Pepsico Inc. (PEP) Annual Valuation

Company Profile (obtained from Google Finance): PepsiCo, Inc. (PepsiCo) is a global food and beverage company. Through the Company’s bottlers, contract manufacturers and other partners, it makes, markets, sells and distributes a range of foods and beverages in more than 200 countries and territories. PepsiCo is organized into four business units: PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of its Latin American food and snack businesses (LAF); PepsiCo Americas Beverages (PAB), which includes all of its North American and Latin American beverage businesses; PepsiCo Europe, which includes all beverage, food and snack businesses in Europe and South Africa, and PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in AMEA, excluding South Africa. It manufactures markets and sells a range of salty, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products and other foods.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value	$56.12
MG Opinion	Overvalued
Value Based on 3% Growth	$58.27
Value Based on 0% Growth	$34.16
Market Implied Growth Rate	6.07%
Net Current Asset Value (NCAV)	-$20.52
PEmg	20.63
Current Ratio	1.24
PB Ratio	5.67

Balance Sheet – 9/30/2013 

Current Assets	$22,931,000,000
Current Liabilities	$18,468,000,000
Total Debt	$24,293,000,000
Total Assets	$76,814,000,000
Intangible Assets	$32,496,000,000
Total Liabilities	$54,400,000,000
Outstanding Shares	1,533,600,000

Earnings Per Share

2013 (estimate)	$4.18
2012	$3.92
2011	$4.03
2010	$3.92
2009	$3.77
2008	$3.21
2007	$3.41
2006	$3.34
2005	$2.39
2004	$2.41
2003	$2.05

Earnings Per Share – ModernGraham 

2013 (estimate)	$4.02
2012	$3.88
2011	$3.80
2010	$3.63
2009	$3.40
2008	$3.13

Conclusion:

Pepsico Inc. leaves the Defensive Investor and Enterprising Investor wondering where the company could be if it reached its potential.  The Pepsi brand is very strong, but the current ratio is too low for the Defensive Investor and the PEmg and PB ratios are too high.  The Enterprising Investor is turned off by the high level of debt relative to the current assets.  The company is not necessarily a risky investment, but one is left to wonder what could the company do with an even better financial position?  Value investors seeking to follow Benjamin Graham’s methods may wish to review other opportunities such as by taking a look at ModernGraham’s valuation of The Coca-Cola Company (KO).  In terms of a valuation, Pepsico has grown its EPSmg (normalized earnings) only from $3.13 in 2008 to an estimated $4.02 for 2013.  This is a weak level of growth that does not support the market’s current estimate of 6.07%.  As a result, the company would appear to be overvalued at the current time.

What do you think?  What value would you put on Pepsico Inc. (PEP)?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Pepsico Inc. (PEP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill