Bloomsburg Investment Group Equity Analysis PepsiCo, Inc.

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1 Bloomsburg Investment Group Opinion: Bloomsburg Investment Group Equity Analysis PepsiCo, Inc. Analyst: Eric Horowitz, Class of 2016 The Bloomsburg Investment Group recommends PepsiCo as a buy for steady and stable growth with an acceptable dividend. To arrive at this conclusion, we took into consideration the intrinsic value from the valuation models, the company's dividend, and the overall state of the economy. We think PepsiCo has established itself as one of the top leading beverage and food companies in the industry. It offers a diverse product line with large brand names known worldwide. The Consumer Staples industry will grow in future years along with the growth of emerging economies. PepsiCo generates almost a quarter of its revenue from developing countries, and it has the potential to grow that to a larger percentage through increases in disposable income around the world. PepsiCo offers a 2.8% dividend and has promised to return $10 billion to shareholders through stock repurchases ending in the second quarter of Based on our valuations, we have come to a fair value range of $ and $ The group believes that long term PepsiCo can reach a price in the middle of this range, while still paying out a hearty dividend. Corporate Summary:. is a global leader in the Food and Beverage industry. Established in 1898, they are headquartered in Purchase, New York. The company operates in five segments; Frito-Lay North America, Quaker Foods North America, Latin America Foods, PepsiCo Americas Beverages, PepsiCo Europe, and Asia and Middle East and Africa. Frito-Lay North America offers chips under the brand names of Lay's, Ruffles, Doritos, and Tostitos, and sells Cheetos, Fritos, and several dips. The Quaker Foods segment provides oatmeal, rice cakes, Aunt Jemima syrups, granola bars, Rice-A-Roni, and Life and Cap'n Crunch cereals. Multiple brands under PepsiCo's Latin America branch include Doritos, Marias Gamesa, Cheetos, Ruffles, Emperador, Saladitas, Sabritas, Elma Chips, Tostitos, Quaker, and Rosquinhas Mabel. The America Beverages segment produces concentrates, fountain syrups, Pepsi, Gatorade, Mountain Dew, Aquafina, 7Up, Tropicana, Sierra Mist, and Mirinda brands. PepsiCo Europe delivers Lay's, Walkers, Doritos, Cheetos, Ruffles, and many of the same beverages sold in America. The Asia and Middle East arm of PepsiCo arm sells snack foods and beverages under the same brand names as sold everywhere else in the world. PepsiCo sells its products to wholesalers, foodservice customers, grocery and convenience stores, mass merchandisers, and authorized independent bottlers. PepsiCo produces over 22 products that generate at least $1 billion in yearly revenue. They compete with other beverage and snack food companies, as well as bottlers and food distributors. Corporate Details: Name Ticker Domicile Sector Industry Exchange Last Close Price 52 Wk High Price 52 Wk Low Latest Dividend Dividend Yield % TTM Beta 5 Yr (Mo End) Avg Daily Volume (3 Mo) Shares Outstanding (mil) Number of Analysts United States Consumer Defensive Beverages So Drinks NEW YORK STOCK EXCHANGE, INC ,490, , Page 1 of 7

2 Financial Summary, Year End 2013 (in millions) Market Capitaliza on 146, Total Revenue 66, Gross Profit 35, Opera ng Income 9, Net Income Cont Ops 6, Net Income 5, Current Assets 20, Cash 8, Total Assets 70, Current Liabili es 18, Long term Liabili es 34, Total Liabili es 53, Total Equity 17, Opera ng Cash Flow 10, Inves ng Cash Flow 4, Financing Cash Flow 8, Change In Cash 3, EBITDA 12, Enterprise Value 167, Capital Expenditure 2, P/E Ra o Forward PEG Ra o 3.04 Dividend Yield % TTM 2.70 Financial Highlights PepsiCo bought back almost $2 billion worth of shares in the second half of the 2013 fiscal year. This is the start of their planned $10 billion repurchase program expected to end in the second quarter of Since then, PepsiCo has increased its annual dividend for the 42nd consecutive year for fiscal They also returned $8.7 billion to shareholders through share repurchases and dividends. This is a 36% increase from The company has decreased its effective tax rate each year since Each segment under PepsiCo's brand increased in revenue year over year except for their America's Beverages segment. This is most likely the result of many consumers going away from soda drinks to healthier alternatives. This segment has been decreasing the past few years. Free Cash flows increased by 10% in 2013 and 20% in This increase of free cash flows in 2014 equates to roughly $8 billion. PepsiCo has also $1 billion in productivity savings in 2014 from their productivity plan implemented in The decline in growth rate is a result of the share buyback program PepsiCo created. This is very impressive from a management point of view and results in a big increase in profit margin. Although liabilties have increased by 3.8% year over year, PepsiCo has decreased liabilities from 2013 by.24%. PepsiCo has made a promise to return value to its shareholders. Investment Growth Time Period: 11/1/2012 to 10/31/ % 60.0% 52.5% 45.0% 37.5% 30.0% 22.5% 15.0% 7.5% 0.0% -7.5% 1/2013 4/2013 7/ /2013 1/2014 4/2014 7/ /2014 1/2015 4/2015 7/ / % S&P 500 TR USD 56.9% Page 2 of 7

3 Industry Environment: Corporations in the Consumer Staples industry were a safe choice in the market during the 2008 recession. Generally large, established, blue chip companies that typically make up the industry were held as defensive plays in the midst of the worst economic downturn since the Great Depression. In a 14 month span from December 2007 to February 2009, the S&P 500 declined over 43%. In the same period, the Consumer Staples industry fell only a fraction of the market at 25%. PepsiCo generates almost half of its revenue in foreign countries. Over a quarter of its revenues are derived from developing countries. This shows promise for increases in revenue as the larger developing countries raise their standard of living. The stronger the foreign economies get, the more disposable income people will have to spend on beverages and snacks. Many Consumer Staples companies are seeing declines in operating revenue as an effect of higher costs and lower margins. Large distributers fall prey to purchasing power of wholesalers, such as Wal-Mart, who can buy products at large discounts. Other factors like increases in commodity prices can hurt these company's bottom lines. A trend observed across the board with large producers is that many companies are selling or spinning off product segments that do not perform at a rate that is worth of the company's time. Even well known products that still make money are being discontinued to let the company focus on perfecting a few segments and brands. An example of this is the, "Going Green," trend that is rising industry wide. Competitor Comparison 2013 Revenue Revenue % Chg Gross Profit Gross Margin Net Income Net Income % Chg Net Margin % Market Cap Current Ratio Receivable Turnover Coca-Cola Co Dr Pepper Snapple Group Inc Mondelez International Inc Class A 64, , , , , , , , , , , , , , , Competitor Comparison (Cont.) 2013 Coca-Cola Co Dr Pepper Snapple Group Inc Mondelez International Inc Class A Investment Growth Time Period: 11/1/2010 to 10/31/ % 175.0% 150.0% 125.0% 100.0% 75.0% 50.0% 25.0% 0.0% Asset Turnover ROA % Total Debt to Total Equity ROE % Beta 5 Yr P/E Ratio PEG Ratio Forward P/B Ratio Current Dividend Yield % TTM Free Cash Flow / Sales % TTM % 4/ /2011 4/ /2012 4/ /2013 4/ /2014 4/ / % Coca-Cola Co 59.8% Dr Pepper Snapple Group Inc 183.5% Mondelez International Inc Class A 153.9% Page 3 of 7

4 Quarterly Dividend Time Series Time Period: 11/1/2010 to 9/30/ Quarterly Cash Dividend /2011 3/2012 9/2012 3/2013 9/2013 3/2014 9/2014 3/2015 9/2015 PepsiCo Profit Tops Estimates PepsiCo's third-quarter profit exceeded analysts' estimates. Earnings per share were $1.35 at the end of the third quarter, exceeding the forecasted EPS of $1.26. Net income for the thirdquarter has fallen 73% along with sales falling 5.2%. Net revenue fell in Europe, Latin America, North Africa, Asia, and the Middle East. The decline is due to the strong which reduces the PepsiCo's value abroad. CFO Hugh Johnston also stated that an increasing portion of revenue is coming from newly introduced products. PepsiCo, Coca-Cola, others talk to invest in Chobani Both PepsiCo and Coca-Cola are interested in investing in Chobani, the Greek yogurt producer. The transactions are being carried out by Goldman Sachs. This investment could value Chobani at $3 billion. The CEO, Hamdi Ulukaya, will remain in his position but is looking for investors that will help expand Chobani into new product categories. This investment could be important to Pepsi given a slowing soda market. Pepsi differs from Coke being that Pepsi has Frito-Lay, a division accountable for snacks. PepsiCo Expands Soda Partnership With SodaStream Pepsi s stake in SodaStream gains traction as they are developing proprietary items that will allow SodaStream users to produce Pepsi and Sierra Mist at home. Coca-Coca has built up a 16% increase for their equity stake in Keurig as the Keurig Cold machine is released, a device almost exactly similar to SodaStream. Soft drink sales have fallen for 10 straight years and can be attributed to the health concerns associated with soft drinks. Although the idea behind SodaStream is to keep soft drinks in health-conscious consumers homes, SodaStream s first-half revenues for 2015 have fallen 27%. Anheuser-Busch InBev agrees to buy SABMiller Anheuser-Busch InBev has agreed to buy its main rival SABMiller for $104 billion, creating the world s largest beer maker with sales of $55 billion. With AB InBev distributing Pepsi products to Latin American countries and SABMiller distributing Coke to African countries, there has been concern over whether or not. UBS states that there should not be a conflict of interests due to the geographic location of each distributor. Page 4 of 7

5 Strengths: PepsiCo's top three direct competitors include Coca-Cola, Dr. Pepper Snapple Group, and Mondelez International. However, PepsiCo is a beverage and snack food company and neither of these companies do both to the extent that PepsiCo does. PepsiCo is a very diversified company since they offer a variety of beverages and foods. PepsiCo sells many products, but 22 different brands of theirs each generate over $1 billion a year. PepsiCo benefits from complementary product sales. They offer many salty snack foods that go well with their refreshing beverages. The Consumer Staples industry has many barriers of entry because most companies are established and have great margins. The large brands are known by consumers and because many are necessities, most consumers are less likely to change to another unfamiliar brand. Weaknesses: PepsiCo, along with many other large producers, has lost bargaining power with its wholesalers. More and more consumers are buying their products from large retail stores because of the discounted prices. This allows wholesalers like Wal-Mart to have the upper hand in contract bargaining with suppliers like PepsiCo. PepsiCo has to take the low priced deal to distribute its product which lowers its profit margins. Along with reduced margins from loss of bargaining power, businesses have to reduce costs to remain competitive in the market. As a beverage business, PepsiCo needs to make its sodas, waters, juices, and teas relatively priced to competitors so consumers will want to purchase their products. This applies to the food industry as well where they have to compete with even more companies in the segment. Opportunities: The largest potential space for growth is in the emerging and developing markets. PepsiCo offers products that are bought cheaply at a fraction of disposable income. Countries like China and India are increasing their GDP and raising their standard of living. More people in countries like these have more income and can choose to spend on PepsiCo's products. PepsiCo will look to grow also through mergers and acquisitions. They have a solid brand name and available cash that can be used to acquire potential companies as additions to their own. PepsiCo and Anheuser-Busch InBev are rumored to be in talks about a merger or partnership. AB InBev already bottles for PepsiCo's Latin America segment and is looking to expand from its primary alcohol business. Threats: The soda industry has been under fire recently because of artificial sweeteners and different coloring dyes. PepsiCo is testing a new soda made from real sugar that would be healthier for the user. If this product fails, and more consumers stray away from original sodas, PepsiCo could face detrimental drops in sales. Consumer taste is also changing constantly, and tastes are different around areas of the world. PepsiCo has to be able to appeal to all consumers where they conduct business. PepsiCo has already seen a decrease in their profit margins, but they may have not hit the bottom yet. As costs continue to rise and competition improves, PepsiCo will have to make decrease spending. More and more consumers are becoming very health-conscious. PepsiCo has and will continue to innovate in this area to appeal to a wider variety of preferences. Page 5 of 7

6 Valuation: Discount Cash Flow Model (DCF) To calculate the Discount Cash Flow Model for PepsiCo, we first found the weighted average cost of capital to be 4.22%. This percentage was derived from PepsiCo's prior year cost of debt, tax rate, and a market risk premium of 7.75%. The premium comes from the difference between historical market return and the yield on 10 year treasury notes. Our group believes 2% as the terminal growth rate of PepsiCo is reasonable as it will continue to grow at a modest rate. Next year estimates for sales growth, cost of goods sold (as a % of sales), selling and general administration expenses, capital expenditure, depreciation, and amortization are as follows respectively: 1.5%, 45.3%, 35%, 4.4%, 82.8%, and Using the Training The Street DCF valuation model through CapitalIQ, we arrived at an intrinsic value of $ Valuation: Multiple Valuation We calculated the fair value of PepsiCo using the EBITDA multiple method. Like in the DCF model, we used the weighted average cost of capital of 5.93%. A terminal multiple of 13.8 was retrieved from CapitalIQ. Next year estimates for sales growth, cost of goods sold (as a % of sales), selling and general administration expenses, capital expenditure, depreciation and amortization are as follows respectively: 1.5%, 45.3%, 35%, 4.4%, 82.8%, and Using these values and the Training The Street EBITDA multiple method, our group derived a fair value of PepsiCo to be $ Considering both models to gain a range of values, we determined that the fair value of PepsiCo to be between $ and $ Page 6 of 7

7 Bloomsburg Investment Group Disclaimer This report was developed by student members of the Bloomsburg Investment Group (BIG). The purpose of the report is to provide research analysis of securi es to poten al and exis ng donors of The BIG Fund. The report is designed to exemplify the abili es of our members through investment research and analysi s. Analysts of the Bloomsburg Investment Group and The BIG Fund are not registered brokers, investment advisors, or licensed financial professionals. The generated opinion of our analysts is not an offe r or solicita on to buy or sell any security, and due diligence is recommended before making any financi al transac on. Informa on included in this report was compiled from different public sources. Not all relevant data was included into the report, and accuracy is not guaranteed. Students, faculty, and staff of Bloomsburg University may have a financial interest in any company listed in this report. Sources Cited Morningstar Direct TDAmeritrade Think or Swim Wall Street Journal.com CapitalIQ.com Bloomberg.com Thomson Reuters.com CNBC.com Market Watch.com Dow Jones.com Fidelity.com Yahoo Finance.com Google Finance.com Page 7 of 7