Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 10 Companies Benjamin Graham Would Invest In Today -Â JuneÂ 2016.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how PepsiCo Inc (PEP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): PepsiCo, Inc. is a food and beverage company. The Company, through its operations, bottlers, contract manufacturers and other third parties, is engaged in making, marketing, distributing and selling a range of beverages, foods and snacks, serving in over 200 countries and territories. The Company operates through six segments, namely, Frito-Lay North America (FLNA); Quaker Foods North America (QFNA); North America Beverages (NAB); Latin America, which includes its beverage, food and snack businesses in Latin America; Europe Sub-Saharan Africa (ESSA), which includes its beverage, food and snack businesses in Europe and Sub-Saharan Africa, and Asia, Middle East and North Africa (AMENA), which includes its beverage, food and snack businesses in Asia, Middle East and North Africa. The Company’s brands include Agusha, Amp Energy, Aquafina, Aquafina Flavorsplash, Aunt Jemima, Cap’n Crunch, Cheetos, Chester’s, Chipsy, Chudo, Cracker Jack, Diet Pepsi, Diet Sierra Mist and Domik v Derevne.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$157,529,176,033||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.40||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||18.96%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||26.45||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||13.03||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.40||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||4.16||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||1.02%|
|MG Value based on 3% Growth||$60.08|
|MG Value based on 0% Growth||$35.22|
|Market Implied Growth Rate||8.97%|
|% of Intrinsic Value||251.02%|
PepsiCo, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $3.88 in 2012 to an estimated $4.14 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.97% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
PepsiCo, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C-.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$23.75|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2016|
|Total Current Assets||$25,878,000,000|
|Total Current Liabilities||$18,459,000,000|
|Shares Outstanding (Diluted Average)||1,456,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$4.42|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.14|
Other ModernGraham posts about the company
|58 Companies in the Spotlight This Week â€“ 1/31/15|
|5 Speculative and Overvalued Companies to Avoid â€“ January 2015|
|Pepsico Inc. Annual Valuation â€“ 2015 $PEP|
|14 Companies in the Spotlight This Week â€“ 1/25/14|
|Pepsico Inc. (PEP) Annual Valuation|
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.