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PepsiCo

PepsiCo . By: Derek Johnson Max Hand John Ridge Eduardo Sanchez Blake Wathen. Background. Created in 1902 and incorporated in 1919 Merged with Frito-Lay in 2001. #2 seller of carbonated soft drinks #1 seller of snack in the United States. Sales Projection. Regression?

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PepsiCo

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  1. PepsiCo By: Derek Johnson Max Hand John Ridge Eduardo Sanchez Blake Wathen

  2. Background Created in 1902 and incorporated in 1919 Merged with Frito-Lay in 2001. #2 seller of carbonated soft drinks #1 seller of snack in the United States

  3. Sales Projection • Regression? • US GDP, US disposable income, # of households • No good match • R squared .39 • P-value .05 • X-Variable -5 • Why is everything off?

  4. Reason Against Regression • PepsiCo’s Acquisitions • Tropicana, 1998 • Quaker Oats 2001 • Divestment • PepsiCo spun off PepsiCo Bottling Company, 1999 • September 11th, 2001 terrorist attacks • Economic slowdown • 27% real sales growth that year

  5. Time Series Analysis Set 1998 at t=0, 1999 t=1, all the way to 2008 as t=10 Ran regression “t” as “x” value, real sales as “y” value R squared .77 P-value .00004

  6. Result • Final formula (#’s in millions) • Y = 28424 + 1199.97 * x • 2009 as t=11, 2010 t =12, all the way to 2019 t=21 • Much better projection of real sales

  7. The Pro-Forma Income Statement

  8. Projecting the Income Statement • Revenues: Time Series Analysis • Cost of Goods Sold and SG&A • Used a % of Sales approach: 75.22% • Regression resulted in similar result • Depreciation Expense • Change in Accumulated Depreciation minus projected Assets Retired

  9. Projecting the Income Statement (cont.) • Interest Income and Interest Expense • Historical average of Interest Income/Cash and ST Investments • Historical average of Interest Expense/LT Debt • Income Tax • Assumed an effective tax rate of 35% • Dividends and Retained Earnings • Historical average of Dividends/Net Income: 37.38% • Retained Earnings the remaining 62.62%

  10. Balance Sheet: Assets Cash and Short-Term Investments Accounts Receivable Inventory

  11. Balance Sheet: Assets • Intangibles • Property, Plant, and Equipment • Accumulated Depreciation • Other Assets

  12. Balance Sheet: Liabilites/Equity Accounts Payable Income Tax Payable Long-Term Debt Other Liabilities Common Stock Retained Earnings

  13. WACC Cost Equity: 10.98% Cost Debt: 8.93% Calculated WACC: 8.94% Industry Range: 7%-11%

  14. Intrinsic Value of PepsiCo Free Cash Flow Depreciation Tax Shield

  15. Valuation Analysis Calculated Share Price: $87.03 Observed Share: $46.52 PepsiCo is Undervalued Reasons: Global Strategy Wide Portfolio of National & Local Brands Innovation & Acquisitions

  16. Conclusion Valuation of PepsiCo share price: $87.03 $40 higher than actual PepsiCo share price PepsiCo is undervalued Difference is explained by our assumption that PepsiCo will continue to acquire new companies and grow

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