Stock Analysis: PepsiCo
Summary:
Current Price of stock: $103.78
Projected Price of stock: $159.98
Recommendation: Buy
About the company
Founded in the year 1898, PepsiCo is an American multinational company that manufacture and process food snacks and beverages. Headquartered in New York, Pepsico is the the behemoth of food and beverage industry in the United States with annual revenue of $63.05 billion. The company owns a series of brands such as Frito Lays, Tropicana, Mountain Dew, Quaker Oats, Gatorade, et cetera. By the end of 2015, the company had employed 263,000 employees and was selling its products in more than 200 countries.
Sector overview
Pepsico Inc. operates in food and beverage industry and is the part of consumer goods sector. Important to note, the United States is a world leader in consumer good sector and benefits from the highly skilled force in the consumer goods arena. By the end of 2012, the consumer good market accounted for a total value of$419.4 billion, the largest in the world.
It is considerable that consumer goods section largely depends on the disposable income of the consumers and how the economy is performing. Post facing the carnage during 2007-08, the consumer goods sector has now rejuvenated and companies have witnessed growth yet again with US economy back on a sustainable bullish trend with high job creation and increasing GDP. However, the growth in the consumer sector comes with a condition in the form of changing taste of the consumers, who now wants the products to be close to its natural state and high tracebility. For companies such as Pepsico, whose product portfolio depends on processed foods, the future is forecasted to be tough. Consumers are now demanding foods and beverages with a tag of ‘healthification’ with a ban on artificial additives. The outcome of such a change in consumer good sector is clearly visible on the financial performance of Pepsico, which during 2015 witnessed a fall of 5.43% in the revenue figures. In fact, the market analysts are also projecting muted growth for the company during 2016 with a consistent fall in the amount of soda consumption in the United States from 0.9% in 2014 to 1.2% in 2015.
Stock Valuation Models
In this section, we will be calculating the intrinsic value of the stock using different valuation method. Highlighted below are the stock valuation models used to project stock price of Pepsico:
Analyst Consensus Method
$99.25, X = 4.67, Pmax = $99.60, Pmin = $89.64
99.25 + (4.67. – 2.5) * (99.6 – 89.64) / 5
99.25 + 2.12* 9.96 / 5
99.25 + 4.22
Projected Price 12 months from now = $103.47
CAPM Model
Next Year Required Return= Risk free rate+ beta(equity risk premium)
= 1.895 + .69 * (6)
= 1.895 + .69 * (6)
= 1.895 + 4.14
= 6.03%
Projected Price: Current price*(1+ required return)
= 103.78*(1+0.0603)
= $110.03
Here:
Risk free rate= 10-year US treasury yield
Beta: Volatility of stock returns to market index
Equity Risk premium: Excess of market index returns over risk free rate
Dividend Discount Model
Here, we will be using Gordon Growth Model in order to project the stock price of the company:
Stock price: Current Dividend*(1+Growth Rate)/(Required Rate-Growth Rate)
= 2.76*(1+0.0386)/(0.0603-0.0386)
= 2.86/0.0217
= $131.79
Calculative Notes:
Growth Rate= Retention Rate* ROE
= 0.193* 0.20
= 3.86%
Relative Stock Price Valuation
Stock Price: Industry Average PE* EPS= 28*3.67
= $102.76
FCFE Model
With the purpose of calculation of intrinsic value of the stock, we have used FCFE model and while the comprehensive model is available in the excel sheet attached, the assumptions are discussed here under:
EBITDA Growth Rate(Year 1-5): 4.5%
EBITDA Growth Rate(Year 6-10) 3%
Terminal Year Growth Rate: 1.5%
Capital Expenditure remains in proportion of EBITDA: 25%
Following the given assumptions and with calculated WACC multiple at 5.373%, we found that the intrinsic value of the stock is $351.83, which is 2.4x times higher than the current market price of 103.78.
Weighted Average Projected Price
In order to calculate the average projected price for the stock, we have used weighted average pricing method with equal weights for each method
As we can see from the above table, the projected stock price of the company is forecasted to be $159.98. Therefore, comparing the stock price to the current levels,we can expect an appreciation of 53.96%.
Sensitivity Analysis
In order to achieve a prudent outcome for our stock valuation methods, we also performed sensitivity analysis for the company’s stock price by changing the EBITDA growth rate to 3% during period 1 and 2.5% during Period 2 while the terminal growth rate was assumed to be 1% this time . We believe that with Pepsico’s management publicly showing their concern for the declining soda consumption in the United States, it was important to analyze how the stock price reacts to muted growth rates as part of sensitivity analysis.
However, here also, our analysis revealed that the intrinsic price of stock is $294.84/share, which is significantly higher than the current market price of $103.78.
Conclusion and Summary
Performing the valuation for the stock under different valuation models, we analyzed that the projected price of the stock is currently undervalued and has a strong potential for capital growth. Most of all, even under the restrictive assumption of minimal growth rate as part of the sensitivity analysis, the stock was still forecasted to be trading at a significant discount.
Henceforth,we conclude that stock is a must include in the portfolio, but with a long-term horizon as while the soda consumption is expected to decline in the United States and around the globe,the company will look for other avenues of growth in its packaged drinking water and food snacks, which just like the beverage business, owns a strong brand equity around the globe. Our analysis is also validated by the market analysts following the stock. Highlighted below are the recent recommendation trends for Pepsico’s stock:
References
Analyst Opinion: PepsiCo. n.d. 4 April 2016 <https://in.finance.yahoo.com/q/ao?s=PEP>.
CNBC. US 10 year treasury yield. n.d. 5 April 2016 <http://data.cnbc.com/quotes/US10Y>.
Damodaran, Aswath. Equity Risk Premium. n.d. 5 April 2016 <http://pages.stern.nyu.edu/~adamodar/>.
Global Food Forums. 2016 Food Trends. n.d. 4 April 2016 <http://www.globalfoodforums.com/food-news-bites/2016-food-trends/>.
Key Statistics: Pepsico. n.d. 5 April 2016 <https://finance.yahoo.com/q/ks?s=pep>.
Profile: Pepsico. Yahoo Finance. 4 April 2016 <https://in.finance.yahoo.com/q/pr?s=PEP>.
Taylor, Kate. Coke and Pepsi are facing a terrifying reality. 30 March 2016. 4 April 2016 <http://www.businessinsider.in/Coke-and-Pepsi-are-facing-a-terrifying-reality/articleshow/51608115.cms>.
The Consumer Goods Industry in the United States. n.d. 4 April 2016 <http://selectusa.commerce.gov/industry-snapshots/consumer-goods-industry-united-states.html>.
