Financial Analysis of Pepsi Cola Company - Term Paper Example

?PepsiCo Inc. Financial Analysis I. Company Profile It was originally known for Pepsi Cola Beverage and was founded by Caleb Bradham way back in 1890. Under the leadership of Donald M. Kendall, this corporation initially merged with Herman W. Lay who led Frito Company in 1961. There are now hundreds of product brands that belong to the business of PepsiCo Inc. all around the world in nearly 200 countries. But the main brands are Pepsi, Mountain Dew, Mirinda, 7-Up, Mist, Lipton, Frito Lay, Topicana, Quaker, and Gatorade. As of the latest 2011 Annual Report, the company’s number of employees has reached 285,000 with total annual revenue of $ 65 billion. 48% of PepsiCo business is made up of Global Snacks like the Lay, Doritos, Cheetos, Tostitos, Sun Chips. and Global Nutrition products like the Quaker Oats, Tropicana Fruit Drinks, and Gatorade. The Global Beverages made up 52% of the entire business. 69% of the current PepsiCo Inc. are owned by Institutions like the Bank of New York Mellon Corp. which had been in business since 1784 and currently ranks Top 11 of all American Banks. Another owner of PepsiCo Inc. is Bank of America, the richest bank in the USA in terms of total assets. Still another bank that forms part of the ownership is Northern Trust Corporation which ranks # 23 in the USA. A more complete list of the major institutional stockholders is shown in Figure 16. PepsiCo Inc. is also partly owned by Mutual fund Holders. They are shown in Figure 17. The 1.56 billion total outstanding shares with an average volume being traded reaching only about 5.65 million in the stock market. Less than 1% of the shares are held by insiders. To be more exact about these details, the main source was included in Figure 18. It would be important to know all these initial background in order to comprehend generalizations about PepsiCo Inc. that may be said to be as follows: (1) The company has been well entrenched in the business world for over a century. It survived the Great Depressions in 1920-21, 1929-1933, the years of Economic Panic in 1893-1897, 1907 – 1908, 1910-1911, and separate years of recession in 1899-1900, 1902-1904, 1907-1908, 1913-1914, 1918-1919, 1923-1924, 1926-1927, 1937-1938, 1945, 1948-1949, 1953-1954, 1957-1958, 1960-1961, 1969-1970, 1973-1975, 1981-1982, 1990-1991, 2001. 2007-2008. In other words, PepsiCo will most probably survive future recessions and even depressions. (2) In performing a financial analysis of PepsiCo Inc., the more important question to ask will be whether or not any investment in the stocks of PepsiCo will earn a more desirable income compared to competitors in the industry and other industries, both for the immediate term (one year) and in the next five years at least. II. Purpose & Objectives The following financial analysis seeks to analyze the current financial strengths and weaknesses of PepsiCo Inc. compared to the competitors and businesses in other industries. Trend analysis and ratio analysis will be performed. Horizontal analysis, otherwise known as trend analysis, will be done by inspecting the percentages of Sales, Income, Returns-On-Investments (ROI), growth per year, and actual dividends paid. A base year will be selected. It is but logical for any investor to look for investment opportunities similar to PepsiCo’s stability over the long-term and decide to invest on a preferred alternative which is that one with higher returns yearly or higher growth in stock value. For the vertical analysis, the latest year’s Balance Sheets and Income Statements will be analyzed in terms of percentages to find out how well PepsiCo maintained its Assets, Liabilities, Equity, Revenue, Expense, and Income accounts compared to the industry standards. Then all these ratios will be interpreted accordingly. On top of the horizontal and vertical analyses, key indicators of financial performance in the stock market will be analyzed. These would consist of the Price-Earning Ratio (P/E), the P/E Trailing Twelve Months (ttm), the Price-Earning to Growth Ratio (PEG), Enterprise Value per Share, Enterprise Value per Revenue (ttm), and Enterprise Value per Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). III. Horizontal Analysis The most valuable trend to analyze would be the Stock Market Prices of PepsiCo Inc. Figures 1 to 13 show the monthly value of PepsiCo Inc. stocks It is summarized below on a yearly basis to show the annual trend since year 2000 up to the present. That is, the average price was computed on a yearly basis and then compared from year to year. Year 2000 2001 2002 2003 2004 2005 2006 Common Stock Value 32.34 39.18 36.28 35.32 41.60 46.12 51.52 Growth or (Loss of Value) 100% Base Year 121.15% 112.18% 109.21% 128.63% 142.61% 159.31 % growth (%decline) vs. Previous Year 21.15 (8.97) (2.97) 19.42 13.98 16.70 Dividends per share 0.555 0.57 0.59 0.63 0.85 1.01 1.16 Figures 14 & 15 show the list of dividends per share paid by PepsiCo Inc. from year 2000 to 2012. It would be good to note that there were dividends each year. In fact, payments were paid quarterly each year. And the attractive trend has been a yearly increase in the total dividends paid out whether or not there has been a high or low growth rate in the stock value in the Stock Exchange. The percentage of dividend paid out was only 3.21% of the stock value. Combined with the average growth in value of the shares of stock, which averaged 4.94% over the past 12-13 years, the benefit of investing in PepsiCo Inc. has been averaging about 8% returns for common shares. If more recent years are taken into consideration, assuming the last five (5) years, the average growth in value of shares has been 7.098% on the average. Combined with the dividends actually paid, that would mean about 10% return on investment although only 3% in cash. Year 2007 2008 2009 2010 2011 2012 May CSV 54.27 57.35 49.94 59.65 63.00 67.80 Growth or (Loss of Value) 161.63% 177.33% 154.42% 184.45% 194.80% 209.65% % growth (%decline) vs. Previous Year 2.32 15.7% (22.91) 30.03 10.35 14.85 Dividends 1.425 1.65 1.775 1.89 2.025 1.053 Figure 19 shows that the company’s revenues have been increasing annually from 2009 to 2011. Total Net Revenue increase by 34% in 2010 and increased some more in 2011 by 15%. Total Operating Profits increased by 4% in 2010 and also increased in 2011 by 16%. These facts take place in spite of the inflationary cost of energy which has substantial impact on the cost of production and the ability of consumers to buy. Total Net Revenue amounted to $ 66.5 billion by end of 2011 fiscal year. Growth in revenue came from Frito-Lay in North America, Latin American Food, PepsiCo Beverages, European Snack Foods, Asian, Middle East, and African Snack Foods. PepsiCo acquired the European Snack Food WBD. As a result, volume of sales increased by 35% in Europe. This strategy of acquiring other Snack Food Brands contributed to the increase in sales of beverages. Figure 20 shows the Consolidated Income Statement wherein it can be confirmed that costs have been indeed rising. Yet the company was able to improve the overall profitability on the overall in 2011. Net Income increased by 6% in 2010 and also increased in 2011 by an additional 1.96% from 2010. Using 2009 as base year, the Diluted Earnings grew by 2.35% in 2010 and by 6.90% in 2011. 2009 2010 2011 Revenue Base Year = 100% 133.78% 153.83% Cost of Sales Base Year = 100% 132.22% 151.19% Net Income Base Year = 100% 106% 108% Diluted Net Income Base Year = 100% 103.71% 106.90% Cash Dividend/ Share $ 1.775 $ 1.89 $ 2.025 For the Horizontal Analysis of the Balance Sheet Accounts, there is a need to check on the condition of the Cash balance and Liabilities in order to discover what might have been the impact of paying dividends annually. Figure 21 and 22 show the Comparative Balance Sheets of PepsiCo in 2010 and 2011. Cash decreased. In the analysis of Cash Flows, it appeared that the company got long-term loans and used funds as follows: (based on Figure 23 – Sources & Uses of Funds) 2009 2010 2011 Cash $ 3,943 $ 5,943 $ 4,067 Long Term Loans $ 1.057 billion $ 6.451 billion $ 3 billion Major Cash Uses: Paid Cash Dividends Paid Debts Acquired Assets Re-acquired Shares ($2,732) million ($1,270) million - ($7) million ($2,978) million ($655) million ($159) million ($4,983) million ($3,157) million ($2,926) million ($1,406) million ($2,496) million IV. Vertical Analysis or Ratio Analysis Utilizing the same Figures showing the Financial Statements, pertinent ratios like the debt-to-equity and liquidity ratios can be computed. Yahoo Finance shows 3 years of Balance Sheet information for PepsiCo. 2009 2010 2011 Total Liabilities / Total Owners’ Equity 1.36 2,21 2.53 Current Ratio = CA / CL 1.44 1.10 0.96 However, the bigger parts of the indebtedness are long-term debts. PepsiCo is becoming more indebted each year from 2009 to 2011. The question will be how PepsiCo has been compared with competitors. There are many other vertical ratios that can be utilized. Undoubtedly, PepsiCo does not have to be analyzed for its short-term liquidity because it is 69% owned by big institutions including top USA banks, like New York Bank and Bank of America. The ratios being compared by potential investors and financial analysts are the Price-Earning Ratio (or P/E), Price-Earning-to-Growth Ratio (or PEG), Return-On-Equity (ROE), and Dividends. Figure 24 shows how well PepsiCo has been performing compared to the Industry Leader of each ratio. For example, in terms of P/E Trailing Twelve Months (ttm), PepsiCo ranks # 16 out of 44 industry players with P/E (ttm)= 18.9. PepsiCo ranks # 7 in terms of PEG (ttm) using 5 years data. Comparison of Earnings per Share Growth shows PepsiCo in # 19. As for the ROE (ttm), the rank of PepsiCo in the industry is # 7. The 3% Dividend Yield of PepsiCo was relatively better than most other competitors, and was ranked # 2. Coca-Cola is the well-known direct competitor of Pepsi in the beverage industry. Its ratios were included in Figure 25 to allow for the comparison of performance in terms of monitored ratios for the beverage industry. Comparison of PepsiCo With Coca-Coca in the Beverage Industry Key Financial Indicators PepsiCo Coca-Cola P/E (ttm) 18.90 19.94 EPS Growth (19.90) 0.8% PEG (ttm, 5 years) 3.89 PepsiCo 2.58 Coke Long-term Debt / Equity 137.567% 99.549% Dividend per share / year 3.0% 2.7% As can be viewed from the comparison of ratios, PepsiCo is currently doing better when it comes to paying dividends per share. The financial strategy it utilized was to leverage with long-term debt so that the earnings can be distributed to less number of shareholders. PepsiCo Inc. has only 1.56 billion outstanding shares whereas Coca Cola has 4.5 billion outstanding shares. But the EPS Growth has been positive in favour of Coca-Cola versus the negative EPS Growth of PepsiCo. It means that Coca-Cola can eventually catch up with eventually giving as much dividends or even better than that paid by PepsiCo. Furthermore, PepsiCola has less borrowing potential than Coca-Cola as of the latest financial statements, because it has exceeded the 100% long-term debt-to-equity ratio. The advantage of PepsiCo, on the other hand, is that its P/E Ratio is lower than that of Coca-Cola. This can attract more people to buy the shares of PepsiCo even though its price per share is relatively higher than that of Coke. On a per dollar investment, potential investors can be assured of higher dividend payments on a quarterly basis at 3% and a good chance of better value for the shares purchased now, given that the demand will probably improve because of higher EPS compared to Coke. Profits Margin Analysis The Net Income of PepsiCo grew for three consecutive years. But there was a declining percentage of growth in the Net Income. Gross Margin remained within the range of 52% to 54%. It was the Operating Expense that pulled down the profits. More specifically, the Interest Expenses and the Selling & Administrative Expenses grew as follows: Interest Expenses were not treated as part of the Operating Expense in the Income Statement. Instead, Interest is deducted from the Operating Profit which is different from the Gross Margin. Notice that the amount and percentages of Interest Expense suddenly grew in 2010, from $397 million to $903 million, or 227.46%. And Selling/Administrative Expenses grew each year --11.19% in 2010 and 1.55% in 2011. PepsiCo had increased its Long-Term Debts as follows: Thus, in order to improve the profitability, more Owners’ Equity should be raised to pay debts. That will in turn reduce the Interest Expenses. The increasing Selling and Administrative Expenses must be due to greater difficulties in selling Pepsi Cola due to the popularity of disadvantages when people take soft drinks. Health trends are changing. Obesity has become an issue especially in America. And sweetened drinks contribute to weight gain. PepsiCo Inc. can go for a Stock Split to lower the price per share to $ 35.92 in order to attract a wider market of smaller investors similar to Coke which prices its share at $ 37.66. The last time Pepsi did a Stock Split was way back in May 29, 1996. This will increase Equity and improve the Debt-to-Equity ratio of the company. In North America, PepsiCo holds the title of being the largest food and beverage corporation in the industry. What has been declining within PepsiCo is the beverage line, probably, because of the incidence of obesity, especially in America. Each sweetened beverage, like Pepsi Cola, has calories that eventually get stored in the body as fats. Diet Pepsi was also found to have induced people to look for the sugar not present in Diet Pepsi and then consume more food as a result. (George, 2011) News about research and development currently in progress, also circulated and stated that PepsiCo is on the way to discovering ways and means to meet the health requirements of people by producing more nutritious food and drinks. Therefore, there is the probability of having some improvements in the business performance right after a new recipe of formula is discovered to contribute to the health improvement of people who drink Pepsi beverages. Holding on to the shares of PepsiCo can realize windfall profits within the coming years. In summary, Pepsi Inc. is currently attractive to investors both for short-term value realization per share because it has been giving quarterly dividends that are currently worth about 3% income per year. The interest rates on savings in the USA are more or less at 1%. On top of the dividend income, an investor who holds on to the shares can realize an average of 8% increase in the value of shares of stocks. This company has proven itself in good and hard times to be stable for over a hundred years. And there are more positive prospects of better times than there are unfavourable indications of financial problems for the corporation. At that 11% average annual gain (3% Cash Dividend + 8% share value appraisal), savings gets doubled between 6 to 7 years. References George, D. (2011). Does Diet Pepsi Make You Gain Weight? LivingStrong.com August 18, 2011. Retrieved September 11, 2012 http://www.livestrong.com/article/295752-does-diet-pepsi-make-you-gain-weight/ Horowitz, A. (2010). The Five Types of Earnings Per Share (EPS) Numbers. The Winning Investor. Episode 46. April 14, 2010. Retrieved September 10, 2012 http://winninginvestor.quickanddirtytips.com/the-five-types-of-earnings-per-share-numbers.aspx PepsiCo Inc. (2012). The Power of PepsiCo. 2011 Annual Report. Retrieved September 10, 2012 http://www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_Report.pdf Spaulding, W. C. (2011). Enterprise Value. Retrieved September 10, 2012 http://thismatter.com/money/stocks/valuation/enterprise-value.htm Appendix I.Figures PepsiCo. Inc. http://finance.yahoo.com/q?s=pep Figure 1. Stock Market Prices in the NYSE, January to September 2012 (Source: Finance.yahoo.com ) Figure 2 – Stock Market Prices in the NYSE, January to December 2011 (Source: Finance.yahoo.com) Figure 3 – Stock Market Prices in the NYSE, January to December 2010 Figure 4 - Stock Market Prices in the NYSE, January to December 2009 (Source: Finance.yahoo.com) Figure 5 - Stock Market Prices in the NYSE, January to December 2008 (Source: Finance.yahoo.com) Figure 6 - Stock Market Prices in the NYSE, January to December 2007 (Source: finance.yahoo.com) Figure 7 - Stock Market Prices in the NYSE, January to December 2006 (Source: Finance.yahoo.com) Figure 8 - Stock Market Prices in the NYSE, January to December 2005 (Source: Finance.yahoo.com) Figure 9 - Stock Market Prices in the NYSE, January to December 2004 (Source; Finance.yahoo.com) Figure 10 - Stock Market Prices in the NYSE, January to December 2003 (Source; Finance.yahoo.com) Figure 11 - Stock Market Prices in the NYSE, January to December 2002 (Source; Finance.yahoo.com) Figure 12 - Stock Market Prices in the NYSE, January to December 2001 (Source; Finance.yahoo.com) Figure 13 - Stock Market Prices in the NYSE, January to December 2000 (Source; Finance.yahoo.com) Figure 14 – PepsiCo Dividends Paid, Year 2007 – 2012 (Source: Finance.yahoo.com) Figure 15 – PepsiCo Dividends Paid, Year 2000 – 2006 (Source: Finance.yahoo.com) Figure 16 – PepsiCo Inc. Institutional Owners – 69% of Total (Source: finance.yahoo.com) Figure 17 – PepsiCo Inc. Top Mutual fund Holders (Source: finance.yahoo.com) Figure 18 – PepsiCo Inc. Statistics of Shares (Source: finance.yahoo.com) Figure 19 – Trend Analysis of Revenue 2009-2011 (Source: 2011 Annual Report of PepsiCo Inc., p.41) Figure 20 – Consolidated Statement of Income, Net Income Per Share, and Diluted Earnings (Source: 2011 Annual Report PepsiCo Inc., p.50) Figure 21 – Comparative Balance Sheet (Assets) 2010 and 2011 (Source: 2011 Annual Report PepsiCo Inc., p.53) Figure 22 – Comparative Balance Sheet (Liabilities & Equity) 2010 and 2011 (Source: 2011 Annual Report PepsiCo Inc., p.53) Figure 23 – Sources & Uses of Funds (Source: 2011 Annual Report PepsiCo Inc., p.52) Figure 24 – Key Indicators Compared By Financial Analysts & Investors (Source: Finance.yahoo.com) Figure 25 – Key Indicators of Coca-Cola II. Acronyms & Definitions Cash EPS – For those who want to avoid the difficulties of looking for the deductibles to the Net Income in order to determine the Diluted EPS, they simply divide the Operating Cash Flow then divide by just the outstanding shares after it is diluted. The numerator represented by the increase in Cash is presumed to be the Net Income in Cash. And the diluted outstanding shares are supposed to be the common public shares without the preferred shares convertible into common stocks. Diluted EPS – Earnings Per Share may include Net Income excluding Dividends but including other deductibles like shares not considered outstanding or public, stock options, preferred stocks convertible into common stocks. These items would lower the number of shares and would have an effect on the final figure for the Earnings divided by number of outstanding shares. Diluted EPS is always lower than the Standard EPS. If an investor is not meticulous enough and companies want to show very competitive EPS, they will simply not dilute or will partially dilute the EPS to make the figure look attractive. (Horowitz, 2010) EPS – Earnings per Share is one basis for judging how well an investment in a company has been performing over time. It refers to the outstanding shares which are expected to earn per share. Dividends are excluded from the earnings (E) in computing the EPS. Thus the formula for computing EPS is Net Income less Dividends divided by Outstanding Number of Shares. It is also called the “theoretical” earnings of each share of stock. Enterprise Value – The real value of an enterprise is the cost to acquire it. The amount usually includes the number of all the shares times the price per share + all debt – Cash and Cash Equivalents. (Spaulding, 2011) Enterprise Value per Earnings – When the Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) is utilized as denominator, the result is known as the Enterprise Value per Earnings. Actually this is the inverse of Returns on Investments (ROI) Enterprise Value per Share – After calculating for the Enterprise Value as defined, the result is divided by the diluted outstanding public shares of stock. GAAP EPS – Generally Accepted Accounting Practice EPS follows the standards of Accounting. Headline EPS – The usual figure heard in analytical reports are sometimes not what the company eventually discloses. They are the computations of Financial Analysts based on the available information. Ongoing EPS - Sometimes, there are additional sources of income that does not normally happen. Such income, if substantial, can mislead people into thinking that there was a sudden improvement in the operating performance of a company. Thus, in order to be more transparent, such extraordinary source of income is deducted prior to the computation of EPS. It will then be a more realistic reflection of the performance of the business. P/E Ratio – Price/Earnings Ratio is a financial tool utilized prior to investing on shares of stocks. It tells the investor, by dividing the price of a company share by the annual earnings of each share, whether or not the P/E is comparatively lower or higher than the P/E of competitors in the same industry. A lower P/E is generally better than a higher P/E if all other considerations are equal. P/E Ratio (TTM) – Price/Earnings Ratio Trailing Twelve Months is another tool which utilizes the same ratio of price and earnings except that the figure utilized for the earnings will be that of the average of the last twelve months and not the latest month or latest quarter. Sometimes, due to lack of information, the average of past three quarters’ earnings are utilized to the effect that the actual P/E Ration (ttm) might be actually higher if the latest quarter earnings are included. Pro-Forma EPS – Assumptions may be made to arrive at a desired EPS for disclosure to the public. Some expenses may be excluded. Projected income for the final quarter may be assumed since data might not be available at the time of preparation of Financial Reports. Unfortunately, the analyst might not have all the deductibles to arrive at a Diluted EPS. Read More