PEP Pepsico, Inc. Consumer Sector: Staples HOLD

Analysts: Zachary Haller,

Andrew Paley Brown and Sean MillerWashburn University

Applied Portfolio Management

Report Date: 4/18/2016

Market Cap (mm) $147,958 Annual Dividend $2.76 2‐Yr Beta (S&P 500 Index) 0.64 Pepsico, Inc.

Return on Capital 26.6% Dividend Yield 2.7% Annualized Alpha 3.9% Compared With:

EPS (ttm) $3.71 Price/Earnings (ttm) 27.2 Institutional Ownership 6.5% The Coca‐Cola Company

Current Price $100.72 Economic Value‐Added (ttm) $5,979 Short Interest (% of Shares) 0.7% Dr Pepper Snapple Group, Inc.

12‐mo. Target Price $105.00 Free Cash Flow Margin 9.9% Days to Cover Short 2.1 and the S&P 500 Index

Business Description

Total Revenue ‐1.3% Free Cash Flow 1.1%

EBIT 1.6% Total Invested Capital ‐0.2%

NOPAT 1.2% Total Assets ‐2.3%

Earnings Per Share ‐2.2% Economic Value‐Added 1.6%

Dividends Per Share 9.1% Market Value‐Added 17.6%

2011 2012 2013 2014 2015

15.6% 14.6% 14.9% 15.1% 15.9%

N/A 9.2% 8.8% 15.9% 9.9%

6.2% 5.8% 5.3% 4.4% 3.7%

3.1% 3.1% 2.7% 2.6% 2.7%

2011 2012 2013 2014 2015

4.09 3.97 4.37 4.32 3.71

2.03 2.13 2.24 2.53 2.76

4.82 4.59 4.89 5.00 5.05

N/A 3.86 3.81 7.01 4.24

Datasource: Capital IQ

NOPAT

Free Cash Flow

Earnings Yield

Dividend Yield

Per Share Metrics

Earnings

Dividends

Free Cash Flow Margin

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

North America segment offers Lay’s 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, Cap’n 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; and ready‐to‐

Investment Thesis

PEP has increased net income even with decreases in total revenue, and

this is due to being able to maintain the growth rates of their profit

margins. With an ROIC to WACC spread of over 23%, PEP still creates value,

even in a sluggish economy. Also, PEP does reduce the portfolio's beta, and

has an expected 5‐year return of 3.7% on the dividend discount valuation

model. We’ve seen increased penetration into emerging markets. The

potential growths of these markets are among a highlight for PEP. The

currency exchange rate fluctuation, and the strengthening of the U.S.

Dollar still remains a concern. The strength of the company’s portfolio and

brand names reduces a portion of that risk. In comparison to industry

competitors, PEP is smaller yet maintains performance and relative

valuation. With PEP’s low beta, expected future returns on dividends, and

steady growth in intrinsic value, our recommendation is to hold.

ANNUALIZED 3‐YEAR CAGR

Margins and Yields

Operating Margin

PEP Pepsico, Inc. Sector: Consumer Staples HOLD

‐12%‐10%‐8%‐6%‐4%‐2%0%2%4%6%8%

PEP ^SPX

‐10%

‐5%

0%

5%

10%

15%

20%

25%PEP KO DPS

0

5

10

15

20

25

30

2012 2013 2014 2015

Price/Earnings Price/Free Cash Flow

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2011 2012 2013 2014 2015

EBIT Net Operating Profit After Tax

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$5,400

$5,500

$5,600

$5,700

$5,800$5,900

$6,000

$6,100

$6,200

$6,300

2011 2012 2013 2014 2015

Economic Value‐Added Market Valued‐Added

0%5%10%15%20%25%30%35%40%45%50%

2011 2012 2013 2014 2015

ROA ROE ROIC

Pepsico, Inc. PEP Sector Consumer Staples The Coca‐Cola Company KO Sector Consumer Staples

2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Total Revenue 66,504 65,492 66,415 66,683 63,056 Total Revenue 46,542 48,017 46,854 45,998 44,294

Cost of Goods Sold 31,547 31,291 31,243 30,884 28,384 Cost of Goods Sold 18,204 19,053 18,421 17,889 17,482

Gross Profit 34,957 34,201 35,172 35,799 34,672 Gross Profit 28,338 28,964 28,433 28,109 26,812

SG&A Expense 24,449 24,530 25,184 25,641 24,565 SG&A Expense 17,422 17,738 17,310 17,218 16,427

R&D Expense 0 0 0 0 0 R&D Expense 0 0 0 0 0

Dep. & Amort. 133 119 110 92 75 Dep. & Amort. 0 0 0 0 0

Other Oper. Exp. 0 0 0 0 0 Other Oper. Exp. 4 10 18 24 145

Operating Income 10,375 9,552 9,878 10,066 10,032 Operating Income 10,912 11,216 11,105 10,867 10,240

Interest Expense (856) (899) (911) (909) (970) Interest Expense (417) (397) (463) (483) (856)

Other Non‐Oper. Exp. 0 0 0 0 0 Other Non‐Oper. Exp. 631 810 608 581 690

EBT ex‐Unusuals 9,576 8,744 9,064 9,242 9,121 EBT ex‐Unusuals 11,609 12,144 11,854 11,610 10,770

Total Unusual Exp. (742) (440) (173) (485) (1,679) Total Unusual Exp. (151) (335) (377) (2,285) (1,165)

Earnings Before Tax 8,834 8,304 8,891 8,757 7,442 Earnings Before Tax 11,458 11,809 11,477 9,325 9,605

Income Tax Expense 2,372 2,090 2,104 2,199 1,941 Income Tax Expense 2,812 2,723 2,851 2,201 2,239

Net Income 6,443 6,178 6,740 6,513 5,452 Net Income 8,584 9,019 8,584 7,098 7,351

Earnings per Share $4.09 $3.97 $4.37 $4.32 $3.71 Earnings per Share $1.88 $2.00 $1.94 $1.62 $1.69

Dividends per Share $2.03 $2.13 $2.24 $2.53 $2.76 Dividends per Share $0.94 $1.02 $1.12 $1.22 $1.32

Effective Tax Rate 26.85% 25.17% 23.66% 25.11% 26.08% Effective Tax Rate 24.54% 23.06% 24.84% 23.60% 23.31%

Total Common Shares 1,576 1,557 1,541 1,509 1,469 Total Common Shares 4,568 4,504 4,434 4,387 4,352

Year‐end Stock Price $66.35 $68.02 $82.71 $97.05 $100.54 Year‐end Stock Price $34.99 $36.25 $41.31 $42.22 $42.96996 997 998 999 1000 996 997 998 999 1000

Assets 2011 2012 2013 2014 2015 Assets 2011 2012 2013 2014 2015

Cash and Equivalents 4,067 6,297 9,375 6,134 9,096 Cash and Equivalents 12,803 8,442 10,414 8,958 7,309

Short‐Term Investments 358 322 303 2,592 2,913 Short‐Term Investments 1,232 8,109 9,854 12,717 12,591

Total Cash & ST Invest. 4,425 6,619 9,678 8,726 12,009 Total Cash & ST Invest. 14,035 16,558 20,268 21,689 19,920

Total Receivables 6,912 7,041 6,954 6,651 6,437 Total Receivables 4,920 4,759 4,873 4,466 3,941

Inventory 3,827 3,581 3,409 3,143 2,720 Inventory 3,092 3,264 3,277 3,100 2,902

Prepaid Expenses 1,269 316 968 871 813 Prepaid Expenses 2,614 1,989 2,400 1,902 1,884

Total Current Assets 17,441 18,720 22,203 20,663 23,031 Total Current Assets 25,497 30,328 31,304 32,986 33,395

Net PPE 19,698 19,136 18,575 17,244 16,317 Net PPE 14,939 14,476 14,967 14,633 12,571

Total Assets 72,882 74,638 77,478 70,509 69,667 Total Assets 79,974 86,174 90,055 92,023 90,093

Liabilities and Equity Liabilities and Equity

Accounts Payable 4,083 4,451 4,874 5,127 5,546 Accounts Payable 2,172 1,969 1,933 2,089 2,795

Accrued Expenses 3,876 3,892 4,034 3,968 4,078 Accrued Expenses 6,488 6,376 7,305 6,793 6,739

Short‐Term Debt 3,656 1,914 3,082 980 962 Short‐Term Debt 12,871 16,297 16,901 19,130 13,129

Total Current Liab. 18,154 17,089 17,839 18,092 17,578 Total Current Liab. 24,283 27,821 27,811 32,374 26,930

Long‐Term Debt 20,568 23,544 24,333 23,821 29,213 Long‐Term Debt 13,656 14,742 19,157 19,100 28,639

Total Liabilities 51,983 52,239 53,089 52,961 57,637 Total Liabilities 48,053 53,006 56,615 61,462 64,329

Preferred Equity (116) (123) (130) (140) (145) Preferred Equity 0 0 0 0 0

Common Stock & APIC 4,487 4,204 4,120 4,140 4,100 Common Stock & APIC 12,092 13,139 14,036 14,914 15,776

Retained Earnings 40,316 43,158 46,420 49,092 50,472 Retained Earnings 53,621 58,045 61,660 63,408 65,018

Treasury Stock (17,870) (19,458) (21,004) (24,985) (29,185) Treasury Stock (31,304) (35,009) (39,091) (42,225) (45,066)

Total Common Equity 20,704 22,417 24,409 17,578 12,068 Total Common Equity 31,635 32,790 33,173 30,320 25,554

Total Equity 20,899 22,399 24,389 17,548 12,030 Total Equity 31,921 33,168 33,440 30,561 25,764

Total Liab. and Equity 72,882 74,638 77,478 70,509 69,667 Total Liab. and Equity 79,974 86,174 90,055 92,023 90,093

Income Statement Highlights

Balance Sheet Highlights

Income Statement Highlights

Balance Sheet Highlights

1. Margins and Profitability PEP, Page 2 of 22 Copyright Robert A. Weigand, Ph.D., 2016

PEP Pepsico, Inc. KO The Coca‐Cola Company

Profit Margins 2011 2012 2013 2014 2015 Profit Margins 2011 2012 2013 2014 2015

Gross Profit Margin 52.6% 52.2% 53.0% 53.7% 55.0% Gross Profit Margin 60.9% 60.3% 60.7% 61.1% 60.5%

Operating Profit Margin 15.6% 14.6% 14.9% 15.1% 15.9% Operating Profit Margin 23.4% 23.4% 23.7% 23.6% 23.1%

Net Profit Margin 9.7% 9.4% 10.1% 9.8% 8.6% Net Profit Margin 18.4% 18.8% 18.3% 15.4% 16.6%

Free Cash Flow Margin N/A 9.2% 8.8% 15.9% 9.9% Free Cash Flow Margin N/A 13.0% 10.5% 16.2% 29.5%

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015

Gross Profit Margin Operating Profit Margin

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 2015


46%

48%

50%

52%

54%

56%

58%

60%

62%

2011 2012 2013 2014 2015

Gross Profit Margin PEP KO

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014 2015

Operating Profit Margin PEP KO

0.0%

5.0%

10.0%

15.0%

20.0%

2011 2012 2013 2014 2015

Net Profit Margin PEP KO

Analyst Comments: Gross Profit Margin: The gross profit margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with

producing the goods and services sold by a company. PEPs Gross profit margin increases steadily from 52.6 in 2011 to 55.0% in 2015, KO has seen a consolidation in their gross profit margin from 60.9% in 2011 to 60.5% in 2015. The important thing to note is that with PEP, we have seen a decrease in cost of goods sold by nearly $3 billion while seeing a decrease in total revenue which has helped increase their gross margin. Even when PEP saw a decline in revenue, they were still able to increase the gross profit margin. EBIT Margin (Operating profit margin): EBIT/Operating margin is a measurement of a company's operating profitability. This margin can provide an investor with a cleaner view of a company's core profitability. PEP sees a slight increase in operating profit margin from 15.6%% to 15.9%, which is a pretty moderate. KOs operating margin also sees a consolidation from 23.4% to 23.1% during the same period. We can

conclude that during this 5 year period PEP and KO have seen moderate to no growth in EBIT/Operating Profit Margin Net Profit Margin: Net profit margin, is the ratio of net profits

revenues, which shows how much of each revenue dollar earned is translated into bottom‐line profits. PEP’s net profit margin decreased from 9.7% in 2011 to 8.6% in 2015. KO has also seen a decrease in net profit margin, but at a greater margin, from 18.4% in 2011 to 16.6% in 2015. We concluded from this that PEP and KO have seen a decrease in their net profit margins, but KO still has double the net profit margin then PEP. Free Cash Flow Margin: Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. We want to make sure that accounting profits are backed up by tangible free cash flows. UNP has seen a slight increase of its free cash flow margin, from 9.2% in 2012 to 9.9% in 2015. KO has seen more of an increase in FCF, 13.0% in 2012 to 29.5% in 2015. Profit margin synthesis: Even though we saw decreases in total revenue in 2015, we saw

increases in total gross, operating, and net profit margins

0.0%

5.0%

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25.0%

30.0%

35.0%

2012 2013 2014 2015

Free Cash Flow Margin PEP KO



Profitability Ratios 2011 2012 2013 2014 2015 Profitability Ratios 2011 2012 2013 2014 2015

Net Profit Margin 9.7% 9.4% 10.1% 9.8% 8.6% Net Profit Margin 18.4% 18.8% 18.3% 15.4% 16.6%

× Total Asset Turnover 0.9 0.9 0.9 0.9 0.9 × Total Asset Turnover 0.6 0.6 0.5 0.5 0.5

= Return on Assets 8.8% 8.3% 8.7% 9.2% 7.8% = Return on Assets 10.7% 10.5% 9.5% 7.7% 8.2%

× Equity Multiplier 3.5 3.3 3.2 4.0 5.8 × Equity Multiplier 2.5 2.6 2.7 3.0 3.5

= Return on Equity 30.8% 27.6% 27.6% 37.1% 45.3% = Return on Equity 26.9% 27.2% 25.7% 23.2% 28.5%

0%

10%

20%

30%

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50%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

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30%

2011 2012 2013 2014 2015

Return on Assets Return on Equity

0.0

0.2

0.4

0.6

0.8

1.0

2011 2012 2013 2014 2015

Total Asset Turnover PEP KO

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2011 2012 2013 2014 2015

Return on Assets PEP KO

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2011 2012 2013 2014 2015

Return on Equity PEP KO

Analyst Comments: Total asset turnover: The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.

PEP’s total asset turner has remained relatively constant from 2011 to 2015, at .9. KO has remained around .6 to .5 for the past 5 years. Total revenue and total assets are increasing at a similar rate, which is why asset turnover has remained constant. With a constant total asset turnover rate, any increase in net profit margin directly increases return on assets. Return on assets: ROA shows how efficient management is at using its assets to generate earnings. The decrease in 2015 on ROA is due to the decrease net profit margin from 2014 to 2015. KO’s ROA has decreased over the past 5 years from 10.7% in 2011 to 8.2% in 2015, due to a decreasing total asset turnover, and with a decrease in net profit margin. KO has an advantage on return on assets due to a higher net profit margin than PEP even with an inferior total asset turnover. Return on equity / equity multiplier: Return on equity (ROE) is the amount of net income returned as a percentage of shareholder’s equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. KO’s return on equity has increased in 2011, from 26.9% to 28.5% in 2015. PEP on the other hand has been able to increase their return on equity from 30.8% in 2011 to 45.3% in 2015; this is a direct result of an increase in equity multiplier. We can conclude that PEP is pushing out more profit with shareholder’s money.

0.0

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2011 2012 2013 2014 2015

Equity Multiplier PEP KO



Multiples and Yields 2011 2012 2013 2014 2015 Multiples and Yields 2011 2012 2013 2014 2015

Price/Earnings 16.2 17.1 18.9 22.5 27.1 Price/Earnings 18.6 18.1 21.3 26.1 25.4

Price/Book 1.4 1.4 1.6 2.1 2.1 Price/Book 2.0 1.9 2.0 2.0 2.1

Price/Free Cash Flow N/A 17.6 21.7 13.8 23.7 Price/Free Cash Flow N/A 26.1 37.3 24.9 14.3

Earnings Yield 6.2% 5.8% 5.3% 4.4% 3.7% Earnings Yield 5.4% 5.5% 4.7% 3.8% 3.9%

Dividend Yield 3.1% 3.1% 2.7% 2.6% 2.7% Dividend Yield 2.7% 2.8% 2.7% 2.9% 3.1%

0.0

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2012 2013 2014 2015


0.0%

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2012 2013 2014 2015

Earnings Yield Dividend Yield

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2012 2013 2014 2015

Earnings Yield PEP KO

Analyst Comments: Price/Earnings: The P/ E ratio, or P/ E multiple, expresses a stock's price as a multiple of its earnings over the past 12 trailing months. As we can see in this chart, PEP’s

P/E ratio has increased from 16.2 in 2011, to a 5‐year high of 27.1 in 2015. It is important to note that PEP’s P/E ratio is above the reasonable range of 12‐18, this add concern that PEP is being overvalued. KO’s P/E ratio has also increased over this 5‐year period, from 18.6 in 2011, to 25.4 in 2015. PEP’s P/E ratio increased because the market is willing to pay more today than they were in 2011 based on their projected future earnings. Earnings Yield: Earnings yield expresses net income (ttm) as a percentage of the price investors are currently paying to buy a fractional claim on that net income. PEP’s earnings yield has steadily decreased from 2011 through 2015, from 6.2% to 3.7%. KO’s earnings yield has also decreased over the last 5 years, from 5.4% in 2011 to 3.9% in 2015. PEP’s earning yield decreased therefore indicating the market is pricing their stock more expensive relative to their earnings. Dividend Yield: Dividend yield indicates how much a company pays out in dividends each year relative to its share price. PEP’s dividend yield on a 5‐year basis has decreased ever so slightly from 3.1% to 2.7%. KO’s dividend yield has increased since 2011, from 2.7% to 3.1% in 2015. The decrease in dividend yield shows investors that PEP is potentially less confident in the future of the company.

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2012 2013 2014 2015

Price to Earnings PEP KO

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2012 2013 2014 2015


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Price to Book PEP KO

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2012 2013 2014 2015

Price to Free Cash Flow PEP KO

2.3%2.4%2.5%2.6%2.7%2.8%2.9%3.0%3.1%3.2%

2012 2013 2014 2015

Dividend Yield PEP KO

2. Relative Valuation and Debt PEP, Page 5 of 22 Copyright Robert A. Weigand, Ph.D., 2016


Liquidity and Debt 2011 2012 2013 2014 2015 Liquidity and Debt 2011 2012 2013 2014 2015

Current Ratio 0.96 1.10 1.24 1.14 1.31 Current Ratio 1.05 1.09 1.13 1.02 1.24

Quick Ratio 0.75 0.89 1.05 0.97 1.16 Quick Ratio 0.92 0.97 1.01 0.92 1.13

Days Sales Outstanding 37.94 39.24 38.22 36.41 37.26 Days Sales Outstanding 38.58 36.18 37.96 35.44 32.48

Inventory Turnover 17.38 18.29 19.48 21.22 23.18 Inventory Turnover 15.05 14.71 14.30 14.84 15.26

Total Debt to Assets 33.2% 34.1% 35.4% 35.2% 43.3% Total Debt to Assets 33.2% 36.0% 40.0% 41.5% 46.4%

Long‐Term Debt to Equity 99.3% 105.0% 99.7% 135.5% 242.1% Long‐Term Debt to Equity 43.2% 45.0% 57.7% 63.0% 112.1%

Times Interest Earned 12.12 10.63 10.84 11.07 10.34 Times Interest Earned 26.17 28.25 23.98 22.50 11.96

0.0

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2011 2012 2013 2014 2015

Current Ratio Quick Ratio

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2011 2012 2013 2014 2015

Current Ratio Quick Ratio

0.0

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0.6

0.8

1.0

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1.4

2011 2012 2013 2014 2015

Current Ratio PEP KO

Analyst Comments: Current Ratio: The current ratio is simply current assets over current liabilities; a quick check to make sure liquid short‐term assets can cover the company’s short‐term

liabilities. PEP’s current ratio has increased from 2011 to 2015, from .96 in 2011 to 1.31 in 2015. KO’s current ratio has also increased over this 5‐year period, from 1.05 in 2011 to 1.24 in 2015. We found that PEP has a better likelihood of maintaining its short‐term liabilities in 2015 then they could in 2011. We can conclude PEP has adequate liquidity. Total Debt to Assets: Total debt to assets defines the total amount of debt relative to assets. PEP’s debt to assets increased from 2011 to 2015, from 33.2% to 43.3%. KO’s total debt to assets has also increased over this 5‐year period, from 33.2% to 46.4%. Based on this 5‐year period, PEP has been increasing their debt relative to their assets. Long‐Term Debt to Equity: Long‐term debt to equity is used to measure a company’s financial leverage; the ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in the shareholders equity. PEP’s long‐term debt to equity ratio has increased significantly from 2011 to 2015, from 99.3% to 242.1%. KO has also seen an increase in debt to equity over this 5‐year period, from 43.2% to 112.1%. As previously stated we concluded that PEP was financing capital expenditures with more debt, therefore this explains why long‐term debt to equity has also been increasing.

0%

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50%

2011 2012 2013 2014 2015

Total Debt to Assets PEP KO

0.05.010.015.020.025.030.035.040.045.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

0.05.0

10.015.020.025.030.035.040.045.0

2011 2012 2013 2014 2015

Days Sales Outstanding Inventory Turnover

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2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

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120.0%

2011 2012 2013 2014 2015

Total Debt to Assets Long-Term Debt to Equity

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2011 2012 2013 2014 2015

Long-Term Debt to Equity PEP KO

2. Relative Valuation and Debt PEP, Page 6 of 22 Copyright Robert A. Weigand, Ph.D., 2016


Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2011 2012 2013 2014 2015

Total Cash and ST Investments 4,425 6,619 9,678 8,726 12,009 Total Cash and ST Investments 14,035 16,558 20,268 21,689 19,920

+ Receivables 6,912 7,041 6,954 6,651 6,437 + Receivables 4,920 4,759 4,873 4,466 3,941

+ Inventory 3,827 3,581 3,409 3,143 2,720 + Inventory 3,092 3,264 3,277 3,100 2,902

− Accounts Payable 4,083 4,451 4,874 5,127 5,546 − Accounts Payable 2,172 1,969 1,933 2,089 2,795

− Accrued Expenses 3,876 3,892 4,034 3,968 4,078 − Accrued Expenses 6,488 6,376 7,305 6,793 6,739

= Net Oper. Working Capital 7,205 8,898 11,133 9,425 11,542 = Net Oper. Working Capital 13,387 16,236 19,180 20,373 17,229

+ Net Property, Plant & Equip. 19,698 19,136 18,575 17,244 16,317 + Net Property, Plant & Equip. 14,939 14,476 14,967 14,633 12,571

= Total Invested Capital 26,903 28,034 29,708 26,669 27,859 = Total Invested Capital 28,326 30,712 34,147 35,006 29,800

÷ Total Weighted Shares 1,576 1,557 1,541 1,509 1,469 ÷ Total Weighted Shares 4,568 4,504 4,434 4,387 4,352

= Total Invested Capital/Share $17.07 $18.01 $19.28 $17.67 $18.96 = Total Invested Capital/Share $6.20 $6.82 $7.70 $7.98 $6.85


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2011 2012 2013 2014 2015

Operating Income (EBIT) 10,375 9,552 9,878 10,066 10,032 Operating Income (EBIT) 10,912 11,216 11,105 10,867 10,240

× (1−Effective Tax Rate) 26.9% 25.2% 23.7% 25.1% 26.1% × (1−Effective Tax Rate) 24.5% 23.1% 24.8% 23.6% 23.3%

= Net Oper. Profit After Tax 7,589 7,148 7,540 7,538 7,415 = Net Oper. Profit After Tax 8,234 8,630 8,346 8,302 7,853

− ∆ Total Invested Capital N/A 1,131 1,674 (3,039) 1,190 − ∆ Total Invested Capital N/A 2,386 3,435 859 (5,206)

= Free Cash Flow N/A 6,017 5,866 10,577 6,225 = Free Cash Flow N/A 6,244 4,911 7,443 13,059

NOPAT per Share $4.82 $4.59 $4.89 $5.00 $5.05 NOPAT per Share $1.80 $1.92 $1.88 $1.89 $1.80

Free Cash Flow per Share N/A $3.86 $3.81 $7.01 $4.24 Free Cash Flow per Share N/A $1.39 $1.11 $1.70 $3.00

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2011 2012 2013 2014 2015

Net Property, Plant & Equip. Total Invested Capital

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

2011 2012 2013 2014 2015

Total Invested Capital per Share PEP KO

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

2012 2013 2014 2015

NOPAT per Share PEP KO

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2012 2013 2014 2015

Net Operating Profit After Tax Free Cash Flow

Analyst Comments: Net Property, Plant & Equipment: Net Property Plant and Equipment is the value of all buildings, land, furniture, and other physical capital that a business has purchased to

run its business. PEP has decreased their PPE each year, decreasing from $19.698 billion in 2011 to $16.317 billion in 2015. Net PPE makes up a large portion of PEP's total invested capital (They are a capital intensive firm), but as we can see PEP does utilize net operating working capital. We can see that the rate of depreciation exceeds the net gain of new assets or improvements to current assets. Net Operating Profit After Tax and Free Cash Flow: NOPAT is simply after tax EBIT. NOPAT is used by analysts and investors as a precise and accurate measurement of profitability to compare a company's financial results across its history and against competitors. PEP's NOPAT has constant from 2011 to 2015, slightly decreasing from $7.589 billion to $7.415 billion. Along with the slow decrease in NOPAT, PEP has seen an increase in free cash flow from $6.017 billion in 2012 to $6.225 billion in 2015. Note that both NOPAT and Free cash flow has seen a slight decline in 2015 from their previous 2014 high. Just to reiterate Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Due to the 2015 decline we had an inconclusive outlook but felt as though the past data indicated positive operating income efficiencies (note operating efficiency margin slightly increasing in the 5 year period).

3. Value Creation and DCF Model PEP, Page 7 of 22 Copyright Robert A. Weigand, Ph.D., 2016


Cost of Capital 2015 Weight % Cost Weighted % Cost of Capital 2015 Weight % Cost Weighted %

Equity Capitalization $147,693 83.1% 5.451% 4.530% Equity Capitalization $186,962 81.7% 5.357% 4.379%

+ Total Debt $30,175 17.0% 5.000% 0.628% + Total Debt $41,768 18.3% 5.000% 0.700%

+ Preferred Stock ($145) ‐0.1% 0.000% 0.000% + Preferred Stock $0 0.0% 0.000% 0.000%

= Value of All Securities $177,723 100.0% = Value of All Securities $228,730 100.0%

Effective Tax Rate 26.08% Alternative RF Rate: Effective Tax Rate 23.31% Alternative RF Rate:

Risk‐Free Rate 1.924% 1.924% Risk‐Free Rate 1.924% 1.924%

Beta (5‐Yr) 0.504 Alternative Beta: 0.50381 Beta (5‐Yr) 0.490 Alternative Beta: 0.49043

Market Risk Premium 7.0% Market Risk Premium 7.0%

CAPM Cost of Equity 5.451% CAPM Cost of Equity 5.357%

Weighted Average Cost of Capital: 5.157% Weighted Average Cost of Capital: 5.079%

5.157% 5.157% 5.157% 5.157% 5.157%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2011 2012 2013 2014 2015

Return on Invested Capital 28.2% 25.5% 25.4% 28.3% 26.6% Return on Invested Capital 29.1% 28.1% 24.4% 23.7% 26.4%

Economic Value‐Added 6,202 5,702 6,008 6,163 5,979 Economic Value‐Added 6,795 7,070 6,612 6,524 6,339

Market Valued‐Added 83,864 83,490 103,047 128,870 135,625 Market Valued‐Added 128,176 130,480 149,996 154,899 161,408

EVA per Share $3.94 $3.66 $3.90 $4.08 $4.07 EVA per Share $1.49 $1.57 $1.49 $1.49 $1.46

MVA per Share $53.21 $53.62 $66.87 $85.40 $92.32 MVA per Share $28.06 $28.97 $33.83 $35.31 $37.09

$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50

2011 2012 2013 2014 2015

EVA per Share PEP KO

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

5,4005,5005,6005,7005,8005,9006,0006,1006,2006,300

2011 2012 2013 2014 2015

Economic Value-Added Market Valued-Added

020,00040,00060,00080,000100,000120,000140,000160,000180,000

5,800

6,000

6,200

6,400

6,600

6,800

7,000

7,200

2011 2012 2013 2014 2015

Economic Value-Added Market Valued-Added

Analyst Comments: WACC (Weighted Average Cost of Capital)*: The WACC measures each investor's expected return in proportion to their contribution to financing the firm's assets. We did

not alter PEP 's or KO's beta as it should represent the risk the company endured during previous years. The same could be said for the the risk free rate as well. All else equal, an investor now receives less value per capital investment made by PEP when compared to KO.Return on Invested Capital: ROIC is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROIC decreased in the 5 year period from 28.2% in 2011 to 26.6% in 2015 for UTX. Note that PEP's WACC is at 5.157%, which is a positive indication for the investment since it is still well below ROIC. When we compare it to KO you will notice that they too had a declining ROIC. Both companies are equally creating value for their company, however in regards to this model PEP has always created less economic value than KO. Economic Value‐Added ‐Market Value‐added: EVA is a year‐by‐year measure of how much economic profit the firm has created. While PEP has been able to increase their economic profit consistently over this 5‐year period, we do see a KO increasing their EVA at a greater rate. From our model we can conclude that PEP grows in value more slowly than KO, but neither is truly outperforming the other, it is important to note that both are positively growing economic value. MVA is measured as the market value of all the firm's securities minus the book value of all the firm's securities and therefore is a basic measure of value creation. As was the case with many of the value creation metrics, PEP posted significantly lower MVA/shares than KO. In conclusion the market has fairly valued PEP stock from 2011‐2015 while undervaluing KO.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2011 2012 2013 2014 2015

Return on Invested Capital PEP KO

0%

10%

20%

30%

40%

50%

2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015

Return on Invested Capital Return on Equity


Long‐Term Growth Rate: Long‐Term Growth Rate:


Intrinsic Value Model 2011 2012 2013 2014 2015 Intrinsic Value Model 2011 2012 2013 2014 2015

PV of Future FCFs 123,934 124,309 124,853 120,715 120,715 PV of Future FCFs 238,413 244,278 251,774 257,118 257,118

+ Value of Non‐Oper. Assets 4,425 6,619 9,678 8,726 12,009 + Value of Non‐Oper. Assets 14,035 16,551 20,268 21,675 19,900

= Total Intrinsic Firm Value 128,359 130,928 134,531 129,441 132,724 = Total Intrinsic Firm Value 252,448 260,829 272,042 278,793 277,018

− Total Debt 24,224 25,458 27,415 24,801 30,175 − Total Debt 26,527 31,039 36,058 38,230 41,768

= Intrinsic Value of Equity 104,135 105,470 107,116 104,640 102,549 = Intrinsic Value of Equity 225,921 229,790 235,984 240,563 235,250

÷ Total Weighted Shares 1,576 1,557 1,541 1,509 1,469 ÷ Total Weighted Shares 4,568 4,504 4,434 4,387 4,352

= Per Share Intrinsic Value $66.08 $67.74 $69.51 $69.34 $69.81 = Per Share Intrinsic Value $49.46 $51.02 $53.22 $54.84 $54.06

vs. Year‐End Stock Price $66.35 $68.02 $82.71 $97.05 $100.54 vs. Year‐End Stock Price $34.99 $36.25 $41.31 $42.22 $42.96

Over (Under) Valuation/Share $0.27 $0.28 $13.20 $27.71 $30.73 Over (Under) Valuation/Share ($14.47) ($14.77) ($11.91) ($12.62) ($11.10)

% Over (Under) Valued 0.4% 0.4% 19.0% 40.0% 44.0% % Over (Under) Valued ‐29.3% ‐28.9% ‐22.4% ‐23.0% ‐20.5%

$0

$20

$40

$60

$80

$100

$120

2011 2012 2013 2014 2015

Year-End Stock Price Per Share Intrinsic Value

0%

10%

20%

30%

40%

50%

$0

$5

$10

$15

$20

$25

$30

$35

2011 2012 2013 2014 2015

$ Over (Under) Valued % Over (Under) Valued

$0

$10

$20

$30

$40

$50

$60

2011 2012 2013 2014 2015

Year-End Stock Price Per Share Intrinsic Value

‐35%

‐30%

‐25%

‐20%

‐15%

‐10%

‐5%

0%

($16)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

2011 2012 2013 2014 2015


$0

$20

$40

$60

$80

$100

2011 2012 2013 2014 2015

MVA per Share PEP KO

Analyst Comments: Intrinsic Value: When both firms are given a long term growth rate of 1% you can see they both created intrinsic value for the past 5 years. It is important to note that KO

has been under valued every year, whereas PEP has been fairly valued. Bankruptcy Score: Both companies are in a solid financial position, and according to the Altman probability of bankruptcy show no recent indications of financial trouble.

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015

Return on Invested Capital WACC



Piotroski Financial Fitness Scorecard 2012 2013 2014 2015 Piotroski Financial Fitness Scorecard 2012 2013 2014 2015

Positive Net Income 1 1 1 1 Positive Net Income 1 1 1 1

Positive Free Cash Flow 1 1 1 1 Positive Free Cash Flow 1 1 1 1

Growing ROA (% change NI > % change TA) 0 1 1 0 Growing ROA (% change NI > % change TA) 0 0 0 1

Earnings Quality (Operating Income > Net Income) 1 1 1 1 Earnings Quality (Operating Income > Net Income) 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 1 1 0 0 Total Assets Growing Faster Than Total Liabilities 0 0 0 0

Increasing Liquidity (Current Ratio) 1 1 0 1 Increasing Liquidity (Current Ratio) 1 1 0 1

% Change Shares Outstanding < +2.0% 1 1 1 1 % Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1

Expanding Operating Margin 0 1 1 1 Expanding Operating Margin 0 1 0 0

Asset Turnover (% change sales > % change assets) 0 0 1 0 Asset Turnover (% change sales > % change assets) 0 0 0 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0 Total Liabilities to Operating Cash Flow (EBIT) < 4.0 0 0 0 0

Piotroski Score (max = 10) 6 8 7 6 Piotroski Score (max = 10) 5 6 4 6


Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015 Altman Probability of Bankruptcy Z‐Score 2012 2013 2014 2015

(Current Assets‐Current Liabilities)/Total Assets 0.0262 0.0676 0.0438 0.0939 ## (Current Assets‐Current Liabilities)/Total Assets 0.0349 0.0465 0.0080 0.0861

Retained Earnings/Total Assets 0.6939 0.7190 0.8355 0.8694 ## Retained Earnings/Total Assets 0.8083 0.8216 0.8269 0.8660

Earnings Before Interest & Tax/Total Assets 0.4223 0.4207 0.4711 0.4752 ## Earnings Before Interest & Tax/Total Assets 0.4295 0.4069 0.3897 0.3751

Market Value Equity/Total Liabilities 1.2164 1.4405 1.6591 1.5375 ## Market Value Equity/Total Liabilities 1.8481 1.9412 1.8081 1.7438

Sales/Total Assets 0.8766 0.8564 0.9448 0.9042 ## Sales/Total Assets 0.5567 0.5198 0.4994 0.4912

Altman Score 3.24 3.50 3.95 3.88 Altman Score 3.68 3.74 3.53 3.56

Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23 Altman Z‐Score Scale: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23


31‐Dec‐11 29‐Dec‐12 28‐Dec‐13 27‐Dec‐14 26‐Dec‐15

Pepsico, Inc. PEP Consumer Staples Report Date:

Average

2011 2012 2013 2014 2015 2011 ‐ 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue 66,504 65,492 66,415 66,683 63,056 Total Revenue 62,425 63,986 65,906 66,894 67,563

% growth N/A ‐1.5% 1.4% 0.4% ‐5.4% ‐1.3% % growth ‐1.0% 2.5% 3.0% 1.5% 1.0%

Gross Profit 34,957 34,201 35,172 35,799 34,672 Gross Profit 34,521 35,384 36,446 36,993 37,362

Gross Margin (% of sales) 52.6% 52.2% 53.0% 53.7% 55.0% 53.3% Gross Margin (% of sales) 55.3% 55.3% 55.3% 55.3% 55.3%


Operating Margin (% of sales) 15.6% 14.6% 14.9% 15.1% 15.9% 15.2% Operating Margin (% of sales) 16.0% 16.2% 16.4% 16.6% 16.8%

Earnings Before Tax 8,834 8,304 8,891 8,757 7,442

Income Tax Expense 2,372 2,090 2,104 2,199 1,941 Forecasted Effective Tax Rate 25.4% 25.4% 25.4% 25.4% 25.4%

Effective Tax Rate 26.9% 25.2% 23.7% 25.1% 26.1% 25.4% Effective Tax Rate Adjustment 25.4% 25.4% 25.4% 25.4% 25.4%

Net Income 6,443 6,178 6,740 6,513 5,452 Net Income 5,493 5,759 6,063 6,288 6,486

Net Margin (% of sales) 9.7% 9.4% 10.1% 9.8% 8.6% 9.5% Net Margin (% of sales) 8.8% 9.0% 9.2% 9.4% 9.6%

Total Common Shares 1,576 1,557 1,541 1,509 1,469 Total Common Shares 1,440 1,411 1,383 1,359 1,336

% growth N/A ‐1.2% ‐1.0% ‐2.1% ‐2.7% ‐1.7% % growth ‐2.0% ‐2.0% ‐2.0% ‐1.7% ‐1.7%

Earnings per Share $4.09 $3.97 $4.37 $4.32 $3.71 Earnings per Share $3.82 $4.08 $4.39 $4.63 $4.85

Dividends per Share $2.03 $2.13 $2.24 $2.53 $2.76 Dividends per Share $2.97 $3.16 $3.34 $3.49 $3.56

% growth N/A 5.1% 5.3% 13.1% 9.1% 8.1% % growth 7.5% 6.5% 5.5% 4.5% 2.0%

Year‐end Stock Price $66.35 $68.02 $82.71 $97.05 $100.54996 997 998 999 1000 996 997 998 999 1000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Cash + ST Investments 4,425 6,619 9,678 8,726 12,009 Cash + ST Investments 11,861 12,157 12,522 12,710 12,837

% of sales 6.7% 10.1% 14.6% 13.1% 19.0% 12.7% % of sales 19.0% 19.0% 19.0% 19.0% 19.0%

Total Receivables 6,912 7,041 6,954 6,651 6,437 Total Receivables 6,492 6,655 6,854 6,957 7,027

% of sales 10.4% 10.8% 10.5% 10.0% 10.2% 10.4% % of sales 10.4% 10.4% 10.4% 10.4% 10.4%

Inventory 3,827 3,581 3,409 3,143 2,720 Inventory 2,684 2,751 2,768 2,743 2,770

% of sales 5.8% 5.5% 5.1% 4.7% 4.3% 5.1% % of sales 4.3% 4.3% 4.2% 4.1% 4.1%

Net PPE 19,698 19,136 18,575 17,244 16,317 Net PPE 19,352 20,476 21,749 22,744 23,647

% of sales 29.6% 29.2% 28.0% 25.9% 25.9% 27.7% % of sales 31.0% 32.0% 33.0% 34.0% 35.0%

Total Assets 72,882 74,638 77,478 70,509 69,667 Total Assets 71,789 72,304 74,473 75,590 76,346

% of sales 109.6% 114.0% 116.7% 105.7% 110.5% 111.3% % of sales 115.0% 113.0% 113.0% 113.0% 113.0%

Payables and Accruals 7,959 8,343 8,908 9,095 9,624 Payables and Accruals 9,676 9,854 10,149 10,302 10,405

% of sales 12.0% 12.7% 13.4% 13.6% 15.3% 13.4% % of sales 15.5% 15.4% 15.4% 15.4% 15.4%

ST Debt plus LT Debt 24,224 25,458 27,415 24,801 30,175 ST Debt plus LT Debt 31,213 32,633 33,612 34,116 34,457

% of sales 36.4% 38.9% 41.3% 37.2% 47.9% 40.3% % of sales 50.0% 51.0% 51.0% 51.0% 51.0%

Total Equity 20,899 22,399 24,389 17,548 12,030 Total Equity 11,861 11,837 11,863 11,706 11,486

% of sales 31.4% 34.2% 36.7% 26.3% 19.1% 29.5% % of sales 19.0% 18.5% 18.0% 17.5% 17.0%

April 18, 2016

Forecasted Income Statement Drivers

Forecasted Balance Sheet Drivers

Historical Income Statement Drivers

Historical Balance Sheet Drivers

Analyst Comments: Total Revenue: We expect total revenues to continue increase into the future. Capital IQ and management expect modest long‐term growth, due to the expectation that the U.S economy will continue to improve at a

modest pace, we do recognize that there will be currency risk associated with total revenue. Some markets outperforming others (We expect strong results from Frito‐Lay North America and growth in international market to translate to positive earnings surprises over the next two years). This is based on the reports and from the 10‐K. We remained moderately pessimistic because of the currency risk. Gross Profit and Operating Income: We had slow growth for both gross profit and growth in operating income. We based this off of our historical data up to 2015 and according to the 10‐K, In the current environment, we expect continued margin improvement driven by ongoing productivity initiatives. (We expect cost cutting to continued to benefit earnings. The company has implemented a $5 billion, five‐year productivity improvement program, in 2016 we expect PEP to achieve its goal of $1 billion in annual cost savings and productivity gains.) –Argus Tax‐Rate: We saw no information about future Tax‐Rates in the 10K or the reports. We decided to implemented the historical tax rate. Net Income: Based off of Capital IQ’s forecast and management's desire to decrease costs, we expect net income to continue to grow slowly from 8.8% in 2016 to 9.6% in 2020. Management mentions in the 10‐k that they focus on utilizing their global scale, eliminating duplication, deploying new technologies and capitalizing on everyday opportunities to lower their cost base. Total Common Shares: Pep implemented a $10 billion repurchase program that began in 2013 and ended in February of 2016. However, they initiated another repurchase program in 2015 for $12 billion, which is set to expire in 2018. Based on this information that we found in PEP’s 10‐k, we implemented a ‐2% growth rate through 2018. Since there was no other information on future repurchase programs, we matched the historical rate of ‐1.7% through 2020. Dividend Per Share: Based off the Argus report PEP is estimated to have dividends of $2.96 in 2016 and $3.24 in 2017. The remaining years we tapered it down and finished 2020 with a perpetual growth rate of 2%. BALANCE SHEET: We maintained a 19% Cash + ST Investmentsgrowth rate from 2015 through 2020. This is due to management’s interests having acquisitions in emerging markets, in order to father their diversification. We left the historical average growth rate for Total Receivables. We see an initial reduction in Inventory in 2016. This is because in 2015, the FASB issued guidance that requires entities to measure inventory at the lower of cost or net realizable value. The guidance is effective in 2017 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are evaluating the timing for adoption of this guidance. After the implementation of this reduction, we maintain inventory at a relatively constant level. In 2016 we see a sudden spike in Net PPE, this is due to managements desire to invest $3 billion into capital expenditures and, they are expecting to continue investing 5% of revenues into future capital. Because of this we continue to slowly grow Net PPE from 2017

4. Forecasting and Valuation PEP, Page 11 of 22 Copyright Robert A. Weigand, Ph.D., 2016

Pepsico, Inc. Pepsico, Inc.

Total Invested Capital 2011 2012 2013 2014 2015 Total Invested Capital 2016E 2017E 2018E 2019E 2020E

Cash and ST Investments 4,425 6,619 9,678 8,726 12,009 Cash and ST Investments 11,861 12,157 12,522 12,710 12,837

+ Receivables 6,912 7,041 6,954 6,651 6,437 + Receivable 6,492 6,655 6,854 6,957 7,027

+ Inventory 3,827 3,581 3,409 3,143 2,720 + Inventory 2,684 2,751 2,768 2,743 2,770

− Payables and Accruals 7,959 8,343 8,908 9,095 9,624 − Payables and Accruals 9,676 9,854 10,149 10,302 10,405

= Net Oper. Working Capital 7,205 8,898 11,133 9,425 11,542 = Net Oper. Working Capital 11,361 11,709 11,995 12,108 12,229

+ Net Property, Plant & Equip. 19,698 19,136 18,575 17,244 16,317 + Net Property, Plant & Equip. 19,352 20,476 21,749 22,744 23,647

= Total Invested Capital 26,903 28,034 29,708 26,669 27,859 = Total Invested Capital 30,713 32,185 33,744 34,852 35,876

÷ Total Common Shares 1,576 1,557 1,541 1,509 1,469 ÷ Total Common Shares 1,440 1,411 1,383 1,359 1,336

= Total Invested Capital/Share $17.07 $18.01 $19.28 $17.67 $18.96 = Total Invested Capital/Share $21.33 $22.81 $24.41 $25.64 $26.85


NOPAT and Free Cash Flow 2011 2012 2013 2014 2015 NOPAT and Free Cash Flow 2016E 2017E 2018E 2019E 2020E


× (1−Effective Tax Rate) 26.9% 25.2% 23.7% 25.1% 26.1% × (1−Effective Tax Rate) 25.4% 25.4% 25.4% 25.4% 25.4%

= Net Oper. Profit After Tax 7,589 7,148 7,540 7,538 7,415 = Net Oper. Profit After Tax 7,451 7,733 8,063 8,284 8,468

− ∆ Total Invested Capital N/A 1,131 1,674 (3,039) 1,190 − ∆ Total Invested Capital 2,854 1,472 1,559 1,108 1,024

= Free Cash Flow N/A 6,017 5,866 10,577 6,225 = Free Cash Flow 4,597 6,261 6,504 7,176 7,443

NOPAT per Share $4.82 $4.59 $4.89 $5.00 $5.05 NOPAT per Share $5.18 $5.48 $5.83 $6.10 $6.34

Free Cash Flow per Share N/A $3.86 $3.81 $7.01 $4.24 Free Cash Flow per Share $3.19 $4.44 $4.70 $5.28 $5.57

Historical Performance Forecasted Performance


Analyst Comments: Total Invested Capital, Net Fixed Assets and Net Operating Working Capital:We forecasted PEP to continue growing their total invested capital, from 2016 through 2020. PEP

utilizes both net fixed assets and net operating working capital. When projecting the future, PEP is expected to grow invested capital at a higher rate than net working capital. The higher rate of growth in invested capital, compared to working capital, is due to management's wishes to increase their investments by $3 billion in 2016 and continued growth of 5% of revenue in the future. This steady growth supports management’s investment strategy.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Invested Capital Net Fixed Assets

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Revenue Operating Income (EBIT)

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Earnings per Share Dividends per Share

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E


22.0%

23.0%

24.0%

25.0%

26.0%

27.0%

28.0%

8%

8%

9%

9%

10%

10%

11%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Net Profit Margin Effective Tax Rate (right axis)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Total Invested Capital Net Operating Working Capital


Pepsico, Inc.

Cost of Capital 2015 Weight % Cost Weighted % Pepsico, Inc.

Equity Capitalization $147,693 83.0% 5.451% 4.526%

+ Total Debt $30,175 17.0% 5.000% 0.633% Year 2016E 2017E 2018E 2019E 2020E

= Value of All Securities $177,868 100.0% Dividend Growth Rates 7.5% 6.5% 5.5% 4.5% 2.0%

Expected Future Dividends $2.97 $3.16 $3.34 $3.49 $3.56

Effective Tax Rate 25.40% Alternative RF Rate:

Risk‐Free Rate 1.924% 10‐year Yield: 1.924% PV Dividends 1‐4 $11.33 Dividend Yield 2.9%

Beta (default = 5‐Yr) 0.504 Alternative Beta: 5‐year Beta: 0.504 PV Perpetual Div. $83.35

Market Risk Premium 7.0% 2‐year Beta: 0.641 Intrinsic Value $94.68 If Purchased For: $100.81

CAPM Cost of Equity 5.451% Current Price $100.81 Expected Return = 3.7%

Weighted Average Cost of Capital: 5.159% ($100.81) $2.97 $3.16 $3.34 $106.56 $103.075.159% 5.159% 5.159% 5.159% 5.159% 5.159% 5.159% 5.159% 5.159% 5.159%


ROIC, EVA and MVA 2011 2012 2013 2014 2015 ROIC, EVA and MVA 2016E 2017E 2018E 2019E 2020E

Return on Invested Capital 28.2% 25.5% 25.4% 28.3% 26.6% Return on Invested Capital 24.3% 24.0% 23.9% 23.8% 23.6%

Economic Value‐Added 6,201 5,702 6,008 6,163 5,978 Economic Value‐Added 5,867 6,072 6,322 6,486 6,617

Market Valued‐Added 83,669 83,508 103,067 128,900 135,663 Market Valued‐Added 133,138 142,213 144,072 145,869 147,665

EVA per Share $3.93 $3.66 $3.90 $4.08 $4.07 EVA per Share $4.08 $4.30 $4.57 $4.77 $4.95

MVA per Share $53.09 $53.63 $66.88 $85.42 $92.35 MVA per Share $92.48 $100.80 $104.20 $107.33 $110.53

Perpetual Growth Rate: 1.0%


DCF Intrinsic Value Model 2011 2012 2013 2014 2015 DCF Intrinsic Value Model 2016E 2017E 2018E 2019E 2020E

PV of Future FCFs 162,477 164,841 167,479 165,541 167,856 PV of Future FCFs 171,918 174,526 177,025 178,981 180,771

+ Cash and ST Investments 4,425 6,619 9,678 8,726 12,009 + Cash and ST Investments 11,861 12,157 12,522 12,710 12,837

= Total Intrinsic Firm Value 166,902 171,460 177,157 174,267 179,865 = Total Intrinsic Firm Value 183,779 186,683 189,547 191,691 193,608

− Total Debt 24,224 25,458 27,415 24,801 30,175 − Total Debt 31,213 32,633 33,612 34,116 34,457

= Intrinsic Value of Equity 142,678 146,002 149,742 149,466 149,690 = Intrinsic Value of Equity 152,566 154,050 155,935 157,575 159,151

÷ Total Common Shares 1,576 1,557 1,541 1,509 1,469 ÷ Total Common Shares 1,440 1,411 1,383 1,359 1,336

= Per Share Intrinsic Value $90.53 $93.77 $97.17 $99.05 $101.90 = Per Share Intrinsic Value $105.98 $109.19 $112.78 $115.94 $119.12

vs. Year‐End Stock Price $66.35 $68.02 $82.71 $97.05 $100.54 vs. Most Recent Stock Price $100.72

Over (Under) Valuation/Share ($24.18) ($25.75) ($14.46) ($2.00) ($1.36) Over (Under) Valuation/Share ($5.26)

% Over (Under) Valued ‐26.7% ‐27.5% ‐14.9% ‐2.0% ‐1.3% % Over (Under) Valued ‐5.0%



Dividend Discount Valuation Model

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EVA MVA (right axis)

Analyst Comments: NOPAT: With projected revenues continuously growing through 2020, and PEP demonstrating their ability to grow their operating margin; we see NOPAT slowly growing. PEP is

forecasted to see an increase in bottom line profits. Free Cash Flow: Management is purposely holding higher free cash flows in order to have the ability to acquire companies and continue to diversify. As mentioned in the 10K, and also potentially reducing their future debt levels. EVA and MVA: We forecasted that PEP will continue to see both economic and market value added. EVA will grow

steadily, while MVA sluggishly grows decreases through 2020.

ROIC and WACC: WACC saw an increase in their risk‐free rate to the current 10‐year treasury note, as well as a reduction in the beta down to .504. Generating a WACC of 5.159%. With a low WACC of

5.159%, PEP is earning an ROIC that far exceeds it WACC. This is creating value for the firm.

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Relative Valuation 2011 2012 2013 2014 2015 Relative Valuation 2016E 2017E 2018E 2019E 2020E

Price to Earnings 16.2 17.1 18.9 22.5 27.1 Price to Earnings 26.4 26.8 25.7 25.1 24.5

Price to Free Cash Flow N/A 17.6 21.7 13.8 23.7 Price to Free Cash Flow 31.5 24.6 24.0 22.0 21.4

Price to Sales 1.6 1.6 1.9 2.2 2.3 Price to Sales 2.3 2.4 2.4 2.4 2.4

Price to Book 1.4 1.4 1.6 2.1 2.1 Price to Book 2.0 2.1 2.1 2.1 2.1

Earnings Yield 6.2% 5.8% 5.3% 4.4% 3.7% Earnings Yield 3.8% 3.7% 3.9% 4.0% 4.1%

Dividend Yield 3.1% 3.1% 2.7% 2.6% 2.7% Dividend Yield 2.9% 2.9% 3.0% 3.0% 3.0%


Analyst Comments: Price to Earnings: PEP’s projected P/E decreases in our forecast, this large P/E ratio can be attributed to the increase in growth and the decrease in shares. Dividend Yield:We

projected that dividends will increase in 2016 according to Argus, then slowly taper back down. We don't see PEP as a dividend play. Earning Yield:We have projected that earnings yield will continue to grow. This is caused by a reduction in the amount of shares outstanding. The trajectory of PEP’s pro forma relative valuation shows that our model is slightly conservative.

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Documents

PEP Pepsico, Inc. Consumer Sector: Staples HOLD