2010 Spring Pepsi

8/9/2019 2010 Spring Pepsi

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PepsiCo, Inc. Fund: Ohio State University SIM Fund

Fund Manager: Chris Henneforth, CFA

(NYSE: E! "oy#e $est, CFA

ri#e %arget: &')**Ana+yst: ourdes ") -udaney

Fisher Co++ege of .usiness

"e#o//endation: .UY %he Ohio State University

Co+u/0us, Ohio Report Date: June 1, 2010 -udaney)12osu)edu, 31()45()35'6

Investment Thesis

e7siCo is one of the +argest #onsu/er 7rodu#ts

#o/7anies /anufa#turing and se++ing a 8ide range of

sna#9s, nona+#oho+i# 0everages and food g+o0a++y)

$hi+e gro8th in #ar0onated soft drin9s (CS-! is

e;7e#ted to 0e stagnant, e7siCo is fo#using on its

gro8ing nonCS- 0usiness 8hi#h it 7+ans to e;7and

through 7rodu#t innovation) %he a#<uisition of its t8o

+argest 0ott+ers in North A/eri#a 8i++ he+7 e7siCo

0ring these ne8 7rodu#ts to /ar9et faster and /ore

effi#ient+y)

%he #o/7any is gro8ing in the internationa+ /ar9et as

8e++) %o a##e+erate its gro8th, e7siCo is investing in

infrastru#tures in 9ey e/erging #ountries) It announ#ed

re#ent+y that it is investing &=)5 0i++ion in China)

e7siCo, 8hi#h do/inates the sna#9 food industry, isone of the +eading #o/7anies to fo#us on hea+th and

nutrition in its 7rodu#t deve+o7/ent through

innovations in hea+thier oi+s, sodiu/ redu#tion, and

the addition of hea+thy

ingredients)

Risks

1 %here is the ris9 of /isste7s in

integrating the t8o 0ott+ers, the e7si

.ott+ing >rou7, In#) (.>! ande7siA/eri#as, In#) (AS! 7reventing the

#o/7any to fu++y rea+i?e the 0enefits and

#ost savings e;7e#ted fro/ the a#<uisitions)

2 Curren#y ris9 in#reases as

e7siCo derives a greater 7ro7ortionof its revenue fro/ its internationa+o7erations)

3 e7siCo o7erates in =** #ountriese;7osing it to 7o+iti#a+ ris9)

4 In#reasing #o//odity 7ri#es 8i++ affe#t

e7siCo s 7erfor/an#e sin#e it is‟

de7endent on agri#u+tura+ #o//odity

7rodu#ts)

ri#es are

de7endent on

g+o0a+ de/and

and su77+y and

are sensitive to

e;tre/e

8eather

#onditions)

Table 1 Highlightsof Stock

Performance



SectorConsumer

Staples

Industry Food and Non-AlcoholicBeverage

Market Data

Current Price !"#$%!-&eek high

'(%)*!)!(*(+ ,"*%!-&eek lo&'(%)!$)!(($+ %("#%

Average Daily olume ,.#(.,%Market Capitali/ation'MM+ 0*(*.1!1Shares 2utstanding'MM+ *.*!",!

Dividend 3ield 'Annual+ !"#1

Financial Summary

4)4BI5DA *!"*

Book alue)Share *6"61

5otal De7t 'MM+ !*.#%#8eturn on 49uity 1*"!1:

;ong-5erm De7t 'MM+ *$.##1

igure 1 12!month Price Performance "raph



PepsiCo Company Report

TABLE OF CONTENTS

C 2MPAN3 2 48I4< 6

P EPSI C O B USINESS U NITS 3

INGREDIENTS AND O THER S UPPLIES 5

C USTOMERS 5 D ISTRIBUTION N ETOR! 5

C OMPETITI"E A D"ANTAGE #

M AC824C2N2MIC A NA;3SIS

C OMMODIT$ P RICES %

D EMOGRAPHIC T RENDS &'

C 2NS=M48 S 5AP;4S S 4C528 *(

F 22D AND N 2N -A ;C2>2;IC B 448A?4 I ND=S583 *6

S NAC! ( OOD I NDUSTR$ &3

S O(T D RIN! I NDUSTR$ &)

C 2MPAN3 A NA;3SIS *%

( UNDAMENTAL D RI"ERS &5

( INANCIAL A NAL$SIS &#

L I*UIDIT$ &%

L E"ERAGE +&

C 2MPAN3 A;=A5I2N !!

D ISCOUNTED C ASH ( LO ,DC(- A NAL$SIS +)

8 IS@S !

C 2NC;=SI2N !

1

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List of Figues

igure 1 12!month Price Performance "raph 1

igure 2 #et Re$enue an% &perating 'ncome (reak%o)n

igure * +acroeconomic actors Rele$ant to Pepsio '

igure - ommo%it. Prices @

igure / Snack oo% 'n%ustr. Pro%uct Segmentation 1

igure Pro%uct an% +arket Segmentation 15

List of T!"#es

Table 1 Highlights of Stock Performance 1

Table 2 onsumer Price 'n%e: oo% 6

Table * S Population Statistics b. 3ge 1*

Table - onsumer Staples Sector 'n%ustries an% ompanies 11

Table / S4P /00 Sector Performance 1=

Table Di$i%en% 5iel% b. Sector 1=

Table 6 onsumer Staples 7aluation 14

Table 8 Pepsio Proforma 'ncome Statement 1'

Table 9 Pepsio Profitabilit. Ratios 16

Table 10 Pepsio arnings Per Share 16

Table 11 oca!ola Profitabilit. Ratios 16

Table 12 oca!ola arnings Per Share 1@

Table 1- omparati$e Profitabilit. Ratios 1@

Table 1* omparati$e PS 2009 1@

Table 1/ Pepsio ;i<ui%it. Ratios =*

Table 1 omparati$e ;i<ui%it. Ratios 5 2009 =*

Table 16 Pepsio ;e$erage Ratios =1

Table 18 omparati$e ;e$erage Ratios 5 2009 =1

Table 19 Target Price (ase% on 7aluation +ultiples ==

Table 21 Pepsio 7aluation Relati$e to the Soft Drink 'n%ustr. ==

Table 20 Pepsio 7aluation Relati$e to S4P /00 ==

Table 22 omparati$e ompan. 7aluations =4

Table 2* Pepsio Discounte% ash lo) +o%el =5

=

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Comp!n$ Ovevie%

e7siCo In#) is a +eading g+o0a+ food, sna#9 and 0everage #o/7any) %he #o/7any /anufa#tures

and se++s a variety of oat, ri#e and grain0ased sna#9s, #ar0onated and non#ar0onated 0everages

and food 7rodu#ts in over =** #ountries) Its +argest o7erations are in North A/eri#a (United

States, Canada and Me;i#o! and the United ingdo/)1

PepsiCo Business =nits

e7siCo is organi?ed into three 0usiness units as fo++o8s:

1 e7siCo A/eri#as Foods (AF! 8hi#h in#+udes Fritoay North A/eri#a (FNA!,Bua9er Foods North A/eri#a (BFNA! and a++ e7siCo atin A/eri#an food and sna#9 0usinesses (AF!)

2 e7siCo A/eri#as .everages (A.!, 8hi#h in#+udes e7siCo .everages North A/eri#aand a++ atin A/eri#a e7siCo 0everage 0usinesses

3 e7siCo Internationa+ (I!, 8hi#h in#+udes a++ e7siCo 0usinesses in Euro7e and a++

e7siCo 0usinesses in Asia, Midd+e East and Afri#a (AMEA!)

%he si; divisions under these 0usiness units are des#ri0ed in /ore detai+ 0e+o8)

Frito-Lay North America (FLNA)

FNA /anufa#tures and se++s 0randed sna#9 foods in#+uding ays and "uff+es 7otato #hi7s,

-oritos and %ostitos torti++a #hi7s, Cheetos #heese f+avored sna#9s, Bua9er Che8y grano+a 0ars

and SunChi7s /u+tigrain sna#9s) FNA s net revenue 8as &14)= 0i++ion in =**@, the +argest in‟

the #o/7any, re7resenting 41 of the #o/7any s tota+ revenue for that year)‟

Quaker Foods North America (QFNA)

BFNA /anufa#tures and se++s #erea+s, ri#e, 7asta and other 0randed 7rodu#ts 8hi#h in#+udes

Bua9er oat/ea+, Aunt De/i/a /i;es and syru7s, Ca7 n Crun#h #erea+, "i#eA"oni, asta

"oni and Near East side dishes) BFNA s net revenue 8as &1)@ 0i++ion in =**@, the s/a++est in‟

the #o/7any, re7resenting of the #o/7any s tota+ revenue for that year)‟

Latin America Foods (LAF)

AF /anufa#tures and se++s sna#9 food 0rands in#+uding >a/esa, -oritos, Cheetos, "uff+es,

ays, Sa0ritas and Bua9er 0rand #erea+s and sna#9s) AF s net revenue 8as &5)' 0i++ion in‟

=**@ re7resenting 14 of the #o/7any s revenue for that year)‟

PepsiCo Americas Beverages (PAB)

A. /anufa#tures and se++s 0everage #on#entrates, fountain syru7s and finished goods under avariety of 8e++9no8n 0rands in#+uding e7si, Mountain -e8, >atorade, 'U, %ro7i#ana ure

1 Source: Pepsio 'nc= 10!> iscal 2009

4




re/iu/, Sierra Mist, ro7e+, Man?anita So+, %ro7i#ana ui#e drin9s, So.e ife8ater, -o+e and

A/7 Energy) A. a+so /anufa#tures and se++s readytodrin9 tea, #offee and 8ater 7rodu#ts

through oint ventures 8ith Uni+ever under the i7ton 0rand and Star0u#9s) It +i#enses the

A<uafina 8ater 0rand to its 0ott+ers and /ar9ets the 0rand) A. s net revenue 8as &1*)1‟

0i++ion in =**@ re7resenting =4 of the #o/7any s revenue for that year)‟

Europe

Euro7e /anufa#tures and se++s 0oth e7siCo 0rand sna#9 foods in#+uding ay s, $a+9ers,‟

-oritos, Cheetos and "uff+es, and its 0everage 0rands in#+uding e7si, 'U and %ro7i#ana)

Si/i+ar to the A. arrange/ents, Euro7e +i#enses the A<uafina 8ater 0rand to its authori?ed

0ott+ers and /anufa#tures and se++s i7ton 0rand readytodrin9 tea) Euro7e s net revenue 8as‟

& 3)' 0i++ion in =**@ re7resenting 13 of the #o/7any s tota+ net revenue)‟

Asia !idd"e East # A$rica (A!EA)

AMEA /anufa#tures and se++s various e7siCo sna#9 food 0rands in#+uding its internationa+ 0rands su#h as ays, -oritos, Cheetos and "uff+es, regiona+ 0rands su#h as ur9ure, Chi7sy,

S/ith s, "ed "o#9 -e+i, /any of the Bua9er0rand #erea+s and sna#9s as 8e++ as 0everage‟

#on#entrates, fountain syru7s and finished goods, under its various 0everage 0rands su#h as

e7si, Mirinda, 'U and Mountain -e8) A<uafina 8ater 0rand is +i#ensed for /anufa#turing to

authori?ed 0ott+ers and /anufa#tures and se++s i7ton readytodrin9 tea) AMEA s net revenue‟

8as & 5)3 0i++ion in =**@ re7resenting 14 of the #o/7any s tota+ net revenue)‟

Net 8evenue 7y Segment

AMEA &3.

(LNA E/rope 3&.&#.

Net8evenu

e 7y

Business =nitPepsiCo

Intern

ationa0 +%.

PepsiCoAmeri1as(oo2s

AMEA .

PAB+3.

*(NA ).

2pera

tingIncome7ySegment

,PA(-Pepsi1Co

).

Ameri1as

Be4erae

s ,PAB- +3.

Pe

ps

iC

o 2

peratingIncome7yBusiness=nit

I

n



E/rope &&

3. &%. PepsiCo

Ameri1as (oo2

PAB +5. A(

*(NA 6.



Pepsi1Co 5#.Ameri1asBe4erae

s

,PAB-

+5.

i




Ingredients and 2ther Supplies

%he 7rin#i7a+ ingredients for its food and 0everage 0usinesses are ui#es +i9e a77+e and 7inea77+e

ui#es, as7arta/e, #orn, #orn s8eeteners, f+avorings, f+our, gra7efruits and other ui#es, oats,

oranges, 7otatoes, ri#e seasonings, su#ra+ose, sugar, vegeta0+e and essentia+ oi+s and 8heat) %he

9ey 7a#9aging /ateria+s in#+ude 7+asti# resins in#+uding 7o+yethy+ene tere7htha+ate (E%! and

7o+y7ro7y+ene resins used for 7+asti# 0everage 0ott+es and fi+/ 7a#9aging used for sna#9 foods,a+u/inu/ used for #ans, g+ass 0ott+es and #ard0oard) Fue+ and natura+ gas are i/7ortant

#o//odities sin#e these are used in the 7+ants and in the tru#9s de+ivering 7rodu#ts) %hese

ingredients, ra8 /ateria+s and #o//odities are 7ur#hased /ain+y in the o7en /ar9et) %o redu#e

the i/7a#t of vo+ati+ity in ra8 /ateria+s and energy #osts, e7siCo uses hedging strategies, fi;ed

7ri#e 7ur#hase orders and 7ri#ing agree/ents)

Customers

e7siCo #usto/ers in#+ude authori?ed 0ott+ers and inde7endent distri0utors su#h as food

servi#e distri0utors and retai+ers) .ott+ers have e;#+usive #ontra#ts to /anufa#ture and se++

#ertain 0everage 7rodu#ts 8ithin a s7e#ifi# geogra7hi# area)

e7siCo, In#) #o/7+eted its & ')6 0i++ion a#<uisition of its t8o +argest 0ott+ers in North A/eri#a,

e7si .ott+ing >rou7 In#) (.>! and e7siA/eri#as, In#) (AS! on Fe0ruary =3, =*1* giving

e7siCo 6* of the vo+u/e in North A/eri#a) %he 0ott+er a#<uisitions 8i++ 7rovide e7siCo the

f+e;i0i+ity to de#ide ho8 its 0everages are distri0uted as #onsu/er tastes shifts fro/ #ar0onated

soft drin9s into non#ar0onated 0everages su#h as 8ater, ui#es and teas) e7siCo e;7e#ts the

transa#tions to #reate 7reta; #ost savings of a0out &1=5 to & 15* /i++ion starting =*1* and

a77ro;i/ate+y &** /i++ion annua++y starting =*1=) %he initia+ synergies are due 7ri/ari+y due to

greater #ost effi#ien#ies 0ut e;7e#t synergies due to a #o/0ination of #ost savings and ne8

revenuegenerating o77ortunities in +ater years)

"etai+ #onso+idation and the e#ono/i# environ/ent have in#reased the 7o8er of /aor retai+erssu#h as $a+Mart 8hi#h re7resented 14 of its tota+ net revenue in fis#a+ =**@)

Distri7ution Net&ork

e7siCo 7rodu#ts are 0rought to /ar9et through the fo++o8ing #hanne+s:

1 -ire#tStore-e+ivery (-S-! G .ott+ers and distri0utors o7erate -S- syste/s that

dire#t+y de+iver sna#9s and 0everages to the retai+ stores) -S- ena0+es e7siCo to dis7+ay

its /er#handi?e to /a;i/i?e its visi0i+ity and a77ea+) %his distri0ution /ethod is idea+ for 7rodu#ts that are resto#9ed often and 7ro/oted instore

2 Custo/er $arehouse G e7siCo de+ivers 7rodu#ts to #usto/er 8arehouses and retai+stores) %hese is a +ess e;7ensive syste/ that 8or9 0est for 7rodu#ts that are not fragi+e,have +onger she+f +ife, +o8er turnover and +ess +i9e+y to 0e an i/7u+se 7ur#hase)

3 Foodservi#e and ending G e7siCo sa+es for#e distri0ute sna#9s, food and 0everages tothird7arty foodservi#e and vending distri0utors and o7erators) %his is the distri0ution

5




net8or9 that su77+ies 7rodu#ts to restaurants, 0usinesses, s#hoo+s, stadiu/s andsi/i+ar +o#ations)

Competitive Advantage

e7siCo o8ns a 0road 7ortfo+io of g+o0a++y re#ogni?a0+e 0rand na/e 7rodu#ts 8ith 1@ 7rodu#t

+ines generating at +east &1 0i++ion in sa+es) It has g+o0a+ rea#h in that it o7erates in =** #ountries)It is 0est 9no8n for its +ines of #ar0onated soft drin9s (CS-! 8hi#h has 0een 7art of the

A/eri#an #u+ture for a +ong ti/e) In addition, its syru7 re#i7es used to /anufa#ture drin9s is a

se#ret and 7rote#ted 0y trade/ar9) Manufa#turers 7ay for +i#enses to e7siCo to /anufa#ture

and se++ 0everages over a s7e#ifi# geogra7hi#a+ area) %he #o/7any has a 8e++ esta0+ished

distri0ution #hanne+) O7erating in the soft drin9 industry re<uires a high +eve+ of #a7ita+

invest/ent su#h that 7rodu#ers +i9e e7siCo 8hi#h is a+ready esta0+ished in the /ar9et #an

0enefit fro/ e#ono/ies of s#a+e)

In addition to its 0everage 7ortfo+io, e7siCo has a strong 7ortfo+io of sna#9 and food 7rodu#ts)

%he #o/7any 0enefits fro/ the #oin#iden#e of #onsu/7tion 0et8een sna#9s and 0everages) ItsFNA division do/inates the sna#9 industry 8ith 51 /ar9et share in the sna#9 industry)

&!coeconomic An!#$sis

%he US e#ono/y, in ter/s of rea+ >-, is e;7e#ted to gro8 0y 4)* in =*1* #o/7ared to a

#ontra#tion of =)@ in =**@) Ho8ever, une/7+oy/ent is e;7e#ted to re/ain high at a0ove @

through the end of this year and higher than 6 0y the end of =*11) %his 8i++ 9ee7 #onsu/ers

#autious 8ith #onsu/er s7ending e;7e#ted to in#rease 0y )5 fro/ the =**@ +o8s)

Fears that the Euro7ean de0t #risis 8i++ s+o8 do8n the g+o0a+ re#overy s7read in May) %he

govern/ents of >ree#e, ortuga+, S7ain, Ita+y and Ire+and have to #ut govern/ent s7ending torein in their defi#its 8hi#h /eant stif+ing #onsu/er s7ending in the region) As a resu+t, the euro

de#+ined against the US do++ar to a four year +o8 of &1)=1'6 on May =3) For US /u+tinationa+s

8ith signifi#ant o7erations in the EU #ountries, this /eans a de#rease in revenue 8hen trans+ated

in do++ar ter/s) Euro7e re7resents 13 of e7siCo s net revenue in =**@ 8ith the United‟

ingdo/ as its +argest /ar9et)

3




igure * +acroeconomic actors Rele$ant to Pepsio

'






Commodity Prices

Agri#u+tura+ #o//odity 7ri#es are e;7e#ted to f+atten) Agri#u+tura+ #o//odity 7ri#es de#+ined

starting in the /idd+e of =**6 ref+e#ting the de#reasing s7e#u+ation that #o//odity 7ri#es 8i++

9ee7 on rising) Foreign de/and 8as a+so he+7ed 0y strengthening of overseas #urren#ies

re+ative to the US do++ar 7roviding foreign 0uyers /ore 7ur#hasing 7o8er) Ho8ever, this trend

has reversed 8ith the do++ar strengthening against the euro and the .ritish 7ounds) -ue to thisrising strength of the US do++ar #rude oi+ 7ri#es have 0een de#+ining as 8e++) %he EU de0t #rises

/ight 9ee7 the do++ars strong in the ne;t fe8 /onths)

igure - ommo%it. Prices

@




Demographic 5rends

.a0y 0oo/ers refer to A/eri#ans 0orn in the 7ost$or+d $ar II era, 0et8een 1@3 and 1@3,

8ith the the o+dest of the 0oo/ers 8i++ turn 35 years of age 0y =*11) A##ording to U)S) Census

.ureau 7roe#tions, 0y =*4* there 8i++ 0e '= /i++ion A/eri#ans over age 35 re7resenting /ore

than 1@ of the US 7o7u+ation%) $ith the aging US 7o7u+ation, rising +ife e;7e#tan#y and rising

hea+th#are #osts, A/eri#ans are 7aying /ore attention to nutrition) Co/7anies +i9e e7siCo aretargeting the gro8ing 0a0y 0oo/er 7o7u+ation) e7siCo is e;7anding its good for youJ

7rodu#t 7ortfo+io fo#using on 8e++ness and nutrition 8ith 7+ans to #ut sodiu/, saturated fat and

sugar in the ne;t five years)

Table * S Population Statistics b. 3ge

Year 2010 Year 2030

Percent of

Age Population Population

'7&) #+83'8#&' +'.

&57#)+'68#+385)

& #6.

#57%% )'8++86&+ &3.

Tota03&'8+3+8#

3 &''.



Percent of

Age Population Population

'7&) 6+8%5%8'5# &%95.

&57#)++8)5+86'

3 #&9+.

#57%% 6+8'%&8%&5 &%93.

Tota036385'38#6

) &''.

%he US Census .ureau s‟

internationa+ data0ase sho8s

that 8or+d 7o7u+ation 8i++

in#rease =* 0y =*4*) On+y

=)5 of this gro8th 8i++ #o/e

fro/ /ore deve+o7ed #ountries

8ith +ess deve+o7ed #ountries

gro8ing * ti/es faster than

deve+o7ed ones) Co/7anies8hi#h are 7ositioned to

#o/7ete in the +ess deve+o7ed

regions #ou+d see su0stantia+

gro8th)

Consume St!p#es Secto

%he #onsu/er sta7+es se#tor is a

defensive se#tor #onsisting of

esta0+ished #o/7anies 8ith 8e++

9no8n 0randed

7rodu#ts)

It is

divided

into five

industries:

the food

and sta7+es

retai+ing,

0everage,food

7rodu#ts,

to0a##o,

househo+d

7rodu#ts

and

7ersona+

7rodu#ts

industries)

%he

industriesare further

divided

into t8e+ve

su0

industries)

%he se#tor

re7resents

11)41 of

the SK

5** inde;)Househo+d

7rodu#ts

and the

soft drin9

su0

industries

are the

+argest in

the se#tor

8ith

=)5 and =)4 8eight in theSK 5**, res7e#tive+y, 8hi+e the

s/a++est is the 0re8ers 8ith

*)*33 8eight in the SK 5**)

$a+Mart has 0oth the +argest

/ar9et #a7ita+i?ation and annua+

revenue in the se#tor 8ith &16@

0i++ion /ar9et #a7ita+i?ation and

annua+ revenues of &*6 0i++ion)

%a0+e 0e+o8 sho8s the

industries and #o/7anies 8ithinthe se#tor and their /ar9et

#a7ita+i?ation and +atest annua+

revenue data)

4 Source: =S= ensus (ureau,

'nternational Data (ase=1*




Table - onsumer Staples Sector 'n%ustries an% ompanies

Industry?roup Industry

Su7-Industry Companies

Market Annual

Capitali/at

ion

8evenu

e

Food & Staples Retailing Food & Staples Retailing Drug Retail C"S Caremar: Corp ;)68&+69) ;%86+%9'

a0reen Co ;3&83)9% ;#383359'

Food Distributors Sys1o Corp ;&68#359+ ;3#85393Food Retail !roer Co<T=e ;&38''9) ;6#86339'

Sa>e?ay In1 ;8#'39# ;)'85'96

SUPER"ALU In1 ;+8596 ;)'85%69'=o0e (oo2s Mar:et

In1 ;#8%3&96 ;8'3&9#Hypermarets & Super !enters Cost1o =o0esa0eCorp ;+58#5%95 ;6&8)++9'

a07Mart Stores In1 ;&%8#59#;)'8+&)9'

Food" #e$erage & %obacco #e$erages #reers

Mo0son CoorsBre?in Co ;68#'%9& ;38'3+9)

Distillers & 'intners Bro?n7(orman Corp ;8++39 ;+8)&9'

Conste00ation Bran2sIn1 ;3855'9 ;383#)9

Soft Drins Co1a7Co0a Co<T=e ;&&85+9) ;3'8%%'9'Co1a7Co0aEnterprises In1 ;&38'#&9& ;+&8#)59'Dr Pepper Snapp0eGro/p In1 ;%83'&9 ;5853&9'

PepsiCo In1<NC ;&'&8)+39% ;)38+3+9'

Food Products (gricultural Products

Ar1=er7Danie0s7Mi20an2 Co ;&#8+)%9% ;#%8+'69'

Pacaged Foods & )eats Camp@e00 So/p Co ;&+8&59' ;685#9'

ConAra (oo2s In1 ;&'86639# ;&+863&9+

Dean (oo2s Co ;&8%339& ;&&8&59)

Genera0 Mi00s In1 ;+38#3+95 ;&)8#%&93

Hers=ey Co<T=e ;&'8#3)9# ;58+%96

H Hein Co ;&38%6&93 ;&'8)%59'

Horme0 (oo2s Corp ;583&%9+ ;#853396

M Sm/1:er Co<T=e ;#8569' ;386569%

!e00o Co ;+'8339) ;&+85659'

!ra>t (oo2s In1 ;)%8#39# ;)'83#9'M1Cormi1: CoIn1<MD ;58&'9& ;38&%+9&Mea2 o=nsonN/trition Co ;&'8'#9% ;+8+#95

Sara Lee Corp ;%836'9+ ;&+8&9'

Tyson (oo2s In1 ;#8#+69& ;+#86')9'

%obacco %obacco A0tria Gro/p In1 ;)+8+5593 ;&#8+)9'

Lori00ar2 In1 ;&'8%+69# ;38##9'P=i0ip MorrisInternationa0 In1 ;&86')9 ;+58'359'Reyno02s Ameri1an

In1 ;&58&%#93 ;8)&%9'House*old & Personal

Products House*old Products House*old Products C0oro Co ;8)696 ;58)5'9'Co0ate7Pa0mo0i4e

Co ;38++%95 ;&583+69'

!im@er0y7C0ar: Corp ;+58&+9& ;&%8&&59'

Pro1ter Gam@0eCo<T=e ;&658%3393 ;6%8'+%9'



Personal Products Personal Products A4on Pro2/1ts In1 ;&&83)9) ;&'83+9

Estee La/2er Cos In1 ;&&8#+'9 ;683+39

11




As a defensive se#tor, #onsu/er sta7+es 7erfor/an#e is +ess sensitive to e#ono/i# do8nturns‟

re+ative to other se#tors) %he #onsu/er sta7+es se#tor out7erfor/ed the SK 5** over the +ast

t8o and three year 7eriods ending in A7ri+ =*1* 8hi#h in#+uded the re#ent do8nturn) It +ost

=)=4 and gained *)6= over the +ast t8o and three years, res7e#tive+y, #o/7ared to a +oss of

1)45 and 1@)@5 for the SK 5** for the sa/e 7eriods, res7e#tive+y) -uring =*1* 8hen the

e#ono/y sho8ed #+ear signs of re#overy, it under7erfor/ed the SK 5**) %he se#tor return 8as)'1 versus 1*)51 for the SK 5** in the first <uarter and a return of 1)53 versus 1)6

for the SK 5** for the /onth of A7ri+)

Table / S4P /00 Sector Performance

%he #onsu/er se#tor is in the /ature stage of the +ife#y#+e su#h that a++ the #o/7anies in these#tor 7ay out regu+ar <uarter+y dividends) It #urrent+y has a dividend yie+d of 4)*4

Table Di$i%en% 5iel% b. Sector

SectorDividend 3ield

:

Energy +93#

Materials &9%

Industrials +9++

Consumer Discretionary &9)+

!onsumer Staples 6"(6

Health Care +9'6

Financials &9&)

Information Technology '9%)Telecommunication Services #9&6

Utilities )9#+

Source: Stan%ar% an% Poor?s

1

=





aluation8atios >igh ;o& Median Current

P<Trai0in EPS &95 '96) &9& '9)

P<(or?ar2 EPS &9# '96# &9& '9%)

P<B +96 '9 &96 &95

P<S &9+ '95 '9 '9#

P<C( &95 '96 &9+ &9&

Foo' !n' Non(A#coho#icBeve!ge In'ust$

e7siCo is #+assified under

the soft drin9 industry)

Ho8ever, un+i9e its

#o/7etitors in the soft drin9

industry, it is not a 7ure 7+ay

soft drin9 #o/7any) It has a

+arge 7ortfo+io of sna#9s and

food 7rodu#ts)

In =**@, retai+ sa+es fro/

food and 0everage stores

tota+ed an esti/ated &5'5)6

0i++ion, u7 0y *)46 fro/

the 7revious year 0ased on

esti/ates 0y the US

-e7art/ent of Co//er#e)

Consu/ers s7ent an

additiona+ &5@)5 0i++ion at

food servi#es and drin9ing 7+a#es su#h as restaurants,

u7 *)=@ fro/ =**6)

%he food industry is #o/7rised

of a 8ide variety of #ategories

su#h as sugar

and#onfe#tionar

y, fruit and

vegeta0+e

7reserving

8hi#h

in#+udes

fro?en food

/anufa#turin

g, fruit and

vegeta0+e#anning,

dairy

7rodu#ts

/anufa#turin

g to na/e a

fe8)

-is#ussion

in this 7a7er

8i++ 0e

+i/ited to thesna#9 food

industry

sin#e

e7siCo has

a do/inant

7osition in

that industrythrough its

FNA

division)

e7siCo is a

9ey 7+ayer in

the #erea+

industry)

Ho8ever, it

on+y has an

6 sharethrough its

Bua9er Foods

division) %he

industry is

do/inated 0y

e++ogg 8ith

4)= /ar9et

share and

>enera+ Mi++s

8ith 41)=/ar9et

share)5

SnackFood

Industry

%he sna#9 food industry is

esti/ated to generate &=5)6

0i++ion in revenue) Frito ay

do/inates the industry 8ith

an esti/ated 51 of the

/ar9et) %he other 9ey 7+ayers

have sing+e digit share of the

/ar9et 8ith ConAgra Foods a

distant se#ond 8ith 3

/ar9et share)

Industry 7erfor/an#e is

inf+uen#ed 0y agri#u+tura+

#o//odity 7ri#es su#h as

nuts, #orn, sugar and grains) It

#o/7etes 8ith 7rodu#ts su#h

as #erea+s and #onfe#tionery)

i9e the 0everage industry,

#onsu/ers in#reased hea+th

#ons#iousness affe#ts the

de/and for its 7rodu#ts)

5 Source: '('S@orl% 'n%ustr. Report

*1191 A Snack oo% Pro%uction in

the S

14




igure / Snack oo% 'n%ustr. Pro%uct Segmentation

%he /ost 7o7u+ar sna#9 food are #hi7s 8hether 7otato, #orn or other #hi7s 8ith '1)5 of the/ar9et) %he nuts and seeds seg/ent is a distant se#ond 8ith 11)5 /ar9et share)

Co/7anies in this industry have to #ontinuous+y innovate and introdu#e ne8 7rodu#ts to

sti/u+ate sa+es) e7siCo introdu#ed a 0a9ed +ine of 7otato #hi7s a fe8 years ago and re#ent+y

added a 9ett+e#oo9ed redu#ed fat #hi7s +ine)

Sna#9 foods are so+d 7ri/ari+y through gro#ery 8ho+esa+ers 8hi#h a##ount for 64) of the

/ar9et in =**@) %hese 8ho+esa+ers se++ to su7er/ar9ets and #onvenien#e stores)

Manufa#turer sa+es dire#t+y to retai+ers a##ount for on+y 14) of the /ar9et) Ho8ever, thisseg/ent is e;7e#ted to in#rease sin#e +arge retai+ers su#h as $a+Mart #an rea+i?e huge #ost

savings fro/ 0y7assing 8ho+esa+ers and negotiating dire#t+y 8ith the /anufa#turers)

Sot Drink Industry

%he nona+#oho+i# 0everage industry is do/inated 0y #ar0onated soft drin9s (CS-s! 8ith

5)4 of industry revenue) Ho8ever, the #ategory s share of industry revenue has 0een fa++ing‟

due to the shift in #onsu/er 7referen#e to non#ar0onated 0everages) A##ording to .everage

-igest, the CS- #ategory in the US +ast gre8 in =**) Maor industry 7+ayers have turned their

fo#us to 7rodu#ing and /ar9eting non#ar0onated drin9s) Another trend 8ithin the #ar0onated

soft drin9 seg/ent is the s+o8ing gro8th of diet CS-s 8hi#h started in =**5)

.ott+ed 8ater in#+udes f+avored 8aters 8hi#h at ti/es are enhan#ed 8ith vita/ins) %he #ategory

is esti/ated to a##ount for 1)5 of the industry s 7rodu#tion in =**6) -uring the e#ono/i#‟

do8nturn, gro8th in the #ategory s+o8ed do8n as /ore #onsu/ers turned to ta7 8ater) %his is a

#o/7etitive #ategory due to the #o//odity nature of the 7rodu#t, resu+ting in +o8er 7ri#es

#o/7ared to other 0everages)

1




%he s7orts drin9s, energy drin9s and ui#e #ategories are vie8ed to have the greatest gro8th

7otentia+ sin#e these 7rovide #onsu/ers 8ith additiona+ 0enefits su#h as nourish/ent fro/

ui#es, faster hydration fro/ s7orts drin9s and in#reased a+ertness fro/ energy drin9s) S7orts

drin9s a##ount for 6) of industry revenue 8ith >atorade as the +eading 0rand in the #ategory)3

%he energy drin9 seg/ent 8hi#h re7resents 1) of sa+es 0y the industry is do/inated 0y "ed

.u++) Other 0everages in#+ude tea and soy0ased drin9s)

Product SegmentationOt=er

Market SegmentationEpor

t&.

.Other S7orts drin9s "en2in

I#e 4)4* 6)* ma1=ine1)5*

operators.ott+ed 8ater

Fruit 0everages &&.1)5* S/permar:ets1)*

an2 enera0

(oo2 ser4i1e mer1=an2isersCon4enien1e ).an2 2rin:in

Car0onated soft

stores an2as

p0a1esEnergy drin9s drin9 stations

5)4* +'.4)3*&+.

&ota" ' *n

igure Pro%uct an% +arket Segmentation

Su7er/ar9ets and genera+ /er#handisers is the +argest /ar9et for the sa+e of soft drin9s and

0ott+ed 8ater and is the /aor #hanne+ to rea#h the end #onsu/ers) %his is fo++o8ed 0y food

servi#e and drin9ing 7+a#es, 8hi#h in#+udes fast food, ta9eout restaurants, diners, fu++servi#e

restaurants and 0ars) -uring the e#ono/i# do8nturn, #onsu/ers #ut do8n on dining out

resu+ting in a de#+ine in sa+es to this seg/ent)

Co#aCo+a has the +argest share of the soft drin9 /ar9et 8ith 45 /ar9et share and a /ar9et

#a7ita+i?ation of &116)56= 0i++ion) It is fo++o8ed 0y e7siCo 8ith a /ar9et share of =' and

a /ar9et #a7ita+i?ation of &1*1)= 0i++ion) A distant third is -r) e77er Sna77+e >rou7 8ith

a /ar9et share of 3)5 and a /ar9et #a7ita+i?ation of &@)4*= 0i++ion)

Comp!n$ An!#$sis

Fundamental Drivers

e7siCo intends to e;7and its /a#ro sna#9 0usiness 0y gro8ing its 0usiness outside the US and

deve+o7ing and introdu#ing ne8 7rodu#ts 0ased on #hanging #onsu/er tastes and #atering to

+o#a+ tastes)

%he #o/7any announ#ed re#ent+y that it 8i++ invest &=)5 0i++ion in China in addition to the &1

0i++ion it had #o//itted in =**6) %he invest/ent 8i++ 0e used to 0ui+d ne8 /anufa#turing

fa#i+ities, in#rease resear#h and deve+o7/ent, in#reased agri#u+tura+ deve+o7/ent and 0ui+ding

its 0rands in the #ountry) e7siCo 7+ans to o7en 1*1= ne8 7+ants in China to /anufa#ture soft

drin9s, non#ar0onated 0everages and sna#9s and e;7and 7rodu#tion +ines in e;isting fa#i+ities)

In addition, it 7+ans to 0ui+d a resear#h and deve+o7/ent #enter in China to deve+o7 7rodu#ts for

3 Source: '('S@orl% 'n%ustr. Report *1211 A Soft Drink Pro%uction in the S






a++ of Asia and 0roaden its 7ortfo+io to 7rovide /ore food and 0everage #hoi#es using8ho+eso/e ingredients)

-ue to heightened hea+th a8areness, and in#reasing o0esity #on#erns, A/eri#ans are turning

a8ay fro/ sna#9 foods high in fat and sodiu/) e7siCo has res7onded to this trend 0y

e;7anding its 7ortfo+io of hea+thier sna#9 foods) It has e+i/inated transfat fro/ its #hi7s

sna#9s 0y using #orn oi+ and added a +ine of 0a9ed #hi7s) It announ#ed ear+ier this year that it is

deve+o7ing a ne8 designer sa+tJ that 8i++ redu#e sodiu/ in its 7otato #hi7s 7rodu#ts 0y =5 or

/ore 8ithout i/7a#t on taste) In =**6, Fritoay introdu#ed a +ine of 7re/iu/ nuts through its

%rueNorth +ine as another o7tion to hea+th#ons#ious #onsu/ers) .y ro++ing out ne8 innovative

7rodu#ts and differentiating its 0rands, e7siCo #an shift the 0uying ha0its of 7ri#e #ons#ious

#onsu/ers to 7ur#hase its 7re/iu/ 0rands over store 0rands)

e7siCo a#<uired its t8o +argest 0ott+ers in North A/eri#a to gro8 its 0everage 0usiness) In the

7ast fe8 years e7si have +aun#hed and a#<uired a range of non#ar0onated 0rands as de/ands

for #ar0onated 0everages de#+ined and #onsu/ers shifted its 7referen#e to s7orts drin9s, energy

drin9s, 8ater, ui#es and tea) S/a++er 0rands su#h as fortified 8ater, ui#es, and energy drin9s

8hi#h are so+d at re+ative+y +o8 vo+u/es, do not have the e#ono/ies of s#a+e that 0ott+ers found

attra#tive to distri0ute sin#e the industry s o7erating /argins are +o8) %he a#<uisitions 7rovide‟

e7siCo the f+e;i0i+ity in getting its 7rodu#ts to /ar9et faster and /ore effi#ient+y) In addition,

+arge retai+ store #hains su#h as $a+Mart and roger have 0een de/anding #usto/i?ed route to

/ar9et) .y verti#a++y integrating, e7siCo e+i/inates any 7rofita0i+ity #onf+i#ts that #an e;ist

0et8een t8o #o/7anies) It then ena0+es e7siCo to 0e /ore res7onsive to the de/ands of 0oth

retai+ers and end #onsu/ers)

%he 0uying 7o8er of retai+ers has in#reased over the 7ast de#ade due to the #onso+idation in the

industry) $ith its e;tensive 7ortfo+io of sna#9s, food and 0everage 7rodu#ts e7siCo in#reases

its 0argaining 7o8er over the retai+ers in ter/s of 7ri#ing and she+f s7a#e) e7siCo has the first

/over advantage in the industry shift to verti#a++y integrate the 0ott+ers and had started rea+i?ing

the synergies of the #o/0ined #o/7anies) Co#a Co+a is yet to #+ose on its a#<uisition of Co#a

Co+a Enter7rises 8hi#h is e;7e#ted in the Fa++ of =*1*)'

e7siCo s 7+ans to e;7and its good for youJ 7ortfo+io 8hi#h #urrent+y generates &1* 0i++ion in‟

revenue fro/ its #ore 7rodu#ts +ed 0y %ro7i#ana, e0edyans9y, andora in the ui#e 0rands,

A<uafina, Bua9er for grains, >, >atorade for ath+etes and the ne8 dairy oint venture 8ith

A+/arai) e7siCo intends to e;7and this to a &4* 0i++ion do++ar 7ortfo+io 0y investing in "K- to

find s#ien#e0ased innovations and through targeted a#<uisitions and oint ventures)

Financial Analysis

e7siCo revenue is esti/ated to in#rease 0et8een eight to nine 7er#ent driven 0y gro8th in itssna#9 food 0usiness and regiona+ gro8th in its e/erging /ar9ets seg/ent, AMEA) rior to the

' +orningstar Stock Strategist 'n%ustr. Reports A oke Rises to the Pepsi hallenge b. Philip "orham, 3, 3pril

1-, 2010

13




e#ono/i# do8nturn e7siCo revenue 8as gro8ing at an average of @ year over year for the si;

years 7rior to the re#ent re#ession) %he shar7 in#rease in revenue 0et8een fis#a+ year =**@ and

=*1* in the 7rofor/a in#o/e state/ent sho8n in %a0+e 6 is due to revenues fro/ the t8o

0ott+ers a#<uired in Fe0ruary 8hi#h are no8 going to 0e ref+e#ted in e7siCo s #onso+idated‟

finan#ia+ state/ents) O7erating in#o/e i/7rove/ents of around 3 year over year is e;7e#ted

as e7siCo #ontinues its #ost /anage/ent initiatives and i/7roves effi#ien#y) O7erating /arginis 16 #onsistent 8ith the #o/7any s e;7erien#e)‟

Table 8 Pepsio Proforma 'ncome Statement

FY FY FY FY FY FY FY FY

+)illions, 2012- 2011- 2010- 200. 200/ 200 200 200

Net Sa0es "100 1"20 "1 3"232 3"21 3." 3"13 32"2

Operatin Epenses "10/ 0"1 "111 3"1// 3"2.2 32"2.2 2/"3 2"/

Operatin In1ome 11"..2 11"0. 10". /"0 ".. "1/2 "02 "./

Interest expense and Income

Bott0in E/ity In1ome 3 3 0 3 .Interest Epense +/0, +3, +/0, +3., +32., +22, +23., +2,

Interest In1ome 121 110 102 1 12 13 1.

Tota0 +/, +2, !"#$ %! #& '&( '#" %)#

In1 @e>ore in1 taes minority interest 11"30 10"1 .".1 /"0. "*+'! "*&'% &*)#) &*%#,

Pro4ision >or In1ome taes 3"3.2 3"11 2".2 2"100 1"/. 1".3 1"3 2"30

Net In1ome ".1 "32. "1. ".. "1 "0 "2 "0/

-ess. /et Income attri0uta0le to noncontrolling interest 4 4 4 +33, +2, +12, 4 4

Net In1ome ".1 "32. "1. ". "12 "/ "2 "0/

Common Shares 1"3 1"3 1"3 1"/ 1"/ 1"1/ 1"2 1".

EPS7Basi1 ,pre a11t 1=ne- 5 52 53 35/1 352 35/ 352 253C/m/0 eFe1t o> a11t 1=ane 4 4 4 4 4 4 4 4

Net In1ome 5 52 53 35/1 352 35/ 352 253

Diluted Shares 1"3 1"3 1"3 1"/ 1". 1"3. 1"/1 1"00

EPS72i0/te2 5 52 53 351 3521 351 353 253.

C/m/0 eFe1t o> a11t 1=ane 4 4 4 4 4 4 4 4

Net In1ome 5 52 53 351 3521 351 353 253.

Prota7ility

e7siCo has 0een #onsistent+y 7rofita0+e 8ith 7rofit /argins #onsistent+y a0ove 1* in thisde#ade and a return of over 4* to its #o//on e<uity ho+ders for /ost the de#ade)

1'




Table 9 Pepsio Profitabilit. Ratios

F3 !(($ F3 !((# F3 !((, F3 !(( F3 !((% F3 !((1 F3 !((6 F3 !((! F3 !((* F3 !(((

Gross Marin 5395& 5+9%5 5)93' 559&) 5#9)# 5)9& 5)9&' 5)9++ 5)9+ #&9&)

Operatin Marin &9#& &#9'3 &9&# &95+ &9&% &9)% &9)% &9'' &965 &596

Preta Marin &9#% &#9+3 &%933 &%9% &%9#' &9%5 &95& &69#5 &69&) &596&

Prot Marin &3965 &&9% &)933 &#9'# &+95+ &)93% &39+3 &&9%5 &&93+ &'9#

Ret/rn on Assets &59#6 &)95# &695+ &9+6 &39#5 &596% &)9#& &39+6 &+95+ &&9)'Ret/rn on CommonE/ity )&9+) 359&) 3)96 39&3 +%9)3 339+5 339)5 339'5 3+96& 3'9&)

Ret/rn on Capita0 +69)% +59)5 +%9'& 3&9'' +39+% +69# +696 +#9'# +)9%3 ++9)

EFe1ti4e Ta Rate +59%% +#96# +59# &%9+6 3#9&' +)96) +953 3+933 339%3 3&9%%

Earnings 7er share (ES! has 0een gro8ing a0ove 1* year over year during the de#adee;#e7t for years during a re#ession) ES +ongter/ future gro8th rate is e;7e#ted to 0e @)

Table 10 Pepsio arnings Per Share

2000 2001 2002 2003 200 200 200 200 200/ 200. 2010 2011-

March +1,# +1%% +1%! +1%) +1'& '953 '9#' '9#5 '96' '96& '96# '9)

2une +1%% +1'& +1'# +1!' +1&( '96' '9' '9%) &9'3 &9'+ &9'% &9+5

Septem0er +1', +1') +1!, +1!# +1&& '96 '9 '9%% &9'# &9' &9+) &93)

Decem0er +1%) +1'' +1'' +1!, +1!# '9#5 '96+ '9' '9 '9%' &9'% &9++

3ear (1', (1", (1") ,1+% ,1%( ,1&& %1++ %1%# %1&" %1"( '1(& '1&'

3ear over 3ear (!4 ,(4 '4 (%4 ('4 (!4 (%4 (%4 )4 (4 (,4 (,4

Co#aCo+a /argins are higher #o/7ared to e7siCo) -uring the de#ade, its gross /argin has

0een a0ove 3* and its 7rofit /argin a77ro;i/ate+y =*) Ho8ever, its return ratios are#o/7ara0+e to e7siCo)

Table 11 oca!ola Profitabilit. Ratios

F3 !(($ F3 !((# F3 !((, F3 !(( F3 !((% F3 !((1 F3 !((6 F3 !((! F3 !((* F3 !(((

Gross Marin #)9++ #)93% #39%% ##9&+ #)933 #)96' #39&+ #39# #5955 #9&

Operatin Marin +#95# +#9)) +#9'# +693% +#9&3 +#9+& +6953 +69%' 3'95' +59&

Preta Marin +96 +39+% +69+ +693& +9%# +9#+ +#9&& +9&& 3+93+ &69'%

Prot Marin ++9'+ &9& +'963 +&9'% +&9'% ++9+% +'9## &595% ++9#+ &'9%5

Ret/rn on Assets &593' &39# &#933 &69&& &#9'& &#9)% &#966 &39'' &935 &'9+#

Ret/rn on Common E/ity 3'9&5 +695& 3'9%) 3'953 3'9& 3+9+% 3395 +#933 393 +39&+

Ret/rn on Capita0 +&93& &%96 +396 +)9&& ++935 +39)# +)9) &9%% +#953 &#9')

EFe1ti4e Ta Rate ++9' +&9%) +)9'3 ++966 +69&6 ++9&' +'9% +696' +%9+ 359%5

Co#aCo+a s ES has 0een /ore vo+ati+e than e7siCo during this de#ade 8ith /ore years in‟

sing+e digit gro8th) It e;7erien#ed a negative 4 ES gro8th during the +atest re#ession in =**@)

For the sa/e year, e7siCo s ES 8as sti++ 7ositive at 1) %his is due to e7siCo s FNA‟ ‟

and AMEA gro8th during the year) ongter/ ES gro8th is +o8er than e7siCo at 6)

1

6




Table 12 oca!ola arnings Per Share

2000 2001 2002 2003 200 200 200 200 200/ 200. 2010 2011

March +1,, +1%! +1%' +1%" +1'& +1'" +1') +1!& +1&" +1&! +1# +1#"

2une +1', +1'! +1') +1!" +1&! '9# '96) '95 &9'& '9%+ &9'+ &9&+

Septem0er +1', +1'( +1'! +1!! +1! '956 '9#+ '96& '93 '9+ '9% '9%

Decem0er +1%# +1%" +1%# +1'& +1'& '9)# '95+ '95 '9#) '9## '963 '9'

3ear (1'' (1!# (1&& (1)! ,1+" ,1(# ,1%" ,1" %1(! %1+! %1'! %1"!

3ear to 3ear (,4 (+4 !4 ("4 &4 !4 )4 ('4 ("4 5%4 (%4 )4

-r e77er Sna77+e >rou7 (-S! finan#ia+ data as a 7u0+i#+y traded #o/7any started in =**6

8hen it 8as s7un off 0y Cad0ury S#h8e77es) It is the s/a++est soft drin9 /anufa#turer in the

inde;) -S 7rofita0i+ity ratios and returns are either si/i+ar to e7siCo s or +o8er) ong‟

ter/ esti/ated ES gro8th is +o8er at 6)

Table 1- omparati$e Profitabilit. RatiosTable 1* omparati$e PS 2009

?eneral

PepsiCoCoca-Cola DPS @rat Mills 6eneral

Gross Marin 5395& #)9++ 5%9#& 3#9&5 359#+ DPS 7raft )ills8

Operatin Marin &9#& +#95# &%9#+ &3953 &595+ 3ear (1)" ,1+' %1)#

Preta Marin &9#% +96 &59#% &'9#+ &396 3ear to 3ear "4 #4 (+4

Prot Marin &3965 ++9'+ &'9'3 69) 9 -6T 7ro8th rate #4 #4 )4

Ret/rn on Assets &59#6 &593' #936 )9#5 69'6

H (is1a0 year +''7+''%

Ret/rn on CommonE/ity )&9+) 3'9&5 &%9&# &+95) ++9%'

Ret/rn on Capita0 +69)% +&93& &&953 9%5 &+9'%

EFe1ti4e Ta Rate +59%% ++9' 3#9+% +%936 3595

raft and >enera+ Mi++s are in#+uded in the #o/7arison 8ith e7siCo sin#e 0oth these #o/7anies are

e7siCo s #o/7etitors in the sna#9 food and #erea+ industries) raft and >enera+ Mi++s have +o8er‟

/argins and returns #o/7ared to e7siCo and the soft drin9 industry in genera+)

;i9uidity

e7siCo s +i<uidity 7osition has 0een #onsistent+y strong as sho8n 0y severa+ +i<uidity‟

/easure/ent ratios) Its #ash, <ui#9 and #urrent ratios have 0een i/7roving over ti/e 8hi#h/eans that its a0i+ity to /eet its shortter/ de0t o0+igations has 0een strengthening) $ith its

#urrent <ui#9 ratio e7siCo s /ore +i<uid #urrent assets (#ash, shortter/ invest/ents and‟

re#eiva0+es!, #an /eet its entire #urrent +ia0i+ities)

On the other hand, its #ash #onversion #y#+e /etri#s 8hi#h /easures the nu/0er of days that the

#o/7any s #ash is tied u7 in inventory and sa+es 7ro#ess has 0een in#reasing) Its inventory‟

turnover days in#reased fro/ * days in =** to 3 in the +ast fis#a+ year, its inventory to #ash

days in#reased fro/ '5 in =**1 to 65 in =**@ and its a##ounts re#eiva0+e turnover days

in#reased fro/ 44 days in =**1 to 4@ days in the +ast fis#a+ year)



1@




e7siCo s 8or9ing #a7ita+ has 0een in#reasing over the years and stood at &4)6 0i++ion 0y the end of‟

=**@) Ho8ever, its #ash f+o8 fro/ o7erations as a 7er#entage of tota+ de0t has 0een de#+ining)

Table 1/ Pepsio ;i<ui%it. Ratios

F3!(($

F3!((#

F3 !((,

F3 !((

F3 !((%

F3 !((1

F3 !((6

F3 !((!

F3 !((*

F3 !(((

Cas= Ratio '9)6 '9+# '93+ '9)& '95+ '95& '93& '93' '933 '93&

*/i1: Ratio&9''

'96% '9% '9%5 '96 '9%5 '965 '96+ '96# '96#

C/rrent Ratio&9))

&9+3 &93& &933 &9&& &9+ &9' &9'# &9&6 &9&6

Tota0 De@t<Tota0 Capita03&.

)'. ++. &#. +6. +'. &#. ++. +#. 3'.

Cas= E/i4a0ents<C/rrentAssets

33.

+&. +). 3&. )6. )'. +%. +%. +. +6.

A11o/nts Re1ei4a@0e T/rno4er7Days 3%

3% 36 3# 3# 3# 3# 3) 33 35

In4entory T/rno4er Days )#)) )3 )+ )+ )' )' )+ )+ )%

In4entory to Cas= Days 5

+ ' 6 6 6# 66 6# 65 )

C(O<Tota0 De@t#.

5. &)6. +&5. &&3. &)#. &%. &#. &+6. &3.

Cas=o?<Tota0 Lia@i0ities3'.

+%. )'. )+. 33. 35. 3+. 33. +%. 3).

or:in Capita0 ,MM-;38&5

;+8'&% ;+83% ;+8+6';&8') ;&86 ;5&5 ;3#& ;55 ;++

e7siCo has the strongest +i<uidity ratios in ter/s of its #ash, <ui#9 and #urrent ratios #o/7ared

to its #o/7etitors) In ter/s of #ash #onversion #y#+e /etri#s, -r e77er Sna77+e has the

shortest turnover days to #onvert inventory to sa+es and inventory to #ash)Table 1 omparati$e ;i<ui%it. Ratios 5 2009

Dr" Pepper ?eneralPepsiC

oCoca-Cola Snapple @rat Mills

Cas= Ratio '9)6 '9#6 '933 '9& '9+&

*/i1: Ratio &9'' '9%5 '9%# '9#) '9)6

C/rrent Ratio &9)) &9+ &95 &9' '9%

Tota0 De@t<Tota0 Capita0 3&. 3+. ). )+. 56.Cas= E/i4a0ents<C/rrent

Assets 33. 5+. ++. &6. +&.A11o/nts Re1ei4a@0e T/rno4er7Days 3% )' 35 )5 +#

In4entory T/rno4er Days )# 65 )3 5) 53

In4entory to Cas= Days 5 &&5 6 %% 6%

C(O<Tota0 De@t #. #. +%. +6. +#.

Cas=o?<Tota0 Lia@i0ities 3'. 35. &5. &+. &5.

or:in Capita0 ,MM- ;38&5 ;383' ;)+5 ;%#3 7;6&



=*




;everage

%ota+ de0t is #a+#u+ated 0y adding shortter/ de0t to +ongter/ de0t o0+igations) e7siCo s‟

tota+ de0t is /ost+y #o/7osed of its +ong ter/ de0t starting in =**3 sin#e +everage ratios using

+ong ter/ de0t and tota+ de0t 8ere not a +ot different during those years) %his is #onfir/ed 0y

#a+#u+ating the 7er#entage of +ongter/ de0t to tota+ de0t) ongter/ de0t has 0een over @* of

tota+ de0t during that 7eriod) In =**5, +ongter/ de0t 8as on+y of its tota+ de0t) e7siCo s‟

+everage ratios 7ea9ed in =**6 and sho8ed a shar7 i/7rove/ent in =**@ and are no8 +ess than

ha+f of #o//on e<uity)

Table 16 Pepsio ;e$erage Ratios

F3 !(($

F3 !((#

F3 !((,

F3 !((

F3 !((%

F3 !((1

F3 !((6

F3 !((!

F3 !((*

F3 !(((

LT De@t<CommonE/ity ))9&. #59&. +)9). &#9#. &#93. &69. &)9). +39&. 3'96. 3%9#.

LT De@t<Tota0 Capita0 +%9+. 39#. &%9&. &)9'. &&9%. &)9&. &+9'. &69. ++96. +69.

LT De@t<Tota0 Assets &9#. +&9. &+9&. 95. 693. 9#. #96. %93. &+9+. &)95.

Tota0 De@t<CommonE/ity )#9%. #9+. +695. &9). 3#9#. +59#. &%9). +%9'. 3)96. )+9+.

Tota0 De@t<Tota0 E/ity )59&. #9'. +69). &9). 3#95. +595. &%93. +9%. 3)9#. )+9&.

Tota0 De@t<Tota0 Capita0 3&9&. )'95. +&95. &595. +#96. +'93. &#9+. ++9). +596. +%9#.

Tota0 De@t<Tota0 Assets &%96. ++9%. &396. %9). &#9). &+93. %9&. &&96. &39%. &595.

Tota0 De@t<Mar:et Cap 9+. %96. 39. +9. 593. )9'. +9%. 39. 395. 396.

-r e77er Sna77+e and >enera+ Mi++s have high +everage #o/7ared to the other #o/7anies)

Co#aCo+a s shortter/ de0t /ust 0e a signifi#ant 7art of its tota+ de0t sin#e its +everage‟

using +ongter/ de0t +oo9s /u#h 0etter than 8hen tota+ de0t is used) e7siCo and Co#aCo+a,#urrent+y, have si/i+ar +everage ratios 8hen using tota+ de0t to #a+#u+ate +everage)

Table 18 omparati$e ;e$erage Ratios 5 2009

?eneral

PepsiCoCoca-Cola DPS @rat Mills

LT De@t<Common E/ity ))9&. +'9). %+9%. #%96. &&&9+.

LT De@t<Tota0 Capita0 +%9+. &39#. )9+. )'9&. )#9&.

LT De@t<Tota0 Assets &9#. &'9). 3396. +69'. 3+9+.

Tota0 De@t<CommonE/ity )#9%. )69. %+9%. 639). &3#96.

Tota0 De@t<Tota0 E/ity )59&. )#9. %+9%. 639&. &3'93.

Tota0 De@t<Tota0 Capita0 3&9&. 3&9%. )9+. )+9+. 5#9#.

Tota0 De@t<Tota0 Assets &%96. +)9). 3396. +95. 3%9#.

Tota0 De@t<Mar:et Cap 9+. %9'. )&9'. )6. )+.

=1








Co#aCo+a Enter7rises is in the 7ro#ess of 0eing a#<uired 0y Co#aCo+a) I in#+uded the

#o/7any in the figure 0e+o8 sin#e its va+uation is sti++ ref+e#ted in the industry +eve+ va+uations)

Current va+uations of -r e77er Sna77+e are +o8er than the soft drin9 industry va+uations)

Co#aCo+a is e;7ensive re+ative to e7siCo in a++ /easures 0e+o8 e;#e7t trai+ing LE) raft and

>enera+ /i++s have va+uations #o/7arative to e7siCo in ter/s of for8ard LE and LCF and

+ess e;7ensive in a++ other /easures)

Table 22 omparati$e ompan. 7aluations

9ame %railing Forard Price to Price to Price to

P:- P:- #oo Sales !as*flo

Soft DrinsCoca5Cola Co6The ("1++ (!1!+ !1++ '1++ ('1!+

Coca5Cola Enterprises Inc ("1!+ (&1++ (&1++ +1&+ "1!+

Dr 9epper Snapple 7roup Inc ("1++ ('1(+ ,1"+ (1!+ ((1"+9epsiCo Inc6/C ("1,+ (!1(+ &1(+ ,1'+ (%1&+

Soft Drins 'aluation ("1!+ (!1&+ !1'+ ,1(+ (%1)+

Pacaged Foods & )eatsCamp0ell Soup Co (!1++ ('1,+ ((1)+ (1&+ ((1'+

Con:gra Foods Inc ('1%+ (%1!+ ,1,+ +1)+ (+1++

Dean Foods Co (+1,+ (+1&+ ,1,+ +1%+ !1'+

7eneral Mills Inc (!1++ (!1++ %1"+ (1&+ ((1!+

Hershey Co6The ()1#+ ('1!+ (%1#+ ,1++ ('1)+

H2 Hein; Co (&1&+ (!1&+ #1(+ (1'+ (,1!+

Hormel Foods Corp ('1&+ ('1)+ ,1'+ +1#+ (+1)+2M Smuc<er Co6The ('1'+ (!1++ (1'+ (1&+ (+1"+

=ellogg Co ("1(+ (!1(+ )1(+ (1&+ (,1)+

=raft Foods Inc ('1#+ ('1&+ (1"+ (1%+ ((1"+

McCormic< > Co Inc6MD (&1'+ (!1'+ '1++ (1&+ (,1!+

Mead 2ohnson /utrition Co ,%1"+ ,,1%+ /M %1#+ ,(1++

Sara -ee Corp ('1,+ (%1(+ %1'+ +1#+ #1'+

Tyson Foods Inc ,+1"+ (%1++ (1&+ +1%+ #1#+

Pacaged Foods & )eats 'aluation (!1#+ (!1,+ ,1#+ +1)+ ((1!+

=4




Discounted Cash Flo& 'DCF+ Analysis

Un+i9e va+uation /etri#s su#h as the LE ratio, -CF re+ies on free #ash f+o8s) It is a /ore re+ia0+e

esti/ate of a #o/7any s intrinsi# va+ue sin#e it re/oves the a##ounting ar0itrariness in‟

re#ogni?ing earnings and e;7enses) "egard+ess of 8hether a #ash out+ay is e;7ensed or

#a7ita+i?ed, free #ash f+o8 is the /oney +eft over for investors)

A dis#ount rate of @)5 is used in the -CF /ode+ 8hi#h the rate used for +ess ris9y defensive

se#tors su#h as #onsu/er sta7+es) %here is no indi#ation fro/ /y resear#h that e7siCo is ris9ier

than the se#tor and that a higher rate is 8arranted) A gro8th rate of is used assu/ing that the

#o/7any s +ongter/ gro8th rate 8ou+d 0e that of the /ar9et) %he fo++o8ing are other‟

assu/7tions used in the #onstru#tion of the /ode+:

1 "evenue for the #o/7any for =*1* to =*1= is 6 on average ref+e#ting the revenue

gro8th e;7e#tations for its 0usiness units) An average of 4)5 revenue gro8th for A., the

0everage unit, ref+e#ting the 0e+o8 /ar9et gro8th of the 0everage industry, an average 16

gro8th for e7siCo Internationa+ as this 0usiness has 0een e;7erien#ing this ty7e of dou0+edigit gro8th 8hi#h is e;7e#ted to #ontinue given that e7siCo 7+ans to e;7and its

internationa+ o7erations and an average of 3 gro8th for a0ove /ar9et gro8th e;7e#tation

for its food and sna#9s unit, AF)

2 O7erating In#o/e is 7roe#ted at an average of 16 in the ne;t three years as aresu+t of ro++ing u7 the 7roe#ted revenues and o7erating #osts of its three 0usiness unitsand is #onsistent 8ith the #o/7any s e;7erien#e during the de#ade)‟

3 Interest E;7ense is 0ased on the #o/7any s e;7erien#e in the 7revious five fis#a+‟

years and in#reasing to 1)= of revenue as the e#ono/y gro8s and interest rates in#rease)

4 -e7re#iation is 0ased on its histori#a+ re+ationshi7 to revenue)

5 %a; for the #urrent fis#a+ year is =6 0ased on the #o/7any s guidan#e during its‟

earnings #a++ for its fis#a+ =**@ 7erfor/an#e) %he ta; rate is 7roe#ted to in#rease to 4*given the defi#its e;7erien#ed 0y the #ountries in 8hi#h e7siCo o7erates)

6 Ca7ita+ E;7enditure for the #urrent fis#a+ year is 0ased on the #o/7any s 7+anned &4)3‟

0i++ion s7ending on this ite/, /oving to8ards its histori#a+ rate re+ative to sa+es and fina++y#onverging 8ith the ter/ina+ de7re#iation rate)

=






Risks

1 %here is the ris9 of /isste7s in integrating the t8o 0ott+ers, the e7si .ott+ing >rou7,In#) (.>! and e7siA/eri#as, In#) (AS! 7reventing the #o/7any to fu++y rea+i?e the 0enefits and #ost savings e;7e#ted fro/ the a#<uisitions)

2 Curren#y ris9 in#reases as e7siCo derives a greater 7ro7ortion of its revenue

fro/ its internationa+ o7erations)3 e7siCo o7erates in =** #ountries e;7osing it to 7o+iti#a+ ris9) A re#ent e;a/7+e of su#h

ris9 o##urred in ear+y May 8hen ene?ue+an resident Hugo Chave? sei?ed a 8arehouseo8ned

0y E/7resas o+ar SA, the #ountry s +argest food /a9er, 8hi#h has a oint venture‟

8ith e7siCo for the +ast 15 years to su77+y #ar0onated drin9s in ene?ue+a)6

4 In#reasing #o//odity 7ri#es 8i++ affe#t e7siCo s 7erfor/an#e sin#e it is de7endent on‟

agri#u+tura+ #o//odity 7rodu#ts) ri#es are de7endent on g+o0a+ de/and and su77+y and are

sensitive to e;tre/e 8eather #onditions)

5 %he i/7a#t of the Euro7ean de0t #risis #ou+d s+o8 do8n the g+o0a+ e#ono/i# gro8th

8hi#h #an have an adverse effe#t on e7siCo s future revenue)‟

Conc#usion

e7siCo is a 8e++ /anaged #o/7any 8ith 8e++ defined strategies to a#hieve gro8th in a /ature

industry) Fro/ re#ent events and announ#e/ents, it see/s that the #o/7any is /a9ing 7rogress

e;e#uting on these strategies) It see9s to derive gro8th 0y e;7anding its o7erations

internationa++y 8hi#h is evident in its re#ent announ#e/ent that it is investing &=)5 0i++ion in

China, the fastest gro8ing e#ono/y in the 8or+d) %he #o/7any is +eading the 8ay in innovation

through "K- and its fo#us on hea+th and nutrition in deve+o7ing its 7rodu#ts)

I have a 0uy re#o//endation on e7siCo) .ased on the dis#ounted #ash f+o8 (-CF! /ode+, the

target 7ri#e for e7siCo is &' for the ne;t year) %his is a 7ri#e a77re#iation of 16)5 on the

#urrent 7ri#e of & 3=)6@, the #+osing 7ri#e on May =6) $ith an additiona+ =)@ dividend yie+d,

tota+ return is esti/ated to 0e =1))

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