Corporate Finance Company Profile of PepsiCo - Essay Example

INTRODUCTION The Pepsi Co, Inc. is a one the biggest in the beverage industry worldwide and is a well renowned company all over the world due toits varieties of product that the company introduces in more than 200 countries. Pepsi operates its business operation in all continents of the world. The sole reason behind Pepsi’s success is its strong brand power and customer loyalty that it has been able to acquire over the years. Pepsi’s business strategy is to take competitive advantage over other competitors not only in the US but also in the global world. The main rival of the Pepsi is Coca cola. Pepsi is working on heightened regulatory and market scrutiny of corporate governance practices in order to communicate and represent the organization in a manner that pleases the shareholders, utilizing resources in a new and evolving compliance environment. Management should be eyeing the macro factors like Government’s policies, competition and tax rates where they operate business because local, national or international jurisdictions and new or changing regulations might create hurdle in their way. Company’s strong point is that they have sharpened their focus on sales, service and customer orientation and are eagerly looking forward to improve its product and service quality. In order to retain its market share in every possible manner, the management is keen on maintaining the performance momentum and competitive advantage in the marketplace. Financial Summary A. Past 3 years total assets & liabilities data, trend and discussion. YEARS 2008 2007 2006 Total Asset 35,994 34,628 29,930 Total Liabilities 23,888 17,394 14,562 There has been a positive increment in cash and cash equivalent in the year 2008 in comparison with the year 2007 and 2006. The sole reason behind this is the decrease in investment in the securities .Moreover, holding of the short-term borrowing makes an impression on cash and cash equivalents. Pepsi utilizes its reserve or liquid cash in a profitable manner because Pepsi makes an investment in securities, which in the end makes a profit for the company. The utilization of cash for investment purposes also shows in the current and quick ratio, and is a healthy sign for the company’s future prospect. In the year 2008 and 2007 no significant moment is observed in fixed assets of the Pepsi. Pepsi has applied proper inventory management techniques and policies. Due to high demand of the companys product less percentage of inventories is in hand, and the inventory turnover is also evidence of proper inventory system adopted by the Pepsi throughout these three years (Myers, Brealey and Marcus, 2001). Pepsi is primarily financing their activities through debt. Creditors have shown confidence in the companys ability, and have granted loans to them. Due to the expansion in the business volume, Pepsi has been acquiring debt to finance their business activities both domestically and internationally in the year 2008 in comparison with the previous years. Overall high tendency has been recorded in the total liabilities in the year 2008 the company acquired some more debt as compared to the previous year, which is very high in comparison to previous years because Pepsi’s volume of business is high and has been soaring since 2006 and the trend is increasing. So, there is a high need to finance increase in operations with debt. B. Past 3 years net income and cash flow data, trend and discussion. YEARS 2008 2007 2006 Net Income 5,142 5,658 5,642 The net income of Pepsi is slightly dipping in the year 2008 with $5,142.The primary reason behind this decline is the credit crunch and recession in the economy, which brings a bad reflection on the Pepsi’s net income in the year 2008. Moreover, Pepsi has also reverted to the use of some indirect channels to increase its sales both domestically and internationally, this has effected the selling and administrative expenses in 2008 but on the whole it shows that the management has adopted a very effective policy and has a very good internal control that has led to making an impression on the net income (Myers, Brealey and Marcus, 2001). The cash flow of Pepsi 2006 to 2008 suggests that its operating activities are slightly low in the year 2008 in comparison with the rest of the years, due to the slump in the economy. However, Pepsi controlled its investing activities in the year 2008, primarily, due to the prevailing credit problem, in comparison with the year 2006-07. Although Pepsi is financing its business with newly issued debt, its overall financing activities have declined in the year 2008. But good news for the Pepsi’s management is the overall impact of cash and cash equivalent, which is not only positive but healthier in 2008, in comparison to previous years. C. Dividend Policy – Dividend amount, dividend yield and dividend growth rate Dividends are generally paid during the late January or early February. The payment of dividends dates are agreed upon after the approval of Board of Directors. From 1965 till now the management of Pepsi has paid quarterly dividends regularly. YEARS 2008 2007 2006 Dividend 2,541 2,204 1,854 Dividend Per Share 1.65 1.43 1.16 Dividend Growth Rate 15% 19% 13% Dividend Yield 1.90% 1.90% 1.90% Pepsi has a bright history of paying dividends consecutively over the years. The premier feature of the entire dividend policy throughout the years from 2006 to 2008 is its incremental growth, which is a good sign for Pepsi’s future perspective. It is quite evident that Dividend per share (DPS) and dividend grows steadily which is a good sign but the dividend yield is constant. The sole reason of drop in the dividend growth rate in the year 2008 is the slump in the economy that prevails in the world economy. D. Capital Structure – Debt to Equity ratio and amount, fixed assets Vs. current assets, last reported liquidity position. YEARS 2008 2007 2006 Debt to Equity Ratio 1.97 1.01 0.95 Debt 23,888 17,394 14,562 Equity 12,106 17,234 15,368 Current Ratio 1.23 1.31 1.33 It is quite evident that Pepsi Inc. has been able to keep Debt to Equity Ratio almost constant through out the 3 year. It is very much prominent fact that Pepsi has basically eyeing on debt financing and its balance sheet reveals the fact that as the business expands year by year the need of short and intermediary term finance is also well grown up. It is very much evident that from the year 2006 to 2008 Pepsi’s balance sheet is densely populated with the debt financing which makes a signal to the debt holders that the creditor shows a confidence on the company’s debt management policy. Pepsi has given a lot of emphasis to managing its net working capital so keeping that into consideration in the whole 3 years Pepsi Inc. also grown up its assets as per the proportion of its debt it is quite noticeable that Pepsi has acquired its asset (like increment in the fixed assets, cash and account receivable) in the last three year with the help of debt financing but the fixed assets in the year 2008 is slightly shrink due to the credit crunch and liquidity problem the Pepsi’s management takes a tentative approach towards making capital expenditures in the year 2008.The current ratio reveals the fact that there is a consistent trend in the current ratio from the year 2008 to 2006. This liquidity trend discloses that due to the market expansion year by year the need of working capital is persistent, which reflects that there is no liquidity crunch. Even though, the Pepsi has increased its current assets slightly, which may indicate the fact that the company has expanded into newer dimensions, it is quite evident that no drastic change has occurred in the company’s financial policies. On the whole we suggest that liquidity position of the Pepsi has been in a state of stability in terms of paying off its current debts. E. Other Statistics – Leverage, Hedging info, Book value per share, market price per share, stock price trends, analyst opinion, P/E ratio, earnings expectations, etc. YEARS 2008 2007 2006 Debt to Total Assets 0.66 0.50 0.49 Book Value per Share 8 11 9 Price Earning Ratio 17 22 18 Market Price Per Share 54.56 77.03 62.55 Pepsi’s D/A ratio have almost been constant through out the past three years. It suggests that Pepsis utilization of debt in order to capitalize assets is persistent throughout three years time. Almost constant D/A ratio would place the company in a comfortable position, as it nullifies the amount of risk, especially if the interest rates are rising. Hence, a lower D/A ratio would be more desirable. Book value per share is also constant throughout the three years, the sole reason behind which is relatively lesser dependency of Pepsi on Equity financing, because of which Pepsi pays relatively less to the investors than the accounting book values. Both Price earning ratio and market price per share is dipping year by year because of the tough economic conditions that have had a toll on the industry’s earning power growth and market price (Myers, Brealey and Marcus, 2001). Pepsi also uses hedging strategies like interest rates, foreign exchange and commodity prices and specially uses hedging strategies in cross currency transactions. Moreover, Pepsi also uses hedge accounting technique for valuation. The prevailing price of Pepsi’s stock dated June 23, 2009 is valued at $53.01. According to the stock analysts, most recommend buying the stock or if someone already owns the stock, to hold it because the company has a potential to play a role of a market player in the future. 3. Current Issues & concerns – Information can be received from reviewing past news and company filings to SEC. According to Reuters, which reported on June 23, 2009 that Pepsi has joined Ceres Network of Companies (Reuters, 2009). 4. Macro Economic Events – How current macro economic (both US & International) events affecting the company? Due to the unfavorable economic conditions Pepsi suffers losses in revenue generation (Annual report, 2008). Due to the liquidity crunch it is a tough task for Pepsi to predict any sales price of its product and services and there is also a decline observed due to slight food inflation in the economy (Annual report, 2008). 5. Financial Analysis Summary (At least one page – inferences from data/numbers). According to my analysis and estimations, I summarize the following points regarding the financial condition of Pepsi. The points are stated below: Pepsi’s management also looks after the short term liquidity which is pointed out in the current ratio and makes necessary adjustments to finance the business with short and intermediate financing modes according to the business requirements. Net Profit of the firm is fair enough from 2006 to 2008 but due to the slight macro economic factors and slightly internal negligence or lack of operational management suffers the company in the year 2008 but on the whole it is the prime responsibility of the Pepsi’s management to revise its strategy and redefines its role in the business which in the end generate revenues at upside. Cash reserve is increased primarily because of expansion in business volume and also the debt financing which really helps the company’s perspective to hold the cash at the optimum level. Company minimizes the risk associated with the time lag or difficulties in marinating the proper inventory level. Pepsi Inc uses the proper inventory management techniques that help in reporting the higher gross profit in comparison with its industry and also with the competitors. Company also supervises the providing supervision of legal and ethical conduct and also the annual performance evaluation. Pepsi Inc also keeps a watch full eye on its obligations to its debt holder because company’s current ratio is low in comparison with the industry practice and also making strategies to uplift its working capital. Formulate risk management techniques regarding the inventory level, economic recession, product lifecycle etc. Reduction in revenue expenditures is the prime objective of the Pepsi Inc and continues the same practice in the year 2009 and also company make capital expenditure with respect to its business volume and also its sales because it has a implication on the Pepsi Inc cash flow. Management of the Pepsi Inc makes capital expenditure where it needs the most. Pepsi’s highest priority is their stockholders and a firm belief that has given the best possible reward of the stockholders’ investment properly which really makes an impression on the stock value and more importantly, the goodwill of the company. Formulate strategies in order to reduce costs of production which resulted in capturing more market segments at competitive prices. 6. Conclusion Pepsi portrays a very strong and positive position in the markets place and without doubt this company has an ability to challenge its rivals to have a girds to become the market leader. There are certain areas where Pepsi should pay attention to like in the area of working capital, net profit margin, reduction in revenue expenditures on consistent basis and assist in increase its investor’s confidence towards the organization. All in all, after reviewing the annual reports from 2006 to 2008, one can evaluate that the directors and senior management of Pepsi keenly practice the corporate governance affairs, SEC rules and regulations, and give a lot of emphasis on meeting the accounting and auditing standards in accordance with the international laws, and compliance affairs. Reference Brealey, Richard A., Stewart C. Myers, Alan J. Marcus, (2001). Fundamentals of Corporate Finance. New York. McGraw Hill Pepsi Inc. (2008). Annual Report. Pepsi Inc. (2007). Annual Report. Pepsi Inc. (2006). Annual Report. Read More