets. The share of net revenues from developing and

emerging markets such as China, India, and Russia. PepsiCo CEO Indra Nooyi has publicly

expressed commitments to further increase the level of presence of the company in emerging

markets.

Fourth: focus on organizational culture. Organizational culture can be defined as “the

collection of words, actions, thoughts, and “stuff” that clarifies and reinforces what a company

truly values” and the nature of organizational culture directly impacts its performance in short-

term and long-term perspectives.

Fifth: developing and promoting the idea of One PepsiCo. Specifically, Indra Nooyi

has been striving to increase the level of association of individual brands with PepsiCo company

values and philosophy through promoting the idea of One PepsiCo.

Sixth: innovation in marketing initiatives. A wide range of innovative marketing

initiatives developed by PepsiCo marketing team include “Do Us a Flavor” campaign that

involved consumers in 17 countries submitting flavor ideas, development of Lipton Brisk Star

Wars game application for mobile phones, and using celebrity endorsement.

Seventh: focus on increasing core organic revenue. Core organic revenue can be

explained as a type of revenue that is achieved through increasing the volume of production and

sales. PepsiCo core organic revenues were increased by 5% during 2012 (Annual Report, 2012)

and the company strategic level management is committed to further increase the levels of core

organic revenues through maintaining high quality standards and applying effective marketing

strategy.

Life Cycle

The Soda Production industry is in the mature stage of its life cycle. Over the 5 years to

2020, industry value added, which measures an industry's contribution to the economy, is

forecasted to decrease at an annualized 0.8%. In comparison, GDP is projected to grow 2.2% per

year on average over the same period. While the industry's energy drink segment continues to

grow, these new gains continue to be offset by declining sales of carbonated soft drinks. These

contradictory trends have somewhat canceled each other out, signaling that the industry is

squarely within the mature phase of its life cycle

Products

Soda produced by industry manufacturers are bottled in cans, glass bottles and plastic

bottles in either single-serve or multi serve container sizes. Manufacturers have added a variety

of can and bottle sizes to their product lines, particularly smaller single-serve bottles, to appeal to

busy consumers and also those who want to consume less calories. PepsiCo's product mix as of

2012 (based on worldwide net revenue) consists of 63 percent foods, and 37 percent beverages.

On a worldwide basis, the company's current products lines include several hundred

brands that in 2009 were estimated to have generated approximately $108 billion in cumulative

annual retail sales The primary identifier of a food and beverage industry main brand is annual

sales over $1 billion. As of 2009, 21 PepsiCo brands met that mark: Pepsi, Mountain

Dew, Lay's, Gatorade, Tropicana, 7 Up, Doritos, Lipton Teas, Quaker Foods, Cheetos, Miranda,

Ruffles, Aquafina, PepsiMax, Tostitos, Sierra Mist, Fritos, and Walkers.

Markets

PepsiCo prides itself in being a global entity and world leader in product innovation. As

seen, there is a strong presence across the world.

Marketing Strategy and Customer Support

One of their core competencies is their product integration and innovation. PepsiCo is

able to enhance their product line by carrying fruit drinks, Gatorade, and Frappuccino. This

allows them to promote their products and services more efficiently while being able to reach a

much broader group of individuals. Through integration, they are able to eliminate potential

competitors, while creating a more diverse product line.

Pepsi always comes up with the unique ad campaign’s focusing towards its target market.

The uniqueness is advertising and branding has given it a competitive advantage over

competitors. PepsiCo’s target audience is mostly teens and young adults and their advertising

reflects this in every possible manner.

Manufacturing and Process Costs

Manufacturing cost is the expenditure incurred in carrying out the production processes

of an organization. The manufacturing costs include direct costs like labor, materials, and

expenses, and indirect costs. Primary costs such as purchases and wages vary from producer to

producer. While changes in demand can significantly impact smaller operators' earnings,

multinational companies with greater resources are able to adjust quickly to market conditions.

Labor costs comprise about 6.0% of revenue in 2015, which represents a slight increase

from 5.7% in 2010. The rise in wage costs can be attributed to producers raising wages as the

overall economy recovered. This increase is also due to rising demand for energy drink products;

this segment has performed much better than traditional carbonated soft drink sales over the past

five years. Employment is estimated to have increased as well at an annualized rate of 0.8% over

the five years to 2015 due to this trend.

Distribution

PepsiCo is a leading food and beverage company with an impressive global presence.

The company’s products reach the market through the following three channels: direct store

delivery (or DSD), customer warehouse, and third-party distributor networks. PepsiCo chooses

the relevant distribution channel based on customer needs, product characteristics, and local

trade practices. Under the DSD system, PepsiCo delivers products directly to retail stores. Of the

three channels, DSD enables PepsiCo to merchandise with maximum visibility. It’s more

suitable for products that are restocked often and are sensitive to promotions and marketing.

The customer warehouse system is a less expensive distribution channel. It’s ideal for

products that are less fragile and perishable, have lower turnover, and are not purchased

impulsively. PepsiCo distributes food and beverage products to restaurants, businesses, schools,

and stadiums through third-party food service and vending distributors and operators.

Suppliers and Raw Materials

The companies are subject to the harvest of raw material that they use in their snack

foods, soft drink and juice, like corn, oranges, grapefruit, vegetables, potatoes, etc. They rely on

trucks to move and distribute many of their products, fuel is also an important aspect, so they are

subject to the fuel prices prevailing in that economy.

Competition

Soda producers compete based on many factors including price levels, range of products

offered, product innovation and marketing. While soda is a low-price item for consumers, price

levels have become more important in recent years following the recession, due to repressed

disposable income levels and frugal consumer spending. As demand for industry goods declined

due to lower overall consumption levels and growing health concerns, producers temporarily

slashed the prices they charged downstream markets to boost demand.

Additionally, the growth of private label brands has also intensified price-based

competition among manufacturers. While energy drinks are sold at a premium compared with

regular carbonated soft drinks, even the leading energy drink producers offered promotions and

discounts over the past five years to drive sales.

Research and Development

At PepsiCo, R&D Associate Engineers translate strategic market objectives into new

products and processes. PepsiCo Engineers participate in and lead accelerated product

development life cycles that include new idea generation, prototype development, product

optimization, process development, process scale-up, and production startup for test market and

national launching of new products. As an R&D Associate Food Scientist with PepsiCo, they

have unique opportunities to increase technical knowledge by participating in the development of

a diverse portfolio of beverage and snack product categories. The teams translate strategic

market objectives into new products and processes, optimize designs per consumer response and

select winning ideas for commercialization.

Foreign Sales and Earnings




of transporting and distributing industry goods.

The major export markets are Canada, Mexico, Taiwan and Vietnam. Canada and

Mexico experience close proximity to the United States and benefit from favorable trade

conditions through the North American Free Trade Agreement. Imports of industry goods have

increased in recent years. Switzerland, Austria, Mexico and Thailand represent the leading

sources of industry imports. Switzerland and Austria remain the leading sources of imports,

driven by popular energy drink brands, such as Red Bull. Over the five years to 2015, imports

are expected to increase an annualized 10.3% to $2.6 billion. As demand for imported beverages

grows in the upcoming years, imports' share of domestic demand is anticipated to increase.

Government Regulation

PepsiCo’s operations and properties are subject to regulation by various federal, state and

local governmental entities and agencies in the U.S., as well as foreign governmental entities. As

a producer of beverage products, PepsiCo is subject to production, packaging, quality, and

labeling and distribution standards in each of the countries where we have operations including,

in the U.S., those of the Federal Food, Drug and Cosmetic Act. In the U.S., we are also subject to

the Soft Drink Interbrand Competition Act, which permits us to retain an exclusive right to

manufacture, distribute and sell a soft drink product in a geographic territory if the soft drink

product is in substantial and effective competition with other products of the same class in the

same market or markets.

The operations of PepsiCo’s production and distribution facilities are subject to various

federal, state and local environmental laws and workplace regulations both in the U.S. and

abroad. These laws and regulations include, in the U.S., the Occupational Safety and Health Act,

the Unfair Labor Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the

maintenance of fuel storage tanks.

Personnel

There are approximately 263,00 employees currently working for PepsiCo.

Properties

PepsiCo's food and beverage products are sold around the world. They have six global

divisions, either independently or in conjunction with third parties, make, market, distribute and

sell a wide variety of food and beverages.

Management

Indra K. Nooyi - Chairman and Chief Executive Officer

-Joined PepsiCo in 1994

Albert P. Carey - Chief Executive Officer, North American Beverages

-Joined PepsiCo in 1981.

Sanjeev Chadha - Chief Executive Officer, Asia, Middle East & North Africa and founding

member of PepsiCo beverage business in India in 1989

Hugh F. Johnston- Vice Chairman and Chief Financial Officer

-Joined PepsiCo in 1987

Pepsi Financial Statement Analysis

Return on Common Equity

Return on common equity measures the return the company generates using common

equity to finance its operations. It can be noted that in the most recent year, PepsiCo Inc., had the

highest return on common equity in comparison to its competitors in the industry. There has been

some volatility in this measure since 2010, but as of late, PepsiCo Inc. is doing well in this

category. This can be a positive for investors because they are earning a higher return than

competitors on common equity.

Return on Common Equity:

2015 2014 2013 2012 2011

PEP 37.24 31.24 28.96 28.84 30.89

KO 26.31 22.36 26.03 28.00 27.37

DPS 34.13 30.76 27.39 27.69 25.67

MDLZ 26.06 7.27 12.12 8.98 9.93

Return on Assets

Return on assets as an indicator of how profitable a company is in comparison to its total

assets. This ratio gives investors an idea of how efficient assets are used to generate profits for a

company. PepsiCo Inc. has an average return on assets relative to its competitors. The company

has neither the highest or lowest ratio compared to competitors. It can be seen that since 2011,

PepsiCo Inc. has been decreasing this ratio. This could indicate that PepsiCo’s business has been

hurting in recent years or that the company is not investing that much in assets to help generate

earnings. I believe part of the reason is that consumers are trying to be healthier and the soda

beverages are known to be an unhealthy option. This could be a potential red flag for anyone

looking to invest in PepsiCo Inc.

Return on Assets2015 2014 2013 2012 2011

PEP 7.78 8.79 8.85 8.37 9.13KO 8.07 7.80 9.74 10.86 11.21DPS 8.91 8.53 7.29 6.91 6.68MDLZ 11.21 3.13 5.29 3.58 3.73

Profit Margins

Profit margin is an indicator of how profitable a company is from its operations. This

margin measures, in a percentage, how much out of every dollar of sales a company actually

keeps in earnings. PepsiCo Inc. has a below average profit margin in comparison to competitors

in the industry. The company has the lowest measure, indicating that it could be better in this

area of business. PepsiCo Inc. has been decreasing its profit margin in recent years, which can be

a point of fear for future investors. They are really trying to get their margins by cutting certain

costs and lowering prices in order to get higher profit margins in the future and I feel like that

should work out in their favor because of all the other companies and products they own, they

should see results rise in the future

Profit Margins2015 2014 2013 2012 2011

PEP 8.65 9.75 10.14 9.42 9.68KO 16.60 15.43 18.32 18.78 18.42DPS 12.16 11.49 10.41 10.49 10.27MDLZ 24.52 6.38 11.09 8.65 6.49

Tax Rate

This measure represents the percentage of earnings before taxes that are paid in taxes.

This is a profitability indicator and measures a company’s tax efficiency. PepsiCo’s tax rate has

stayed below the federal tax rate of 35%, which can suggest that they look for possible tax

breaks. This could be a positive sign for investors when looking to pursue PepsiCo due to a

lower than industry average tax rate. They also receive lots of tax breaks and loop holes, which

makes sense.

Tax Rate:2015 2014 2013 2012 2011

TAX RATE 26.08 25.11 23.66 25.17 26.85

Common Sized Income Statement

This is an income statement in which each account is expressed as a percentage value of

sales. The common size statement analysis will show how various components of the income

statement will affect a company’s profit. When looking at the common size income statement, it

was seen that PepsiCo has been increasing its gross profit margin over the years examined. This

is a good sign for a company, which indicates more profit and efficient use of cost of goods sold.

It was also noted though that total operating expenses are higher each year in comparison to

previous years of the company. This signals the company is handling its expenses inefficiently.

Finally, it is noticed that net income has been the lowest since 2011. This is a point of interest for

a potential investor and is a bad sign. The increase in net income can arise from a more efficient

handling of operating expenses and tax expenses.

Common Sized Income Statement% 2011 2012 2013 2014 2015REVENUES 100 100 100 100 100COGS 47.51 47.78 47.04 46.31 45.01GROSS PROFIT 52.49 52.22 52.96 53.69 54.99

TOTAL OPERATING EXPENSES 38.01 38.31 38.35 39.32 41.74

OPERATING INCOME 14.48 13.91 14.61 14.37 13.25

INCOME BEFORE TAXES 13.28 12.68 13.39 13.13 11.80

NET INCOME 9.69 9.43 10.15 9.77 8.65

Common Sized Balance Sheet

As said earlier, the common size statement demonstrates accounts as a percentage of

assets, liabilities, and stockholder’s equity. This will let the analyst (myself) determine trends

over the past years and relate them to profit. Seeing the percentage change in accounts over the

years can be a good analytical tool. When examining the common size balance sheet, it was

noted that PepsiCo has been decreasing its total non-current assets over the years which may

indicate an decreased spending in long-term assets such as P, P, &E. In contrast, the company

has increased its current assets over the years. To match the movements in asset accounts,

PepsiCo has done the same thing with current and non-current liabilities over the past few years.

Matching assets with liabilities shows an efficient use of resources and keeps financing stable for

the company, a positive sign for potential investors. The company has decreased stockholder’s

equity since 2011, which indicates the company is potentially losing sales or stockholders

looking to buy equity in the company.

Common Sized Balance SheetASSETS

2011 2012 2013 2014 2015TOTAL CASH 6.07 8.87 12.49 12.38 17.24TOTAL CURRENT ASSETS 23.93 25.08 28.66 29.31 33.06TOTAL NON-CURRENT ASSETS 76.07 74.92 71.34 70.69 66.94TOTAL ASSETS 100 100 100 100 100

LIABILITIES & STOCKHOLDERS EQUITY2011 2012 2013 2014 2015

TOTAL CURRENT LIABILITIES 24.91 22.90 23.02 25.66 25.23TOTAL NON-CURRENT LIAB 46.84 47.23 45.64 49.61 57.65TOTAL LIABILITIES 71.75 70.13 68.66 75.27 82.89STOCKHOLDERS EQUITY

2011 2012 2013 2014 2015TOTAL STOCKHOLDERS EQUITY 28.25 29.87 31.34 24.73 17.11TOTAL LIABILITIES AND EQUITY 100 100 100 100 100

Asset Turnover

This ratio indicates the value of a company’s sales/revenues generates relative to the

value of its assets. This is an efficiency ratio to measure how effective a company uses its assets

to generate profit. PepsiCo has been increasing its asset turnover in recent years and almost back

to where it was in 2011, indicating that it is efficiently using its assets. In comparison to its

competitors, PepsiCo has one of highest asset turnover ratios, making it a point of interest for

investors. Investors would see Pepsi using its assets to generate profits as a positive when

considering investing in the company.

Asset Turnover2015 2014 2013 2012 2011

PEP 0.90 0.90 0.87 0.89 0.94KO 0.49 0.51 0.53 0.58 0.61DPS 0.73 0.74 0.70 0.66 0.65MDLZ 0.46 0.49 0.48 0.41 0.57

Fixed Asset Turnover

This financial ratio is an efficiency ratio similar to the previous ratio we examined. This

ratio measures a company’s ability to generate sales from fixed-asset investments like property,

plant, and equipment. A higher fixed-asset turnover ratio shows that a company has been

effective in using their investments in fixed assets to generate revenues. PepsiCo has an average

fixed-asset turnover ratio in comparison to its competitors but lower than the leader Mondelez

International Inc. Not investing in fixed assets would increase turnover, which indicates that

Pepsi is using its fixed assets more than others, which decreases turnover. This could be a

positive sign for investors looking to invest in PepsiCo.


2015 2014 2013 2012 2011PEP 3.76 3.72 3.52 3.37 3.43KO 3.26 3.11 3.18 3.26 3.14DPS 5.47 5.29 5.05 5.09 5.09MDLZ 3.26 3.41 3.49 2.94 3.94

Receivables Turnover

The receivables turnover ratio measures a firm’s effectiveness in extending credit and

collecting debt related to the credit. This ratio indicates how efficiently a company uses its assets

and handles credit. PepsiCo has a slightly higher level of receivables turnover ratio in

comparison with its competitors in the industry. This measure has been increased marginally

since 2011. This could be a positive when looking at the company if someone was interested in

investing in PepsiCo. An investor wants to have a company that handles their credits and assets

in an efficient, consistent manner.

Receivables Turnover2015 2014 2013 2012 2011

PEP 11.15 11.12 10.86 10.10 10.05KO 10.54 9.85 9.73 9.92 9.96DPS 11.16 10.39 10.22 10.55 10.53MDLZ 9.21 7.44 6.12 5.61 8.43

Inventory Turnover

This ratio shows how many times a company’s inventory is sold and replaced over a

specific period of time. A low turnover implies poor sales and excess inventory, while a high

turnover indicates strong sales. While comparing PepsiCo against its competitors, it can be seen

the company has an average inventory turnover ratio. The company may want to increase sales

efforts or try a new inventory management system to help generate profits and increase investors

for the business but they are about in the middle so I think they’re fine in this category.

Inventory Turnover2015 2014 2013 2012 2011

PEP 9.68 9.43 8.94 8.45 8.78KO 5.83 5.61 5.63 6.00 6.34DPS 12.39 12.33 12.59 12.22 10.90MDLZ 5.95 5.99 5.93 4.64 6.42

Financial Leverage

Financial leverage relates total assets to total shareholder’s equity for a company. The

higher the ratio, the more debt the company uses in its capital structure. PepsiCo has had a fairly

increasing trend in this ratio with the past years. This increase indicates the company is relying

on more debt to finance the company and its operations. When comparing PepsiCo to its

competitors, it was noted that PepsiCo has one of the highest financial leverage ratios. This can

be a negative aspect of PepsiCo because debt financing is riskier than equity financing. Investors

may want to use caution after seeing this information.

Financial Leverage2015 2014 2013 2012 2011

PEP 5.86 4.05 3.20 3.35 3.55KO 3.53 3.04 2.71 2.63 2.53DPS 4.06 3.61 3.60 3.92 4.10MDLZ 2.24 2.41 2.24 2.34 2.66

Times Interest Earned

This is a ratio used to measure a company’s ability to meet its debt obligations. More

specifically, it indicates how many times a company can cover its interest charges on a pretax

basis. It can be seen that PepsiCo’s times interest earned ratio has decreased every year since

2011 and its biggest decrease was in the past year. Also, it is noted that PepsiCo’s ratio is

relatively average compared to their competitors in the industry. This can be a huge red flag for

investors seeing that PepsiCo cannot cover their interest expenses as efficiently as those

operating in the industry. Ensuring interest payments to debt holders and preventing bankruptcy

is a critical factor to examine when deciding to invest in a company.

Times Interest Earned2015 2014 2013 2012 2011

PEP 7.67 9.63 9.75 9.23 10.32KO 11.22 19.31 24.78 29.74 27.43DPS 10.11 9.84 4.40 7.82 8.11MDLZ 12.94 3.28 2.35 1.50 2.90

Current Ratio

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term

debt obligations. This ratio compares current total assets of a company to its current total

liabilities. This can be used as a main indicator of a company’s financial health. PepsiCo has a

faintly higher current ratio in comparison to its competitors. A fairly average current ratio signals

that PepsiCo is handling its assets and liabilities in similar fashion as their competitors, not

showing any red flags for potential investors.

Current Ratio2015 2014 2013 2012 2011

PEP 1.31 1.14 1.24 1.10 0.96KO 1.24 1.02 1.13 1.09 1.05DPS 1.15 1.17 1.09 1.08 0.92MDLZ 0.82 0.84 0.92 1.05 0.88

Quick Ratio

The quick ratio can be used to measure a company’s short-term liquidity. A company

should use its most liquid assets to meet its short-term debt obligations. Inventory is not included

in this ratio because it is not the most liquid asset. PepsiCo’s quick ratio is pretty consistent with

their competitors in the industry and this year has the highest again since 2011. Being on the

higher side indicates that the company has more liquid assets relative to liabilities compared to

others in the industry. This is a good aspect for investors given a higher ratio.

Quick Ratio2015 2014 2013 2012 2011

PEP 1.05 0.85 0.93 0.80 0.62KO 0.89 0.81 0.90 0.77 0.78DPS 0.97 0.82 0.75 0.79 0.70MDLZ 0.52 0.46 0.56 0.71 0.45

Statement of Cash Flows

Operating

Operating Cash Flow- Revenue:2015 2014 2013 2012 2011

PEP 10,580 10,506 9,688 8,479 8,944When looking at revenues generated via cash flow from operations, it is seen that the

company has good amounts of increases in this area since 2011.These increases are a great sign

because they are getting more cash flow.

Operating Cash Flow-Net Income:2015 2014 2013 2012 2011

PEP 5,501 6,558 6,787 6,214 6,462KO 7,366 7,124 8,626 9,086 8,634DPS 764 703 624 629 606MDLZ 7,291 2,201 3,935 3,055 3,547

It is seen that net income from operating cash flows has been quite volatile since 2011.

This decrease in net income since 2011 is a worrisome sign for investors, and the recent decrease

from 2014 is also a red flag. When compared to competitors in the industry, PepsiCo has an

average level of net income.

Free Cash Flow:2015 2014 2013 2012 2011

Operating Cash Flow 10,580 10,506 9,688 8,479 8,944

Capital Expenditure

(2,758) (2,859) (2,795) (2,714) (3,339)

As said earlier, when looking at revenues generated via cash flow from operations, it is

seen that the company has good amounts of increases in this area since 2011. This increase can

be a positive signal for investors. Another thing to consider is that their capital expenditure is

much less than operating cash flow, which is a good thing because high capex drains cash, this

means lower dividend and higher geared. Many times, high capex companies require investors to

come up with financing through rights issue or placement or capital increase, which dilutes the

shareholdings. Otherwise, more debt has to be taken up, which investors hate the most.

PepsiCo, Inc. Valuation

For my first valuation, I used the ValuePro to PepsiCo, Inc. This valuation gave me a

value of $105.75, which makes it favorable purchase considered the stock, is currently

$103.21.These calculations infer that the stock is fairly undervalued. I manually entered these

values in ValuePro after finding them on sources such as Morningstar, Zacks, and Valueline. I

also calculated some of the values like the depreciation and investment rate relative to PepsiCo,

Inc. I calculated a growth rate of 6.9% for the company’s revenues. I used the 30-year treasury

yield of 3% and an equity risk premium 5%.

PEP KO DPS MDLZ

Growth 6.90% 8.80% 11.50% -9.90%

ROE 30.98 28.77 34.13 26.06

Beta 0.70 0.80 0.61 1.05

P/E 22.56 23.36 22.70 23.93

Est. P/E 22.12 24.20 21.22 23.93

EPS $3.67 $1.67 $3.97 $4.44

VALUE $82.80 $39.01 $90.12 $106.25

For my second valuation, I used the P/E method. I compared PepsiCo to some of its peers

that are in the consumer beverage industry. With an industry average P/E of 23.13; which I felt

that was right on target especially after comparing Pepsi to these three companies with very

similar P/E ratios. With the stock being priced at $103.21, this valuation gives PepsiCo a

favorable position. PepsiCo’s beta in comparison to its competitors is right around the middle,

which is good because the amount of volatility is lower.

Recommendation

While the valuations show that PepsiCo is a good buy, I would have to agree with the

analysis. Since this class focuses on buying and selling for the long term, I believe PepsiCo is a

great buy, not only because of how well they pay dividends but how much the company is

projected to grow within the next few years. In the long run, I think that PepsiCo is an ideal

company that this class favors and a large corporation that can and has gained a competitive

advantage when competing against the biggest rivals in the industry. The company had a decline

in revenue between 2014 and 2015, but it is clear that PepsiCo is on the rise. Thus, I recommend

buying 50-100 more shares of PepsiCo. If we are deciding to add more consumer beverage

stocks to the portfolio, it should be one of the industry leaders- PepsiCo.

Dr. Pepper Snapple, Inc. Financial Statement Analysis



equity to finance its operations. It can be noted that in the most recent year, PepsiCo Inc., had the

highest return on common equity in comparison to its competitors in the industry. There has been

some volatility in this measure since 2011, but as of late, Dr. Pepper Snapple is doing well in this

category and has been increasing year after year. This can be a positive for investors because

they are earning a higher return than most of the competitors on common equity.


2015 2014 2013 2012 2011

DPS 34.13 30.76 27.39 27.69 25.67

KO 26.31 22.36 26.03 28.00 27.37

PEP 37.24 31.24 28.96 28.84 30.89

MDLZ 26.06 7.27 12.12 8.98 9.93

Return on Assets



company. Dr. Pepper Snapple has an average return on assets relative to its competitors. The

company has neither the highest or lowest ratio compared to competitors in 2015. It can be seen

that since 2011, Dr. Pepper Snapple has been increasing this ratio. This could indicate that Dr.

Pepper Snapple’s business has been getting better in recent years or that the company is

investing more in assets to help generate earnings. This could be a good sign for anyone looking

to invest in Dr. Pepper Snapple.

Return on Assets

2015 2014 2013 2012 2011DPS 8.91 8.53 7.29 6.91 6.68KO 8.07 7.80 9.74 10.86 11.21PEP 7.78 8.79 8.85 8.37 9.13MDLZ 11.21 3.13 5.29 3.58 3.73

Profit Margins



keeps in earnings. Dr. Pepper Snapple has a below average profit margin in comparison to

competitors in the industry, but not the worst. The company has the 2nd lowest measure,

indicating that it could be better in this area of business. Dr. Pepper Snapple has been increasing

its profit margin in recent years, which can be a good sign for future investors potentially.

Profit Margins

2015 2014 2013 2012 2011DPS 12.16 11.49 10.41 10.49 10.27KO 16.60 15.43 18.32 18.78 18.42PEP 8.65 9.75 10.14 9.42 9.68MDLZ 24.52 6.38 11.09 8.65 6.49

Tax Rate


This is a profitability indicator and measures a company’s tax efficiency. Dr. Pepper Snapple’s

tax rate has stayed below the federal tax rate of 35%, which can suggest that they look for

possible tax breaks.

Tax Rate

2015 2014 2013 2012 2011TAX RATE 35.47 34.58 34.53 35.69 34.59




statement will affect a company’s profit. When looking at the common size income statement, it

was seen that Dr. Pepper Snapple has been increasing its gross profit margin over the years

examined. This is a good sign for a company, which indicates more profit and efficient use of

cost of goods sold. It was also noted though that total operating expenses are lower each year in

comparison to previous years of the company for the most part. This signals the company is

handling its expenses efficiently. Finally, it is noticed that net income has been increasing every

year. This is a point of interest for a potential investor and is a good sign. The increase in net

income can arise from a more efficient handling of operating expenses and tax expenses.

Common Sized Income Statement% 2011 2012 2013 2014 2015REVENUES 100 100 100 100 100COGS 42.10 41.70 41.67 40.70 40.74GROSS PROFIT 57.90 58.30 58.33 59.30 59.26

TOTAL OPERATING EXPENSES 40.56 40.08 40.89 40.03 38.60



NET INCOME 10.27 10.49 10.41 11.49 12.16


As said earlier, the common size statement demonstrates accounts as a percentage of

assets, liabilities, and stockholder’s equity. This will let the analyst (myself) determine trends

over the past years and relate them to profit. Seeing the percentage change in accounts over the

years can be a good analytical tool. When examining the common size balance sheet, it was

noted that Dr. Pepper Snapple has been decreased its total non-current assets last year which may

indicate a decreased spending in long-term assets such as P, P, &E. In contrast, the company has

increased its current assets over the years. To match the movements in asset accounts, Dr. Pepper

Snapple has done the same thing with current and non-current liabilities over the past few years.

Matching assets with liabilities shows an efficient use of resources and keeps financing stable for

the company, a positive sign for potential investors. The company has decreased stockholder’s

equity since 2011 has been quite volatile and has decreased a lot since 2014 particularly, which

indicates the company is potentially losing sales or stockholders looking to buy equity in the

company.






Asset Turnover



to generate profit. Dr. Pepper Snapple has been increasing its asset turnover in recent years and

almost back to where it was in 2011, indicating that it is efficiently using its assets. In

comparison to its competitors, Dr. Pepper Snapple has the second highest asset turnover ratios

among competitors, making it a point of interest for investors. Investors would see Dr. Pepper

Snapple using its assets to generate profits as a positive when considering investing in the

company.

Asset Turnover2015 2014 2013 2012 2011

DPS 0.73 0.74 0.70 0.66 0.65KO 0.49 0.51 0.53 0.58 0.61PEP 0.90 0.90 0.87 0.89 0.94MDLZ 0.46 0.49 0.48 0.41 0.57





effective in using their investments in fixed assets to generate revenues. Dr. Pepper has the

highest fixed-asset turnover ratio in comparison to its competitors. Not investing in fixed assets

would increase turnover, which indicates that Dr. Pepper Snapple is using its fixed assets more

than others, which decreases turnover. This could be a positive sign for investors looking to

invest in Dr. Pepper Snapple.

Fixed Asset Turnover2015 2014 2013 2012 2011

DPS 5.47 5.29 5.05 5.09 5.09KO 3.26 3.11 3.18 3.26 3.14PEP 3.76 3.72 3.52 3.37 3.43MDLZ 3.26 3.41 3.49 2.94 3.94

Receivables Turnover

The receivables turnover ratio measures a firm’s effectiveness in extending credit and

collecting debt related to the credit. This ratio indicates how efficiently a company uses its assets

and handles credit. Dr. Pepper Snapple has a slightly higher level of receivables turnover ratio in

comparison with its competitors in the industry. This measure has been increased marginally

since 2011. This could be a positive when looking at the company if someone was interested in

investing in Dr. Pepper Snapple. An investor wants to have a company that handles their credits

and assets in an efficient, consistent manner

Receivables Turnover2015 2014 2013 2012 2011

DPS 11.16 10.39 10.22 10.55 10.53KO 10.54 9.85 9.73 9.92 9.96PEP 11.15 11.12 10.86 10.10 10.05MDLZ 9.21 7.44 6.12 5.61 8.43

Inventory Turnover

This ratio shows how many times a company’s inventory is sold and replaced over a

specific period of time. A low turnover implies poor sales and excess inventory, while a high

turnover indicates strong sales. While comparing Dr. Pepper Snapple against its competitors, it

can be seen the company has the highest inventory turnover ratio among the pack.

Inventory Turnover2015 2014 2013 2012 2011

DPS 12.39 12.33 15.59 12.22 10.90KO 5.83 5.61 5.63 6.00 6.34PEP 9.68 9.43 8.94 8.45 8.78MDLZ 5.95 5.99 5.93 4.64 6.42

Financial Leverage

Financial leverage relates total assets to total shareholder’s equity for a company. The

higher the ratio, the more debt the company uses in its capital structure. Dr. Pepper Snapple has

had a fairly volatile trend in this ratio with the past years with increases since 2013. This increase

indicates the company is relying on more debt to finance the company and its operations. When

comparing Dr. Pepper Snapple to its competitors, it was noted that Dr. Pepper Snapple has just

about average financial leverage ratios. This can be a negative aspect of Dr. Pepper Snapple

because debt financing is riskier than equity financing. Investors may want to use caution after

seeing this information.

Financial Leverage2015 2014 2013 2012 2011

DPS 4.06 3.61 3.60 3.92 4.10KO 3.53 3.04 2.71 2.63 2.53PEP 5.86 4.05 3.20 3.35 3.55MDLZ 2.24 2.41 2.24 2.34 2.66




basis. It can be seen that Dr. Pepper Snapple’s times interest earned ratio has been very volatile

every year since 2011 but it is at the highest in has been in 2015. Also, it is noted that Dr. Pepper

Snapple’s ratio is relatively average compared to their competitors in the industry. This can be a

huge red flag for investors seeing that Dr. Pepper Snapple cannot cover their interest expenses as

efficiently as those operating in the industry. Ensuring interest payments to debt holders and

preventing bankruptcy is a critical factor to examine when deciding to invest in a company.

Times Interest Earned2015 2014 2013 2012 2011

DPS 10.11 9.84 4.40 7.82 8.11KO 11.22 19.31 24.78 29.74 27.43PEP 7.67 9.63 9.75 9.23 10.32MDLZ 12.94 3.28 2.35 1.50 2.90

Current Ratio

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term

debt obligations. This ratio compares current total assets of a company to its current total

liabilities. This can be used as a main indicator of a company’s financial health. Dr. Pepper

Snapple has a middle of the road current ratio in comparison to its competitors. A fairly average

current ratio signals that Dr. Pepper Snapple is handling its assets and liabilities in similar

fashion as their competitors, not showing any red flags for potential investors.

Current Ratio2015 2014 2013 2012 2011

DPS 1.15 1.17 1.09 1.08 0.92KO 1.24 1.02 1.13 1.09 1.05PEP 1.31 1.14 1.24 1.10 0.96MDLZ 0.82 0.84 0.92 1.05 0.88

Quick Ratio

The quick ratio can be used to measure a company’s short-term liquidity. A company

should use its most liquid assets to meet its short-term debt obligations. Inventory is not included

in this ratio because it is not the most liquid asset. Dr. Pepper Snapple’s quick ratio is pretty

consistent with their competitors in the industry and this year has the highest again since 2011.

Being on the higher side indicates that the company has more liquid assets relative to liabilities

compared to others in the industry. This is a good aspect for investors given a higher ratio.

Quick Ratio2015 2014 2013 2012 2011

DPS 0.97 0.82 0.75 0.79 0.62KO 0.89 0.81 0.90 0.77 0.78PEP 1.05 0.85 0.93 0.80 0.62MDLZ 0.52 0.46 0.56 0.71 0.45


Operating


DPS 991 1,022 866 458 760

When looking at revenues generated via cash flow from operations, it is seen that the

company has seen quite a bit of volatility in this area since 2011.This volatility can be a negative

signal for investors, but the decreased revenue from 2014 could be a negative sign also.


DPS 764 703 624 629 606KO 7,366 7,124 8,626 9,086 8,634PEP 5,501 6,558 6,787 6,214 6,462MDLZ 7,291 2,201 3,935 3,055 3,547

It is seen that net income from operating cash flows has been quite volatile since 2011.

This increase in net income since 2011 is a good sign for investors, but the recent decrease from

2014 is also a red flag. It should also be noted that the company had very low net income in

2012. It is a bad sign for anyone looking to invest in Dr. Pepper Snapple. When compared to

competitors in the industry, Dr. Pepper has a significantly lower level of net income. This could

mean that competition has better business practices and can potentially gain a competitive

advantage over Dr. Pepper Snapple. They also have a significantly lower amount of inventory,

other working capital, and other non-cash items, which shows clearly in the cash flow statement

via Morningstar.

Free Cash Flow:2015 2014 2013 2012 2011

Operating Cash Flow 991 1,022 866 458 760

Capital Expenditure

(180) (171) (184) (200) (218)

As said earlier, when looking at revenues generated via cash flow from operations, it is

seen that the company has seen quite a bit of volatility in this area since 2011. This volatility can

be a negative signal for investors, but the decreased revenue from 2014 could be a negative sign

also. Another thing to consider is that their capital expenditure is much less than operating cash

flow, which is a good thing because high capex drains cash, this means lower dividend and

higher geared. Many times, high capex companies require investors to come up with financing

through rights issue or placement or capital increase, which dilutes the shareholdings. Otherwise,

more debt has to be taken up, which investors hate the most.

Dr. Pepper Snapple Company Analysis

Industry: Beverage- Soft Drinks

Sector: Consumer Defensive

Ticker: DPS

Stock Exchange: NYSE

Headquarters: Plano, Texas

Company Description

Dr. Pepper Snapple Group, Inc. is a leading integrated brand owner, manufacturer and

distributor of non-alcoholic beverages in the United States, Canada and Mexico with a diverse

portfolio of flavored carbonated soft drinks and non-carbonated beverages, including ready-to-

drink teas, juices, juice drinks, water and mixers. They have some of the most recognized

beverage brands in North America, with significant consumer awareness levels and long

histories that evoke strong emotional connections with consumers.

Corporate Strategy

Build and enhance leading brands:They use an on-going process of market and consumer analysis to identify key brands

that they believe have the greatest potential for profitable sales growth. They also intend to

continue to invest most heavily in these key brands to drive profitable and sustainable growth by

strengthening consumer awareness, developing innovative products and brand extensions to take

advantage of evolving consumer trends, improving distribution and increasing promotional

effectiveness.

Focus on opportunities in high growth and high margin categories:

Dr. Pepper Snapple is focused on driving growth in their business in selected profitable

and emerging categories. These categories include ready-to-drink teas, energy drinks and other

functional beverages. They also intend to capitalize on opportunities in these categories through

brand extensions, new product launches and selective acquisitions of brand and distribution

rights.

Increase presence in high margin channels and packages:

They focus on improving their product presence in high margin channels, such as

convenience stores, vending machines and small independent retail outlets, through increased

selling activity and investments in coolers and other cold drink equipment. They intend to

increase demand for high margin products like single-serve packages for many of their key

brands through increased promotional activity and innovation.

Leverage our integrated business model:

They believe their integrated brand ownership; bottling and distribution business model

provides them opportunities for net sales and profit growth through the alignment of the

economic interests of their brand ownership and their bottling and distribution businesses. They

aim to leverage their integrated business model to reduce costs by creating greater geographic

manufacturing and distribution coverage and to be more flexible and responsive to the changing

needs of their large retail customers by coordinating sales, service, distribution, promotions and

product launches.

Strengthen our route-to-market through acquisitions:

The acquisition and creation of their Bottling Group is part of their longer-term initiative

to strengthen the route-to-market for their products. They believe additional acquisitions of

regional bottling companies will broaden their geographic coverage and enhance coordination

with their large retail customers.

Improve operating efficiency:

They believe their recently announced restructuring will reduce their selling, general and

administrative expenses and improve their operating efficiency. In addition, the integration of

recent acquisitions into their Bottling Group has created the opportunity to improve their

manufacturing, warehousing and distribution operations.

Life Cycle

The Soda Production industry is in the mature stage of its life cycle. Over the 5 years to

2020, industry value added, which measures an industry's contribution to the economy, is

forecasted to decrease at an annualized 0.8%. In comparison, GDP is projected to grow 2.2% per

year on average over the same period. While the industry's energy drink segment continues to

grow, these new gains continue to be offset by declining sales of carbonated soft drinks. These

contradictory trends have somewhat canceled each other out, signaling that the industry is

squarely within the mature phase of its life cycle.

Products

CSDs:

#1 in its flavor category and #2 overall flavored CSD in the U.S.. Distinguished by its unique

blend of 23 flavors and loyal consumer following. Flavors include regular, diet, cherry and Dr.

Pepper TEN. Oldest major soft drink in the U.S., introduced in 1885.

Their core four brand: Canada Dry, 7UP, A&W Root Beer, and Sunkist. Canada Dry is

#1 ginger ale in the U.S. and Canada, which includes regular, diet and Canada Dry TEN. Brand

also includes club soda, tonic, sparkling seltzer water and other mixers. Created in Toronto,

Canada in 1904 and introduced in the U.S. in 1919. 7UP is #2 lemon-lime CSD in the U.S.

Flavors include regular, diet, cherry and 7UP TEN. The original "Un-Cola," created in 1929.

A&W Root Beer is #1 root beer in the U.S. Flavors include regular, diet, A&W TEN and cream

soda. A classic all-American beverage first sold at a veteran's parade in 1919. Lastly, Sunkist is

#1 orange CSD in the U.S. Flavors include orange, diet, grape, strawberry, Sunkist TEN and

other fruits. Licensed to us as a CSD by the Sunkist Growers Association since 1986.

Markets

They hold the #1 position in the U.S. flavored CSD beverage markets by sales volume

according to Nielsen. They are also a leader in the Canada and Mexico beverage markets. Their

portfolio of products is biased toward flavored CSDs, which continue to gain market share

versus cola CSDs, but also focuses on growing categories such as teas and juices. They believe

marketing and product innovations that target fast growing population segments, such as the

Hispanic community in the U.S., could drive market growth.


They are focused on improving their product presence in high margin brands, products

and channels, such as convenience stores, vending machines and small independent retail outlets,

through increased selling activity. They also intend to increase demand for high margin products

like single-serve packages for many of their key brands through increased in-store activity. They

believe their integrated brand ownership, manufacturing and distribution business model

provides them opportunities for net sales and profit growth through the alignment of the

economic interests of their brand ownership and their manufacturing and distribution businesses.

They intend to continue leveraging their integrated business model to reduce costs by

optimizing geographic manufacturing and distribution coverage and to be more flexible and

responsive to the changing needs of their large retail customers by coordinating sales, service,

distribution, promotions and product launches. Strengthening their route-to-market will ensure

the ongoing health of their brands. They continue to invest in information technology to

improve route productivity and data integrity and standards. With third party bottlers, they

continue to deliver programs that maintain priority for their brands in their systems.


As of December 31, 2015, they operated 21manufacturing facilities across the U.S. and

Mexico. Almost all of their CSD beverage concentrates are manufactured at a single plant in St.

Louis, Missouri. All of their manufacturing facilities are either regional manufacturing facilities,

with the capacity and capabilities to manufacture many brands and packages, facilities with

particular capabilities that are dedicated to certain brands or products, or smaller bottling plants

with a more limited range of packaging capabilities.

They have a variety of production capabilities, including hot-fill, cold-fill and aseptic

bottling processes, and they manufacture beverages in a variety of packaging materials, including

aluminum, glass and PET cans and bottles and a variety of package formats, including single-

serve and multi-serve packages and "bag-in-box" fountain syrup packaging. In 2015, 91% of

their manufactured volumes came from their brands and 9% from third party and private-label

products. They also use third party manufacturers to package their products for us on a limited

basis.

The principal raw materials they use in their business, which they commonly refer to as

ingredients and packaging costs, are aluminum cans and ends, glass bottles, PET bottles and

caps, paper products, sweeteners, juice, fruit, water and other ingredients. These ingredients and

packaging costs can fluctuate substantially. As it relates to their costs of sales, these costs make

up a significant portion of their costs, as shown below. In addition, they are significantly

impacted by changes in fuel costs, which can also fluctuate substantially, due to the large truck

fleet they operate in their distribution businesses. Under many of their supply arrangements for

these raw materials, the price they pay fluctuates along with certain changes in underlying

commodities costs, such as aluminum in the case of cans, natural gas in the case of glass bottles,

resin in the case of PET bottles and caps, corn in the case of sweeteners and pulp in the case of

paperboard packaging. When appropriate, they will mitigate the exposure to volatility in the

prices of certain commodities used in their production process through the use of forward

contracts and supplier pricing agreements. The intent of the contracts and agreements is to

provide a certain level of short-term predictability in their operating margins and their overall

cost structure, while remaining in what they believe to be a competitive cost position.

Distribution

They are a leading integrated brand owner, manufacturer and distributor of non-alcoholic

beverages in the U.S., Mexico and the Caribbean and Canada. They also sell certain of their

products to distributors in Europe and Asia. They recognized net sales from the shipment of 1.6

billion equivalent 288 fluid ounce cases in 2015. The following chart provides details regarding

sources of their total 288 fluid ounce cases in 2015:

Competition

The consumer beverage industry is highly competitive and continues to evolve in

response to changing consumer preferences. Competition is generally based upon brand

recognition, taste, quality, price, availability, selection and convenience. Brand recognition can

also be impacted by the effectiveness of their advertising campaigns and marketing programs, as

well as their use of social media. They compete with multinational corporations with significant

financial resources. Their two largest competitors in the consumer beverage market are Coca-

Cola and PepsiCo, which represent approximately 46% of the U.S. market by retail sales,

according to Nielsen. They also compete against other large companies, including Nestle, Kraft

Foods and Campbell Soup. These competitors can use their resources and scale to rapidly

respond to competitive pressures and changes in consumer preferences by introducing new

products, changing their route to market, reducing prices or increasing promotional activities.

As a bottler and manufacturer, they also compete with a number of smaller bottlers and

distributors and a variety of smaller, regional and private label manufacturers, such as Cott.

Smaller companies may be more innovative, better able to bring new products to market and

better able to quickly exploit and serve niche markets. They also compete for contract

manufacturing with other bottlers and manufacturers. They have lower exposure to energy

drinks, some of the faster growing bottled water segments in the overall consumer beverage

market. In Canada, Mexico and the Caribbean, they compete with many of these same

international companies as well as a number of regional competitors


Their research and development team is composed of scientists and engineers in the U.S.

and Mexico who are focused on developing high quality products which have broad consumer

appeal, can be sold at competitive prices and can be safely and consistently produced across a

diverse manufacturing network. Their research and development team engages in activities

relating to product development, microbiology, analytical chemistry, process engineering,

sensory science, nutrition, knowledge management and regulatory compliance. They have

particular expertise in flavors and sweeteners, which allows them to focus their research in areas

of importance to the industry, such as new sweetener development.

Foreign Sales and Earnings

Their Latin America Beverages segment is a brand ownership, manufacturing and

distribution business. This segment participates mainly in the carbonated mineral water, flavored

CSD, bottled water and vegetable juice categories, with particular strength in carbonated mineral

water, vegetable juice categories and grapefruit flavored CSDs. In 2015, their Latin America

Beverages segment had net sales of $497 million, with their operations in Mexico representing

approximately 90% of the net sales of this segment. Key brands include Peñafiel, Squirt,

Aguafiel, Clamato and Crush.

In Mexico, they manufacture and distribute their products through their bottling

operations and third party bottlers and distributors. In the Caribbean, they distribute their

products through third party bottlers and distributors. They have also begun to distribute certain

products in other international jurisdictions through various third party bottlers and distributors.

In Mexico, they also participate in a joint venture to manufacture Aguafiel brand water

with Acqua Minerale San Benedetto. They sell their finished beverages through all major

Mexican retail channels, including "mom and pop" stores, supermarkets, hypermarkets,

convenience stores and on-premise channels.

In 2015, OXXO and Walmart, the largest customers of their Latin America Beverages

segment, accounted for approximately 11% and 10% of their net sales in this segment,

respectively.


They are subject to a variety of federal, state and local laws and regulations in the

countries in which they do business. Regulations apply to many aspects of their business,

including their products and their ingredients, manufacturing, safety, labeling, transportation,

recycling, advertising and sale. For example, their products and their manufacturing, labeling,

marketing and sale in the U.S. are subject to various aspects of the Federal Food, Drug, and

Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection

laws and state warning and labeling laws.

In Canada and Mexico, the manufacture, distribution, marketing and sale of many of their

products are also subject to similar statutes and regulations. Additionally, the government of

Mexico enacted broad based tax reform, including a one peso per liter tax on the manufacturing

of certain sugar-sweetened beverages, which went into effect January 1, 2014. Their bottlers use

various refillable and non-refillable, recyclable bottles and cans in the U.S. and other countries.

Various states and other authorities require deposits, eco-taxes or fees on certain containers.

Similar legislation or regulations may be proposed in the future at local, state and federal

levels, both in the U.S. and elsewhere. In Mexico, the government has encouraged the soft drink

industry to comply voluntarily with collection and recycling programs of plastic material, and

they are in compliance with these programs.

In the normal course of their business, they are subject to a variety of federal, state and

local environmental, health and safety laws and regulations. They maintain environmental, health

and safety policies and a quality, environmental, health and safety program designed to ensure

compliance with applicable laws and regulations. The cost of such compliance measures does not

have a material financial impact on their operations.

Personnel

As of December 31, 2015, they employed approximately 19,000 employees. In the U.S.,

they have approximately 16,000 full-time employees. They have union collective bargaining

agreements covering approximately 4,000 full-time employees. Several agreements cover

multiple locations. These agreements address working conditions as well as wage rates and

benefits. In Mexico and the Caribbean, they employ approximately 3,000 full-time employees,

with approximately 2,000 employees party to collective bargaining agreements. They do not

have a significant number of employees in Canada or overseas.

Properties

As of December 31, 2015, they have owned or leased 148 office buildings,

manufacturing facilities and principal distribution centers and warehouse facilities operating

across the Americas. Their corporate headquarters are located in Plano, Texas, in a facility that

they own

Management

Larry D. Young- President and Chief Executive Officer

Marty Ellen- Chief Financial Officer

Jim Baldwin-Executive Vice President and General Counsel

Rodger Collins- President- Packaged Beverages

Derry Hobson- Executive Vice President- Supply Chain

Jim Johnson- President- Concentrate Sales


Life Cycle Position


Companies in the Soda Production industry manufacture soft drinks by blending various

ingredients with artificially carbonated water. This industry also includes energy beverages.

Producers of bottled water, ready-to-drink teas and coffees, as well as juice manufacturers are

excluded from this industry. Falling per capita soft drink consumption significantly dampened

the Soda Production industry's performance. Demand for both regular and diet carbonated soft

drinks has declined as more consumers turned to healthier beverages to quench their thirst.

However, robust growth of energy drinks brands kept the industry from completely going flat.

Over the five years to 2020, the industry's soda segment will experience a difficult operating

environment, as government campaigns promoting healthier habits cause consumers to purchase

less soda, despite improving consumer spending. Even with the introduction of healthier soda

made with all-natural ingredients, volume consumption is anticipated to further decline as taxes

and bans on soda are implemented at the state and city levels of government. Health concerns are

also expected to curb demand for energy drinks, causing this product segment to grow more

conservatively than during the previous period. In the next five years to 2020, the Soda

Production industry is expected to decline at an average annual rate of 1.1% to $40.7 billion.

Business Cycle

Revenue Growth

Year Revenue $ million Growth %2002 42,004.1 0.02003 42,726.6 1.72004 46,597.6 9.12005 49,818.0 6.92006 47,048.3 -5.62007 49,779.7 5.82008 48,958.6 -1.72009 46,049.1 -6.02010 45,758.1 -0.62011 49,037.8 7.22012 45,113.8 -8.02013 44,923.2 -0.42014 44,307.7 -1.42015 43,056.6 -2.8

External Factors

As per capita soft drink consumption declines, demand from downstream markets, such

as wholesalers and retailers, will decline and negatively impact industry revenue. Furthermore,

price-based competition intensifies in response to weakened demand, which can negatively affect

producers' revenue and profitability.

Healthy eating index

As a growing number of consumers become more health conscious, indicated by a rise in

the healthy eating index, demand for regular, calorie-laden soda, energy drinks and sports drinks

is expected to decline. Furthermore, consumers have become more aware of the negative health

consequences of drinking both regular and diet beverages in recent years.

Per capita disposable income

While some consumers drink soda, energy drinks and sports drinks regularly, these

beverages represent discretionary items for most consumers. Consequently, as disposable income

levels decline, consumers are likely to turn to more affordable options, such as bottled and tap

water.

Per capita sugar and sweetener consumption

As per capita sugar and sweetener consumption declines, demand from consumers who consume

products with sugar and sweeteners will decline causing a drop in demand from downstream

markets, such as retailers. Sugar and sweetener consumption moves inversely with the Healthy

eating index, thus the per capita sugar and sweetener consumption is expected to stagnate in

2015.

Price of corn

High fructose corn syrup is a key ingredient used to produce regular soda. A rise in the

price of corn causes producers to either pass along the cost increase to downstream markets in

the form of higher prices or absorb the cost to the detriment of profitability. The price of corn is

expected to decline in 2015, presenting an opportunity for the industry.

Demand Analysis

Products

As it can be seen above the beverage industry, more specifically the soft drinks sector is

mainly focused on regular soft drinks taking up just over 50% of the products and services sector

as opposed to the 25% each for diet soft drinks and energy drinks. Also, grocery stores at just

above 40% take up the majority of the major market segmentation with gas stations, warehouse

clubs and super centers, vending machines, and others all about the same between 10% and 20%.

Supply Analysis


The Soda Production industry exhibits a high level of concentration. IBIS World

estimates that the four largest producers account for a combined 71.0% of industry revenue in

2015. Market share has increased significantly over the past five years as the leading producers,

The Coca-Cola Company and PepsiCo, have undergone major structural changes. These

companies previously partnered with many bottlers to produce finished beverages under their

brand names but have recently acquired these bottling operations to obtain greater control of the

production process. They also engage in significant marketing and brand promotion activities to

generate brand loyalty. Finally, the leading soda manufacturers have historically purchased

regional brands to expand their presence in the market and diversify their product portfolios,

which have raised the level of concentration in this industry.

Ease of Entry

The barriers to entry in this industry are high and steady. There are significant barriers to








position and promote their brand.

Profitability

38,000.00

40,000.00

42,000.00

44,000.00

46,000.00

48,000.00

50,000.00

52,000.00Revenue $ Million

Revenue $ Million

20022003200420052006200720082009201020112012201320142015

-10

-5

0

5

10

15

Growth %

Growth %

Demand Analysis

Demand for industry products depends on many factors including price levels, consumers' health

concerns and product innovation. Generally, higher prices for soda will place downward pressure

on all varieties of CSDs. Due to the homogeneous nature of soda, when the price of branded

products increases at the retail level, many consumers opt for more affordable branded products

or trade down to generic brands. However, many soda drinkers are also brand-loyal and will

purchase their favorite brand despite higher prices. Additionally, higher per capita disposable

income enables consumers to purchase more soda. Growing health and nutrition concerns have

negatively impacted demand for soda in recent years. Although producers introduced a greater

variety of low-calorie and naturally sweetened soda, Americans still perceive CSDs as unhealthy

when compared with bottled water, iced tea and a variety of juice beverages. The healthy eating

index has increased from 65.6% in 2013 to 67.8% in 2015 showing that Americans have been

opting for healthier choices, and furthermore, is forecast to continue rising in the next few years.

Marketing is another significant driver of demand for industry goods. In particular, energy drink

producers invest a great deal of their revenue to promote their products on college campuses and

in major cities. All companies in this industry also partner with popular athletes, musicians and

celebrities to send targeted messages to teens and young adults.

Capital Intensity

The Soda Production industry exhibits a high level of capital intensity. Using wages as a

proxy for labor and depreciation as a proxy for capital, IBIS World estimates that for every

dollar spent on labor in the industry, $0.37 will be spent on capital in 2015. Capital expenditure

is required in this industry to purchase and maintain machinery and equipment that operators rely

on to produce a high volume of soda and functional beverages on a daily basis. Capital intensity

has fallen slightly over the past five years due to falling demand for traditional soda brands and

dull industry profitability. In turn, operators have begun their investments in new machinery, and

in some cases, opting instead to shutter their factories. Depreciation's share of revenue has also

declined as revenue has grown at a faster annualized rate than capital expenditure.

Profit

The industry's average profit, defined as earnings before interest and taxes, accounted for

an estimated 6.2% of industry revenue in 2015. This figure represents a decline from 6.1% in

2010. While the leading manufacturers experience higher earnings than the industry average,

regional soft drink and private label producers are much less profitable due to the lower price

point of their products. As competition intensified and demand for soda declined over the past

five years, many producers were pressured to lower the prices they charge downstream

customers while investing in advertising and promotional campaigns to drive demand for their

drinks.

Purchases

Although the markup for soda, energy and sports drinks over the cost of raw materials is

high, purchases of raw material account for the largest expense for soda producers.

Manufacturers purchase ingredients such as carbon dioxide gas, sugar, artificial sweeteners, high

fructose corn syrup, caffeine, flavorings and food color. The fluctuating costs of key ingredients

caused purchases' share of revenue to increase over the past five years.


The industry's cost structure is based on estimates for total enterprises. Thus, primary

costs such as purchases and wages vary from producer to producer. While changes in demand

can significantly impact smaller operators' earnings, multinational companies with greater

resources are able to adjust quickly to market conditions. Labor costs comprise about 6.0% of

revenue in 2015, which represents a slight increase from 5.7% in 2010. The rise in wage costs

can be attributed to producers raising wages as the overall economy recovered. This increase is

also due to rising demand for energy drink products; this segment has performed much better

than traditional CSD sales over the past five years. Employment is estimated to have increased as

well at an annualized rate of 0.8% over the five years to 2015 due to this trend.

Pricing

Price levels are important, many consumers are loyal to specific brands and are willing to

pay a premium for their brand of choice. The leading soda, energy drinks and sports drink

producers invest heavily in marketing and promotions to further drive brand loyalty among

consumers. The range of products that a manufacturer produces is also an important basis of

competition





of transporting and distributing industry goods. The major export markets are Canada, Mexico,

Taiwan and Vietnam. Canada and Mexico experience close proximity to the United States and

benefit from favorable trade conditions through the North American Free Trade

Agreement. Imports of industry goods have increased in recent years. Switzerland, Austria,

Mexico and Thailand represent the leading sources of industry imports. Switzerland and Austria

remain the leading sources of imports, driven by popular energy drink brands, such as Red Bull.

Over the five years to 2015, imports are expected to increase an annualized 10.3% to $2.6

billion. As demand for imported beverages grows in the upcoming years, imports' share of

domestic demand is anticipated

to increase.

Porter’s Five Forces

Threat of New Entrants

Barriers to entry in this industry are high and steady. There are significant barriers to








position and promote their brand. A high degree of market saturation also acts as a barrier to

entry. Not only is the market saturated, but demand for soda is also declining in the United

States. While niche producers that target specific regions and consumer groups have appeared in

recent years, they have not been able to obtain significant market share. However, many private

label brands were introduced during the recession when consumers sought more affordable

alternatives at retail stores.


While larger manufacturers like PepsiCo and The Coca-Cola Company also produce

noncarbonated beverages, the emergence of companies that specialize in these smaller beverage

categories continue to threaten the position of the major soda producers.

Due to changing consumer tastes and growing health concerns, producers have

introduced a variety of brand extensions that are made with healthier sweeteners and contain

fewer calories. To capitalize on the growing popularity of natural zero-calorie sweeteners and

low-calorie beverages, soda producers have competed to be the first to introduce alternative low-

calorie soda beverages in recent years.


While large retailers, such as Walmart and Safeway, have lots of shelf space to offer a

variety of soda brands, smaller downstream markets usually carry a limited number of products.

Many convenience stores, vending machines and food service operators limit their soda offerings

to one manufacturer. For instance, many vending machines carry only Pepsi or Coca-Cola

products, which makes it even more difficult for smaller competitors to obtain contracts with

downstream markets


Industry operators produce a variety of soda products in different flavors, container types,

container sizes and caloric content. Offering a range of products gives producers a competitive

advantage when negotiating with retailers, boosts brand loyalty among consumers and enables

producers to tap into new markets and consumer groups. Additionally, wholesalers and large

retailers prefer to source a variety of goods from one producer rather than several producers to

reduce transaction costs, further incentivizing manufacturers to expand their product portfolios.


Competition with producers of other ready-to-drink beverages has intensified over the

five years to 2015. Mainly the growths of the bottled water and juice production industry have

declined revenue growth for soda producers. Products that are manufactured by juice producers

such as sparkling fruit drinks have experienced growth in recent years.

Industry Analysis:Securities Brokerage


Life Cycle Position


The Securities Brokering industry buy, sell and issue securities varying from typical

assets such as stocks and bonds to alternative assets such as mortgage-backed securities. The

industry generates revenue from trading commissions as well as from transaction and asset-based

fees. With the recent popularity of electronic trading and discount brokering, many industry

operators have started to offer more value-added services, such as investment advice for clients.

Over the past five years, industry revenue has trended upward at an annualized rate of 1.5% to an

estimated $140.1 billion. A slow financial and economic market recovery, linked with decreasing

securities trading volumes, caused revenue to decline in 2010 and again in 2012 before slowly

starting to improve. Moreover, the average industry profit margin has declined due to various

competitors from online trading platforms that eliminate the demand for financial intermediaries.

Business Cycle

The Securities Brokerage industry is mature, indicated by technological change, declining

profitability and increasing regulation. Developments in electronic trading platforms and the

widespread use of the internet lowered barriers to entry within the industry, resulting in higher

competition and lower commission rates. Since then, commissions have declined as a share of

industry revenue as fee-based structures become more prominent. Industry value added, or

contribution to the overall economy, is anticipated to increase at an average annual rate of 1.3%

over the 10 years to 2020. In comparison, GDP is projected to grow at a similar annualized rate

of 2.2%, indicating that the Securities Brokerage industry is mature.

External Factors

Technology

The industry's use of telecommunications services, information technology and electronic

distribution technologies has grown rapidly. Technology in this industry is used to improve the

effectiveness and efficiency of sending information and provides assistance to clients, which

lowers processing and labor costs. Technology expenses will continue grow as a share of

revenue because firms will compete for trading platform features and require the IT foundation

to support and increase their market shares.

Algorithmic trading and high frequency trading are the two latest market technological

developments that could affect future revenue and profitability. Large investment banks such as

Morgan Stanley, Goldman Sachs, Merrill Lynch and small proprietary trading firms have

expensive technology to cut trading times down to milliseconds in order to enter and exit trade

positions rapidly. They look to find small securities price inefficiencies in the market in a method

known as market making. Current estimates place nonhuman trading on exchanges between

50.0% and 70.0% of total trade volume. Several studies say that high frequency trading adds

major liquidity to markets, improves securities pricing and lowers trading costs. This type of

trading can have significant impacts on investor confidence in the future and pose a significant

threat to future earnings.

Government

Regulation requirements made by the Securities and Exchange Commission (SEC) as

well as regulatory requirements are set by other federal government and self-regulating

organizations. The SEC and state securities commissions require that broker-dealers and their

representatives be registered federally and in the state that the participants operate their business.

The regulations help keep everyone on the same playing field and that no trader will have an

advantage over its competitors. The SEC takes regulation very seriously and has harsh

consequences with people who back the rules. The role of the SEC is to protect investors and

maintain the integrity of the securities markets. The SEC oversees key participants in the

securities world, including stock exchanges, broker-dealers, investment advisers, mutual funds,

and public utility holding companies. Federal or state securities laws require brokers, advisers

and their firms to be licensed or registered with the Financial Industry Regulatory Authority.

Investment advisers who manage $25 million or more in client assets must register with the SEC.

If they manage less than $25 million, they must register with the state securities agency in the

state where they have their principal place of business.

Legislation can also have adverse effects on the industry. New higher capital

requirements for brokerage firms that engage in margin lending for trading acts as a barrier to

entry for small firms. The extensive registration, regulation, and disclosure requirements on

brokers who provide investment advice also act as a barrier to entry. It is not yet known whether

the 2010 Dodd-Frank Act will impact principal trading, underwriting, market making or other

brokerage revenue streams. Due to the likelihood of future legislation regarding the sale of risky

financial products and additional disclosure requirements, IBIS World estimates legislation will

increase, potentially hurting the growth of independent financial advisers and profit.

Demographic

The securities brokering industry does not rely a whole lot on demographics due to the

vast locations in which they are bought and sold. Of course you have the big financial hubs like

New York City and Chicago but with computers and all the new technology, one can basically

trade anywhere they wish. The 78 million Americans born between 1946 and 1964 haven't saved

enough for retirement or forced the government to properly fund their entitlements. As a result,

they'll be a drag on the investment markets for decades.

Although many baby boomers have already retired, millions of them still have 15 to 20

years of work ahead. They're not all retiring at once. Also consider that many, if not most,

Americans haven't saved enough to retire early. Research from Fidelity indicates, “that four in 10

retiree households don't have enough income to cover the bills”. A survey by the Employee

Research Institute found that 47% of Americans aged 45 and older have less than $25,000 saved,

not counting home equity and defined-benefit pensions. The retirement age will have to rise,

which will spread out the boomer effect.

The amount of baby boomers that have retired has affected the industry greatly because

there are now more and more people familiar with the technology who have been using it more

like the millennial population and generations who grew up during the technology boom

Foreign

This also can be related to demographics because using trading platforms can allow

people to trade just about every market available foreign or domestic. Other countries can trade

in the US markets just like Americans can trade in foreign markets

Demand Analysis

As it can be seen in the above two charts, the securities brokering industry is somewhat

balanced in the number of product and services included. What can be seen from the product and

service chart on top is that trading debt instruments takes up the largest amount of segmentation

at 22.5%, which means if that is the largest section, it makes for a balanced industry. The second

chart displaying major market segmentation also has a good amount of balance to it where

institutional clients with investment funds are at 27.2% of the market being the largest amount.

Supply Analysis


The Securities Brokering industry, despite a fairly low level of concentration, is

becoming increasingly concentrated. Information technology advances continue to provide

economies of scale in the delivery of services. At the same time, brokerage services are

becoming just one of a range of financial services delivered to institutional and retail clients.

Ease of Entry

New entrants to this industry are most likely to be smaller companies of existing financial

institutions or associated with current players. Firms with an existing client base and distribution

network whose size is big enough to collect economies of scale are the most likely new entrants

to succeed in the industry. It is too late this day in age to start from scratch; you need a base with

clientele and capital.

ProfitabilitySupply Analysis

While the share of revenue generated from securities brokerage activity has declined,

industry players have grown by offering services traditionally provided by companies in other

industries, primarily in the Financial Planning and Advice industry. Asset-based fees are growing

in importance, as is revenue from wealth management and retail banking services provided to

brokerage clients. Through mergers and acquisitions, financial companies are seeking greater

economies of scale and providing value-added services to increase revenue.

The capacity of trading systems has been increasing, providing growing economies of

scale and scope for trading financial instruments. The increase in financial services that firms

now provide is pressuring smaller firms to further consolidate. In the future, the role of electronic

exchanges in providing trading services directly to institutional clients and increasing broker

disintermediation will contribute to further decline in commission-based revenue for securities

brokerage firms. Conversely, some of the large mergers that arose from the subprime mortgage

crisis will likely make securities brokerage services available to a wider market as part of a

bundle with wealth management services.

Revenue GrowthYear Revenue $ million Growth %

2005 164,281.1 6.12006 186,778.2 13.72007 183,087.6 -2.02008 80,844.5 -55.92009 133,136.3 64.72010 129,865.2 -2.52011 131,424.8 1.22012 129,751.7 -1.32013 135,764.7 4.62014 139,582.0 2.82015 140,100.8 0.4

Revenue OutlookYear Revenue $ million Growth %2016 142,841.0 2.02017 146,609.6 2.62018 149,483.1 2.02019 151,658.4 1.52020 154,408.2 1.82021 156,579.3 1.4

20052007

20092011

20132015

20172019

20210.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

160,000.00

180,000.00

200,000.00

Revenue and Growth Outlook

Revenue and Growth Outlook

20052007

20092011

20132015

20172019

2021

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Revenue Growth and Outlook %

Revenue Growth and Outlook %

Demand Analysis

Demand for securities brokering services is mainly decided by investors' willingness

to invest their wealth into capital markets. Investor doubt is a measure of investors'

willingness to take risks, based on their assessment of the market. The demand for

securities brokerage services grows when uncertainty is low and investors are willing to

invest more money in capital and commodity markets.

A sign of investor funds available is the personal savings rate, which decreased over

the past five years. The level of interest rates is also essential because stocks normally look

more attractive than bonds and other investments during periods of lower interest rates.

Cost FactorsCapital Intensity

Capital intensity ultimately depends on the size of the operation. The industry is labor-

intensive with wages accounting for 36.4% of revenue. Labor expenses include the salaries,

bonuses and benefits paid to professionals and administrative staff. Given very high average

wage costs, this industry is considered to have a lower than average level of capital intensity

compared similar sectors and the economy as a whole.

Policies

The Securities Brokering industry is extremely monitored at the federal and state levels in

the United States. People in the field are required to register as broker-dealers with the Securities

and Exchange Commission (SEC) and with state securities commissions in the states where they

conduct business. The role of the SEC is to protect investors and maintain the integrity of the

securities markets. The SEC monitors main participants in the securities world, including stock

exchanges, broker-dealers, investment advisers, mutual funds, and public utility holding

companies.

Many people in the industry are also members of self-regulatory associations and various

securities exchanges, like Chicago Board of Trade and Chicago Board Options Exchange. The

Commodity Futures Trading Commission, the National Futures Association, the Federal Deposit

Insurance Corporation, the Federal Reserve, the Municipal Securities Rulemaking Board and the

Office of Thrift Supervision are just a few regulatory organizations that may be included.

Profit

The average industry profit margin is projected to increase to 14.7% of revenue in 2015.

Although this share is higher than its five-year low of 12.8% in 2010, profit margins remain

lower than their previous highs before the financial crisis. More competition also comes from the

rise of discount brokers and electronic trading systems have lowered profit over the past five

years. Higher prices for trading services have also hurt profit margins, as stock exchanges began

to merge and shift from privately owned to public.


Wages represent the largest expense for this industry, using 36.4% of revenue in 2015.

This shows a decrease from 39.9% in 2010. Labor costs vary depending on the type of brokerage

services available. Full-service brokerage firms, including investment banks, have higher labor

costs, while discount brokerage firms offering only trade execution and online brokerage firms

have lower labor costs. Clearing and execution costs include the cost of floor brokerage,

commission paid to other brokers and the cost of clearing and settlement.

Trading platforms allow brokerages to reduce communication and equipment costs as a

percentage of revenue as the volume of trade increases. Other costs include rent and utilities,

purchases of hardware and software, marketing costs, professional fees and general

administration. Online brokers promoting their services to retail clients may have substantial

advertising and marketing costs.

Pricing

Discount and online brokers entered the industry in the 1980s and late 1990s,

respectively. Online brokers are very competitive in pricing, and larger online brokers have the

advantage of lower expenses due to the economies of scale provided by trading platforms that

have scalability.


The Securities Brokering industry is services-based; therefore, trade is not valid. While

industry services can include brokering transactions for consumers worldwide in global financial

markets, industry revenue in this report reflects revenue generated from US-based enterprises

and establishments.

Porter’s Five ForcesThreat of New Entrants

The barriers to entry in this industry are medium and are steady. Those who wish to start

up as securities brokerages face major marketing costs in order to gain market credibility.

Additionally, startups will require upfront funds to create effective distribution channels.

Although technology has lowered the cost of trading platforms and products and services

distribution networks, allowing independent advisers to enter the industry, significant investment

in the technology required to develop and run a web-based platform for clients is still sizable.

Investments in computer-based settlement systems are also required to maintain and grow market

share. Newly formed entities in the industry face additional challenges in attracting and retaining

qualified and experienced staff.


Rivalry within securities brokerage firms is very high and the trend is increasing. A lot of

factors including brand name, the number of products and services offered, research and pricing.

The amount of competition usually varies depending on if the services are geared towards

institutional clients or retail clients using full-service firms or discount trading firms online.

Competition for institutional clients is based on reputation for investment returns and

financing services. Full-service brokers focus on product and service offerings, for example,

retirement and financial planning, equity advising, funds management and equity margin

lending. Giving customer’s the chance to engage in future initial public offerings is another

benefit.

Discount brokers compete on trading platform features. Recently, online brokers are

offering more varieties of products and services online, including access to market information,

mutual funds, IPOs, margin lending and cash management trusts. The amount of brokerage fees

and commissions is a huge form of competition because the one’s with the lower fees usually

tends to have more clients.


The bargaining power of the buyer ties into the competition of the firms because the

clients usually chose the firm that offers the best returns or lower fees for making trades and

transactions. People won’t typically pay extra for a product or service unless they are getting

additional perks or advantages. Usually they will stay with the same firm or bank for a long time

if they are getting positive results and favorable rates.


The bargaining power of the suppliers all depends on if the firm or bank can continually

make the clients satisfied because most of the rates and fees tend to be quite similar in order to

keep up with other competitors.


Threat of substitutes for securities brokerages are deciding if a client will decide to

manage their own account through an online platform and avoid paying commissions and would

pay sometimes less in fees because they are essentially doing someone’s job for them. The

market for securities brokerages is massive so usually if a number of people decide to manage

their own account the firms will not be that negatively affected.

TD Ameritrade Company Analysis

Industry: Investment Brokerage- National

Sector: Financial

Ticker: AMTD

Stock Exchange:

Headquarters: Omaha, Nebraska

Company Description

TD Ameritrade Holding Corporation provides securities brokerage services and related

technology-based financial services to retail investors, traders, and independent registered

investment advisors (RIAs) in the United States.

The company provides its services primarily through the Internet, a network of retail

branches, mobile trading applications, interactive voice response, and registered representatives

through telephone. TD Ameritrade Holding Corporation was founded in 1971 and is

headquartered in Omaha, Nebraska.

Corporate Strategy

TD Ameritrade considers itself an industry leader in product innovation. The company is

committed to delivering the most innovative trading platforms in the world. TD Ameritrade also

emphases the integrity of their business and customer service. Quality can be seen in their

service and in their reputation. The day-to-day actions TD Ameritrade performs are done with

the highest level of integrity and professionalism.

Life Cycle

With the changing technology industry, any company that wants to compete needs to

have a significant amount of capital to invest in research and development, which is about 37%

of revenue. Also, with such change occurring rapidly, employees in this industry must be

compensated fairly for the quality of work they perform. With these large expenses and

competitive environment, it shows that TD Ameritrade is a mature company by competing in a

harsh industry with large competitors.

Products

Its products and services include tdameritrade.com web platform for self-directed retail

investors; Trade Architect, a Web-based platform that enables active investors and traders

identify opportunities and stay informed; thinkorswim, a desktop platform for traders; and TD

Ameritrade Mobile, which allows on-the-go investors and traders to trade and monitor accounts

from Web-enabled mobile devices.

Markets

TD Ameritrade operates in many different financial markets nationally and

internationally. The most popular markets include New York Stock Exchange, Chicago Board of

Trade, Chicago Board Options Exchange, and many other foreign markets.


Being the best rated online brokerage company in the country it makes it easy for TD

Ameritrade to bring in clients because of their great reputation. The clients come from all over

the United States, Europe and Asia and have access to the many office locations and the amount

of customer support that TD Ameritrade offers whether it is over the phone or chatting via online

messaging, they put the client first and that is why I believe they are so successful. They also

have a lot of commercials on national television and through the Internet; so many high traffic

areas see their name quite frequently.


Manufacturing cutting edge technology can be a very expensive to develop and put on the

market. TD Ameritrade has arguably the best trading platforms and customer service

representatives in its industry and one of their biggest strengths is that they offer the services free

of charge. They may lose some money by not charging clients a fee to use their products and

services but they believe it gives them an advantage in bringing in clients to their company. The

only fee that they charge is trade commission and every company in their industry also charges a

commission fee. A large amount of R&D expense must be used to ensure that TD Ameritrade is

competing with giants like Fidelity or Charles Schwab.

Distribution

TD Ameritrade doesn’t necessarily distribute products into stores or deliver to doorsteps

but what they do is provide downloadable trading platforms that can be set up on any computer

and all the client needs to do is set up an account and begin to trade. It also helps their company

save from distribution expenses because they have none.

Suppliers and Raw Materials

Being in the investment brokerage industry it requires the use of cutting-edge technology

and some of the fastest computers with processing speeds that are much quicker than the average

computer. In 2009, TD Ameritrade acquired thinkorswim Group Inc., which included the fastest-

growing brokerage at the time, thinkorswim, a company recognized throughout the industry for

its record of innovative technology and sophisticated trading platforms. This most recent

combination allowed TD Ameritrade to further expand its offerings for active traders by

introducing complex options, futures and foreign exchange trading. In 2010 and 2011 the

company embraced mobile devices by developing trading applications for the Android, iPhone,

and iPad. In 2011, the company launched Trade Architect, a streaming web-based trading

platform that brought together the best of thinkorswim and TD Ameritrade.

Competition

TD Ameritrade competes in a highly competitive industry that is constantly evolving and

becoming more and more innovative. Due to this constant changing industry, it is vital that TD

Ameritrade competes on a basis of providing industry leading technology and reliable customer

service. Another advantage TD Ameritrade has over it’s competitors is that they offer

educational online called TD Ameritrade U, which offers access to customized, interactive

learning tools from leading educating affiliates, which its two biggest competitors simply do no

offer. Fidelity and Charles Schwab offer lower fees for trading commission but they also do not

offer the education for the trading, which happens to be a huge competitive advantage for TD

Ameritrade as well as free access to Level 2 quote. It is worth it to pay an extra two-dollars for

trade commissions when clients have access to much more resources.


TD Ameritrade Holding Corporation is an organization that relies very heavily on

research and development spending almost 37% of its revenue. This is a very important sector

of the company. The majority of R&D efforts are focused primarily on developing services and

platforms that are designed to keep up with the competition and evolving market. TD Ameritrade

recently acquired Tacoma, WA-based research and consulting firm FA Insight, in an effort to

provide big data capabilities to its registered investment advisors. The acquisition will enable

access to FA Insight’s more than a decade of survey data and its industry studies for advisers

including “Growth by Design”, which analyses how firms can achieve sustainable growth and

"People and Pay" that focuses on human capital strategies.

Instead of general research based data, the company will gain access to customized peer

benchmarking data and assistance on key areas including staffing and compensation, client

acquisition, pricing strategies, operational efficiency and risk management. The development of

new data bases and product platform are a large reason why R&D is such an important

component of TD Ameritrade.


The government and the Securities and Exchange Committee (SEC) heavily regulate TD

Ameritrade. The Securities Brokering industry is extremely monitored at the federal and state

levels in the United States. People in the field are required to register as broker-dealers with the

Securities and Exchange Commission (SEC) and with state securities commissions in the states

where they conduct business. The role of the SEC is to protect investors and maintain the

integrity of the securities markets. The SEC monitors main participants in the securities world,

including stock exchanges, broker-dealers, investment advisers, mutual funds, and public utility

holding companies.

Many people in the industry are also members of self-regulatory associations and various

securities exchanges, like Chicago Board of Trade and Chicago Board Options Exchange. The

Commodity Futures Trading Commission, the National Futures Association, the Federal Deposit

Insurance Corporation, the Federal Reserve, the Municipal Securities Rulemaking Board and the

Office of Thrift Supervision are just a few regulatory organizations that may be included.

Personnel

There are approximately 5,690 employees currently working for TD Ameritrade Holding

Corporation.

Properties

TD Ameritrade has 126 branches across the country. All of the branches operate the same

and offer all the same services.

Management

Fredric J. Tomczyk, 60, Chief Executive Officer

Stephen J. Boyle, 54, Chief Financial Officer

Marvin W. Adams, 59, Chief Operating Officer

John Thomas Bradley Jr., 53, President of Retail Distribution

Thomas A. Nally, 44 President of TD Ameritrade Institutional

Financial Statement Analysis: AMTD



equity to finance its operations. It can be noted that in the most recent year, TD Ameritrade had

the highest return on common equity compared to all of its competitors as well as the highest

mark since 2011. There has been some volatility in this measure since 2011, but as of late, TD

Ameritrade is doing well in this category. This can be a positive for investors because they are

earning a higher return than competitors on common equity


2015 2014 2013 2012 2011AMTD 16.73 14.13 -12.76 2.03 29.19

GS 7.10 19.82 18.78 15.03 20.43SCHW 11.58 8.15 8.49 16.55 -3.17ETFC 4.80 19.86 16.05 20.91 32.03

MS 8.48 4.94 4.31 -0.05 3.82

Return on Assets



company. The company has the highest ratio compared to competitors year after year since 2011.

It can be seen that since 2011, TD Ameritrade has a similar ratio every year but the returns are

that of double to the next closest company. This could indicate that TD Ameritrade’s business

has been doing well in recent years or that the company is investing more in assets as noted the

ratio has been decreasing.

Return on Assets

2015 2014 2013 2012 2011AMTD 3.24 3.45 3.26 3.20 4.01

GS 1.42 0.96 0.87 0.80 0.48SCHW 1.87 0.89 0.77 0.77 0.86ETFC 0.59 0.64 0.18 (0.24) 0.33

MS 1.53 0.42 0.36 0.01 0.53

Profit Margins



keeps in earnings. TD Ameritrade has a higher profit margin in comparison to competitors in the

industry. The company has the highest measure, indicating that it is another strength for the

company. TD Ameritrade has been increasing its profit margin in recent years steadily, which

can be a point of interest for investors. These higher than average profit margins can possibly

mean that TD Ameritrade has effective cost control. They believe having higher commission

prices and a lot more free resources for clients is a great opportunity cost and it shows.

Net Profit Margins

2015 2014 2013 2012 2011AMTD 25.49 25.40 24.64 22.43 23.36

GS 17.99 24.55 23.50 21.88 15.42SCHW 22.95 21.82 19.71 18.94 18.35ETFC 19.66 17.23 5.34 (6.57) 7.69

MS 17.43 24.25 23.06 0.00 14.41




statement will affect a company’s profit. When taking a look at the common sized income

statement, it was seen has been increasing interest income has increased every year since 2014

with slight movement from 2011-2013. It is also noted that the operating income has stayed

relatively the same since 2011. The income before taxes and net income have also increased

since 2011. This point of interest for a potential investor and is a good sign. The increase in net



% 2011 2012 2013 2014 2015REVENUES 100 100 100 100 100

INTEREST INCOME 17.95 17.23 17.18 18.76 19.16OTHER INCOME 82.05 82.77 82.82 81.24 80.84

TOTAL NON-INTEREST EXPENSES 61.94 64.49 61.64 58.74 59.19



NET INCOME 23.04 22.14 24.36 25.15 25.04

Tax Rate


This is a profitability indicator and measures a company’s tax efficiency. The numbers are once

again consistent when handling their taxes. This could be another positive for investors when

looking to possibly invest in TD Ameritrade.

2015 2014 2013 2012 2011TAX RATE 36.88 38.03 37.96 35.32 37.26

Asset Turnover



to generate profit. In comparison to its competitors, TD Ameritrade has higher asset turnover

ratios, but still relatively low to non-financial companies. Investors would see TD Ameritrade

using its assets to generate profits as a negative when considering investing in the company

because although the numbers are higher, they are not very impressive.

2015 2014 2013 2012 2011AMTD 0.13 0.14 0.13 0.14 0.17

GS 0.04 0.04 0.04 0.04 0.03SCHW 0.04 0.04 0.04 0.04 0.05ETFC 0.04 0.04 0.04 0.04 0.04

MS 0.04 0.04 0.04 0.03 0.04





effective in using their investments in fixed assets to generate revenues. TD Ameritrade has a

high fixed-asset turnover ratio in comparison to its competitors. This indicates that TD

Ameritrade is either not using its fixed assets effectively to generate profits or that the company

is not investing in fixed assets. This could be a negative sign for investors looking to invest in

TD Ameritrade.


2015 2014 2013 2012 2011AMTD 6.02 5.96 5.82 6.66 8.91

GS 3.36 3.72 3.93 4.04 2.91SCHW 5.89 6.62 7.42 7.20 7.19ETFC 5.71 7.06 6.56 5.85 6.76

MS 5.91 5.65 5.42 4.21 5.14


The common size statement demonstrates accounts as a percentage of assets, liabilities,

and stockholder’s equity. This will let the analyst determine trends over the past years and relate

them to profit. Seeing the percentage change in accounts over the years can be a good analytical

tool. TD Ameritrade has been increasing year after year in current assets and current liabilities

It is also a good sign that current assets every year increase to stay ahead of current

liabilities. Stockholder’s equity has been on a downfall the last five years and that could mean

that the company has increased its dividend payout and it has pay out more every year.


ASSETS2011 2012 2013 2014 2015

TOTAL CASH 6.03 4.69 4.86 6.13 7.50TOTAL CURRENT ASSETS 71.60 75.62 77.71 78.09 78.66

TOTAL NON-CURRENT ASSETS 22.38 19.70 17.43 15.78 13.84TOTAL ASSETS 100 100 100 100 100


TOTAL CURRENT LIABILITIES 68.16 70.43 73.77 74.83 74.59TOTAL NON-CURRENT LIAB 7.81 6.89 4.82 5.25 6.82

TOTAL LIABILITIES 75.97 77.32 78.59 80.08 81.41STOCKHOLDERS EQUITY

2011 2012 2013 2014 2015TOTAL STOCKHOLDERS EQUITY 24.03 22.68 21.41 19.92 18.59

TOTAL LIABILITIES AND EQUITY 100 100 100 100 100




basis. It can be seen that TD Ameritrade’s times interest earned ratio has decreased from last

year but from 2012-2014 it increased steadily. It can be noted that TD Ameritrade’s ratio is much

larger than its competitors, this can be a good sign for investors seeing that TD Ameritrade can

cover their interest expenses better than others operating in the industry. Ensuring interest

payments to debt holders and preventing bankruptcy is a critical factor to examine when to invest

in a company.


2015 2014 2013 2012 2011AMTD 29.81 40.64 32.21 26.64 27.45

GS 1.63 2.22 3.51 1.49 0.77SCHW 17.18 20.69 16.22 9.77 8.05ETFC 0.80 1.74 1.88 1.19 2.57

MS 3.09 0.97 1.01 0.08 0.88


Operating

When looking at revenues generated via cash flow from operations, it is seen that TD

Ameritrade has been somewhat volatile the past five years and is back to around what it was in

2011. This volatility can be a negative signal for investors along with the decreased revenue in

2015.


AMTD 746 1,025 739 592 790

It is seen that the net income from operating cash flows has increased steadily since 2011.

The increase in net income since 2011 is a good sign for investors and I believe it is due to the

fact that more and more people are using the online resources that are available and technology

has been on the rise every year, making online brokerages more relevant. They have a lower than

average net income, this could mean that competitors have better business practices and can

potentially gain a competitive advantage over TD Ameritrade. The biggest value in operating

cash flow is “changing in other operating activities”, which isn’t much help because we don’t

know exactly what that is.


AMTD 814 787 675 586 638GS 7,484 8,477 8,040 7,475 4,442

SCHW 1,381 1,321 1,071 928 864ETFC 220 293 86 (113) 157

MS 3,757 3,667 3,613 716 4,645

Operating cash flow is the most important barometer that investors have. Although many

investors lean toward net income, operating cash flow is a better metric of a company's financial

health for two main reasons. First, cash flow is harder to manipulate under GAAP than net

income. Second, "cash is king" and a company that does not generate cash over the long term is

in a bad position.

Investing

History of Free Cash Flow

Since 2011, TD Ameritrade has had volatility in capital expenditures. It is the lowest it

has been since 2013, this could mean the company is spending less capital on expenses that

could increase profits for TD Ameritrade. In contrast, the history of cash flows has been

increasing every year, which means the company continues to grow in that aspect.

($Million) 2015 2014 2013 2012 2011Cash Flow from Operations 225 1,025 739 592 790

Capital Expenditure (71) (144) (44) (186) (153)History of Cash Flow 813 787 675 586 638

Financing

The financing portion of the statement of cash flows was fascinating. There has been

volatility in the portion of debt used to finance TD Ameritrade. Also, it is noted the company

has continued to pay out dividends. The company has increased its use of debt in 2015, and also

repurchased a significant amount of stocks. The recent increase in debt, repurchase of stocks

should make investors cautious. They do pay dividends, which is a positive.

($Million) 2015 2014 2013 2012 2011Repurchases of Stocks (372) (199) 14 (56) (163)

Dividends (326) (540) (471) (132) (114)Debt (Increase/Decrease) (1.78) 862 378 (1,631) (117)

Industry Comparison

When comparing TD Ameritrade to its competitors, its return on equity has been steady

both years with a slight increase. This is a positive sign for investors showing the company is

giving solid returns to its equity holders. When compared to the industry, TD Ameritrade had a

higher return on equity the last two years and it was double of the industry average.

ROE 2015 2014 TD Ameritrade Holding Corp 16.85 16.70Financial Services- Capital Markets 8.0 7.62

Financial Statement Analysis: AMTD



equity to finance its operations. It can be noted that in the most recent year, TD Ameritrade had

the highest return on common equity compared to all of its competitors as well as the highest

mark since 2011. There has been some volatility in this measure since 2011, but as of late, TD

Ameritrade is doing well in this category. This can be a positive for investors because they are

earning a higher return than competitors on common equity

Return on Common Equity 2015 2014 2013 2012 2011

AMTD 16.73 14.13 -12.76 2.03 29.19GS 7.10 19.82 18.78 15.03 20.43SCHW 11.58 8.15 8.49 16.55 -3.17ETFC 4.80 19.86 16.05 20.91 32.03MS 8.48 4.94 4.31 -0.05 3.82

Return on Assets



company. The company has the highest ratio compared to competitors year after year since 2011.

It can be seen that since 2011, TD Ameritrade has a similar ratio every year but the returns are

that of double to the next closest company. This could indicate that TD Ameritrade’s

business has been doing well in recent years or that the company is investing more in assets

as noted the ratio has been decreasing.

Return on Assets2015 2014 2013 2012 2011

AMTD 3.24 3.45 3.26 3.20 4.01GS 1.42 0.96 0.87 0.80 0.48SCHW 1.87 0.89 0.77 0.77 0.86ETFC 0.59 0.64 0.18 (0.24) 0.33MS 1.53 0.42 0.36 0.01 0.53

Net Profit Margins



keeps in earnings. TD Ameritrade has a higher profit margin in comparison to competitors in the

industry. The company has the highest measure, indicating that it is another strength for the

company. TD Ameritrade has been increasing its profit margin in recent years steadily, which

can be a point of interest for investors. These higher than average profit margins can possibly

mean that TD Ameritrade has effective cost control. They believe having higher commission

prices and a lot more free resources for clients is a great opportunity cost and it shows.

Net Profit Margins2015 2014 2013 2012 2011

AMTD 25.49 25.40 24.64 22.43 23.36GS 17.99 24.55 23.50 21.88 15.42SCHW 22.95 21.82 19.71 18.94 18.35ETFC 19.66 17.23 5.34 (6.57) 7.69MS 17.43 24.25 23.06 0.00 14.41




statement will affect a company’s profit. When taking a look at the common sized income

statement, it was seen has been increasing interest income has increased every year since 2014

with slight movement from 2011-2013. It is also noted that the operating income has stayed

relatively the same since 2011. The income before taxes and net income have also increased

since 2011. This point of interest for a potential investor and is a good sign. The increase in net


Common Sized Income Statement% 2011 2012 2013 2014 2015REVENUES 100 100 100 100 100INTEREST INCOME 17.95 17.23 17.18 18.76 19.16OTHER INCOME 82.05 82.77 82.82 81.24 80.84

TOTAL NON-INTEREST EXPENSES 61.94 64.49 61.64 58.74 59.19



NET INCOME 23.04 22.14 24.36 25.15 25.04

Tax Rate


This is a profitability indicator and measures a company’s tax efficiency. The numbers are once

again consistent when handling their taxes. This could be another positive for investors when

looking to possibly invest in TD Ameritrade.

2015 2014 2013 2012 2011TAX RATE 36.88 38.03 37.96 35.32 37.26

Asset Turnover



to generate profit. In comparison to its competitors, TD Ameritrade has higher asset turnover

ratios, but still relatively low to non-financial companies. Investors would see TD Ameritrade

using its assets to generate profits as a negative when considering investing in the company

because although the numbers are higher, they are not very impressive.

Asset Turnover:2015 2014 2013 2012 2011

AMTD 0.13 0.14 0.13 0.14 0.17GS 0.04 0.04 0.04 0.04 0.03SCHW 0.04 0.04 0.04 0.04 0.05ETFC 0.04 0.04 0.04 0.04 0.04MS 0.04 0.04 0.04 0.03 0.04





effective in using their investments in fixed assets to generate revenues. TD Ameritrade has a

high fixed-asset turnover ratio in comparison to its competitors. This indicates that TD

Ameritrade is either not using its fixed assets effectively to generate profits or that the company

is not investing in fixed assets. This could be a negative sign for investors looking to invest in

TD Ameritrade.

Fixed Asset Turnover2015 2014 2013 2012 2011

AMTD 6.02 5.96 5.82 6.66 8.91GS 3.36 3.72 3.93 4.04 2.91SCHW 5.89 6.62 7.42 7.20 7.19

ETFC 5.71 7.06 6.56 5.85 6.76MS 5.91 5.65 5.42 4.21 5.14


The common size statement demonstrates accounts as a percentage of assets, liabilities,

and stockholder’s equity. This will let the analyst determine trends over the past years and relate

them to profit. Seeing the percentage change in accounts over the years can be a good analytical

tool. TD Ameritrade has been increasing year after year in current assets and current liabilities

It is also a good sign that current assets every year increase to stay ahead of current

liabilities. Stockholder’s equity has been on a downfall the last five years and that could mean

that the company has increased its dividend payout and it has pay out more every year.









basis. It can be seen that TD Ameritrade’s times interest earned ratio has decreased from last

year but from 2012-2014 it increased steadily. It can be noted that TD Ameritrade’s ratio is much

larger than its competitors, this can be a good sign for investors seeing that TD Ameritrade can

cover their interest expenses better than others operating in the industry. Ensuring interest

payments to debt holders and preventing bankruptcy is a critical factor to examine when to invest

in a company.

Times Interest Earned 2015 2014 2013 2012 2011

AMTD 29.81 40.64 32.21 26.64 27.45GS 1.63 2.22 3.51 1.49 0.77SCHW 17.18 20.69 16.22 9.77 8.05ETFC 0.80 1.74 1.88 1.19 2.57MS 3.09 0.97 1.01 0.08 0.88


Operating

When looking at revenues generated via cash flow from operations, it is seen that TD

Ameritrade has been somewhat volatile the past five years and is back to around what it was in

2011. This volatility can be a negative signal for investors along with the decreased revenue in

2015.


AMTD 746 1,025 739 592 790

It is seen that the net income from operating cash flows has increased steadily since 2011.

The increase in net income since 2011 is a good sign for investors and I believe it is due to the

fact that more and more people are using the online resources that are available and technology

has been on the rise every year, making online brokerages more relevant. They have a lower than

average net income, this could mean that competitors have better business practices and can

potentially gain a competitive advantage over TD Ameritrade. The biggest value in operating

cash flow is “changing in other operating activities”, which isn’t much help because we don’t

know exactly what that is.


AMTD 814 787 675 586 638GS 7,484 8,477 8,040 7,475 4,442

SCHW 1,381 1,321 1,071 928 864ETFC 220 293 86 (113) 157

MS 3,757 3,667 3,613 716 4,645

Operating cash flow is the most important barometer that investors have. Although many

investors lean toward net income, operating cash flow is a better metric of a company's financial

health for two main reasons. First, cash flow is harder to manipulate under GAAP than net

income. Second, "cash is king" and a company that does not generate cash over the long term is

in a bad position.

Investing

History of Free Cash Flow

Since 2011, TD Ameritrade has had volatility in capital expenditures. It is the lowest it

has been since 2013, this could mean the company is spending less capital on expenses that

could increase profits for TD Ameritrade. In contrast, the history of cash flows has been

increasing every year, which means the company continues to grow in that aspect.

($Million) 2015 2014 2013 2012 2011Cash Flow from Operations 225 1,025 739 592 790

Capital Expenditure (71) (144) (44) (186) (153)History of Cash Flow 813 787 675 586 638

Financing

The financing portion of the statement of cash flows was fascinating. There has been

volatility in the portion of debt used to finance TD Ameritrade. Also, it is noted the company

has continued to pay out dividends. The company has increased its use of debt in 2015, and also

repurchased a significant amount of stocks. The recent increase in debt, repurchase of stocks

should make investors cautious. They do pay dividends, which is a positive.

($Million) 2015 2014 2013 2012 2011Repurchases of Stocks (372) (199) 14 (56) (163)

Dividends (326) (540) (471) (132) (114)Debt (Increase/Decrease) (1.78) 862 378 (1,631) (117)

Industry Comparison

When comparing TD Ameritrade to its competitors, its return on equity has been steady

both years with a slight increase. This is a positive sign for investors showing the company is

giving solid returns to its equity holders. When compared to the industry, TD Ameritrade had a

higher return on equity the last two years and it was double of the industry average.

ROE 2015 2014 TD Ameritrade Holding Corp 16.85 16.70Financial Services- Capital Markets 8.0 7.62

PepsiCo, Inc. Valuation

For my first valuation, I used the ValuePro to PepsiCo, Inc. This valuation gave me a

value of $105.75, which makes it favorable purchase considered the stock, is currently

$103.21.These calculations infer that the stock is fairly undervalued. I manually entered these

values in ValuePro after finding them on sources such as Morningstar, Zacks, and Valueline. I

also calculated some of the values like the depreciation and investment rate relative to PepsiCo,

Inc. I calculated a growth rate of 6.9% for the company’s revenues. I used the 30-year treasury

yield of 3% and an equity risk premium 5%.

PEP KO DPS MDLZ

Growth 10.37% 8.80% 11.50% -9.90%

ROE 30.98 28.77 34.13 26.06

Beta 0.70 0.80 0.61 1.05

P/E 22.56 23.36 22.70 23.93

Est. P/E 22.12 24.20 21.22 23.93

EPS $3.67 $1.67 $3.97 $4.44

VALUE $82.80 $39.01 $90.12 $106.25

For my second valuation, I used the P/E method. I compared PepsiCo to some of its peers

that are in the consumer beverage industry. With an industry average P/E of 23.13; which I felt

that was right on target especially after comparing Pepsi to these three companies with very

similar P/E ratios. With the stock being priced at $103.21, this valuation gives PepsiCo a

favorable position. PepsiCo’s beta in comparison to its competitors is right around the middle,

which is good because the amount of volatility is lower.

Recommendation

While the valuations show that PepsiCo is a good buy, I would have to agree with the

analysis. Since this class focuses on buying and selling for the long term, I believe PepsiCo is a

great buy, not only because of how well they pay dividends but how much the company is

projected to grow within the next few years. In the long run, I think that PepsiCo is an ideal

company that this class favors and a large corporation that can and has gained a competitive

advantage when competing against the biggest rivals in the industry. The company had a decline

in revenue between 2014 and 2015, but it is clear that PepsiCo is on the rise. Thus, I recommend

buying 50-100 more shares of PepsiCo. If we are deciding to add more consumer beverage

stocks to the portfolio, it should be one of the industry leaders- PepsiCo.

Dr. Pepper Snapple, Inc. Valuation

For my first valuation, I used the ValuePro for Dr. Pepper Snapple, Inc. This valuation

gave me a value of $69.78, which makes it unfavorable purchase considered the stock, is

currently $91.42. These calculations assume that the stock is rather overvalued. I manually

entered these values in ValuePro after finding them on sources such as Morningstar, Zacks, and

Valueline. I also calculated some of the values like the depreciation and investment rate relative

to Dr. Pepper Snapple, Inc. I calculated a growth rate of 7.5% for the company’s revenues. I used

the 30-year treasury yield of 3% and an equity risk premium 5%.

PEP KO DPS MDLZ

Growth 10.37% 8.80% 11.50% -9.90%

ROE 30.98 28.77 34.13 26.06

Beta 0.70 0.80 0.61 1.05%

P/E 22.56 23.36 22.70 23.93

Est. P/E 22.12 24.20 21.22 23.93

EPS $3.67 $1.67 $3.97 $4.44

VALUE $82.80 $39.01 $92.12 $106.25

For my second valuation, I used the P/E method. I compared Dr. Pepper Snapple, Inc. to

some of its peers that are in the consumer beverage industry. With an industry average P/E of

23.13; which I felt that was right on target especially after comparing Dr. Pepper Snapple to

these three companies with very similar P/E ratios. With the stock being priced at $91.42, this

valuation gives Dr. Pepper Snapple a favorable position. Dr. Pepper Snapple’s beta in

comparison to its competitors is the lowest, which is respectable because the amount of volatility

is lower.

Recommendation

I believe Dr. Pepper Snapple at this point would be a don’t buy. I just think we have

enough stocks within this industry and we don’t need to add anymore at this time. I think Dr.

Pepper Snapple is overvalued and if we were to buy it, it should have been at a lower price.

Although growth seems to be somewhat high I think now isn’t a good time to buy it. Also, the

intrinsic value is much lower at $69.78 as opposed to its stock price of $91.42. That to me is a

huge red flag and we should stay away from it unless it comes closer to its intrinsic value.

TD Ameritrade Holding Corporation Valuation

For my first valuation, I used the ValuePro for TD Ameritrade Holding Corp. This

valuation gave me a value of $26.23, which makes it somewhat unfavorable purchase considered

the stock, is currently $31.20.These calculations conclude that the stock is a little overvalued. I

manually entered these values in ValuePro after finding them on sources such as Morningstar,

Zacks, and Valueline. I also calculated some of the values like the depreciation and investment

rate relative to TD Ameritrade. I calculated a growth rate of 11% for the company’s revenues. I

used the 30-year treasury yield of 3% and an equity risk premium 5%.

AMTD GS SCHW ETFC MS

Growth 11% 21.70% 28.90% 31.60% -14.80%

ROE 16.85 6.57 10.82 4.80 7.76

Beta 1.50 1.36 1.58 1.36 1.51

P/E 21.17 8.31 28.69 20.59 9.01

Est. P/E 19.48 10.05 21.91 15.44 9.29

EPS $1.49 $12.14 $1.03 $0.91 $2.90

VALUE $31.54 $100.88 $29.55 $18.74 $26.13

For my second valuation, I used the P/E method. I compared TD Ameritrade Holding

Corp. to some of its peers that are in the consumer financial services industry. With an industry

average P/E of 17.55; which I felt that was rather favorable especially after comparing TD

Ameritrade to these four companies with some different P/E ratio values and they are among the

highest. TD Ameritrade’s beta in comparison to its competitors is in the middle, which is

respectable because the amount of volatility for this industry happens to be very high.

Recommendation

For TD Ameritrade I recommended a hold because of the recent volatility of the market.

We simply don’t have that good of an idea of where the market is heading at this point and

especially with The Fed going back and forth with interest rates, we simply don’t know how the

stock will react so I think its safe to just keep it as is and check back on it in the future. The

growth is relatively low compared to its peers and that to me should indicate we hold it and don’t

make any huge moves at the moment.

nicholas m theodore economic analysis

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