PepsiCo Corporate Performance

Introduction

PepsiCo Inc is an American multinational company in the beverages and food processing industry. The company was founded in 1898 as Pepsi-Cola, making it more than a hundred years old in the market. The headquarters of the company are located in Purchase, New York in the United States. The merger of Frito-Lay Inc and Pepsi-Cola in 1965 led to the formation of PepsiCo. The company serves the global market with presence in over 200 countries. The company has a wide range of products that include Pepsi, Mountain View, Lay’s Potato Chips, Gatorade, Diet Pepsi, Tropicana Beverages, 7 Up, Doritos tortilla chips, Lipton teas and many others. The company boasts of having 14 billion-dollar beverage brands and eight billion-dollar food brands (PepsiCo, 2012a). 

The first product by PepsiCo after the merger in 1965 is the Doritos brand Tortilla chips. It is also during this time that the company entered the Asian and European markets. The company moved to its headquarters in Purchase, New York in the 1970’s and was also the first organization to produce lightweight recyclable plastic bottles. PepsiCo adopted its code of worldwide business code in 1976 and acquired Pizza Hut Inc the following year. During the 1980’s, the company started its operations in China, Pepsi Free and Diet Pepsi Free are introduced, the company is listed in Tokyo Stock Exchange, and it acquires Kentucky Fried Chicken. The company acquired several companies in the 1990’s which include Gamesa and Tropicana products. In 1996, the company shot the first ever commercial in space. In 2006, Indra Nooyi becomes the Chief Executive Officer of PespiCo.  The company continues to acquire other brands as a method of expansion such as Pepsi Bottling Group Inc, Sandora, IZZE Beverage Company, and Stacy’s Pita Chip Co (PepsiCo, 2016b).

The primary distribution channels employed by PepsiCo are customer warehouse, direct store delivery and third-party distributor networks. Direct store delivery is where the company delivers its products directly to the retail stores. Customer warehouse is a less costly system where the company delivers the product from the manufacturing plant to customer warehouses and it is appropriate for perishable and less fragile products (PepsiCo, 2009c). The third-party distributor networks are employed by distributing the food and beverage products to schools, businesses, and restaurants through third party vendors. 

PepsiCo global operations are divided into six business divisions or segments: North America Beverages, Frito-Lay North America, Quaker Foods North America, Latin America, Europe Sub-Saharan Africa, and Asia, Middle East and North Africa. All these six segments are a source of revenue for the company with North America beverages being the best performing in terms of operating profit and revenues. The company has a diversified business model in the food and beverage industry. The portfolio of the company products comprises of cereals, salty, snacks, jelly, milk, peanut butter, and liquid refreshment beverage (LRB). The main competitor of PepsiCo in the LRB is the Coca-Cola Company. Figures released by Statista (2015) on LRB brands indicate that Coke has 16.5% volume share, followed by Pepsi at 8.2% and in the third place was Mountain Dew at 5.6% closely followed by Dr Pepper and Gatorade at 4.9% and 4.8% respectively. 

Financial Statement Overview

The income statements for the past five years (2012 – 2016) are retrieved from Amigobulls (2017). Assessment of the financial statements for PepsiCo indicates that the company is performing fairly well and better than its competitor. The revenues of PepsiCo have reduced from 2012 to 2016 from $65.49 Billion to $62.8 Billion but also Coca Cola experienced a similar trend as its net sales reduced from $48.02 Billion to $41.86 Billion in the same period. Despite the decline in PepsiCo’s net sales from 2012 to 2016, the gross profit remained relatively stable while the net income increased in the period. Below is a table of the company’s gross profit and net income for the past five years.

Table 1 (Amigobulls, 2017)

Year 2012 2013 2014 2015 2016
Gross Profit $34.2B $35.17B $35.8B $34.67B $34.59B
Net Income $6.18B $6.74B $6.51B $5.45B $6.33B

 

Despite the decreasing revenues, the company was able to maintain stable and even increasing net income due to reduction of cost of goods sold, general and administrative expenses and depreciation depletion amortization. Below is a table of the company’s Earnings Per Share Basic Net and Diluted Net. 

Table 2 (Amigobulls, 2017)

Year 2012 2013 2014 2015 2016
EPS Basic Net 3.92 4.32 4.27 3.71 4.40
EPS Diluted Net 3.92 4.32 4.27 3.67 4.36

 

Earnings Per Share (EPS) is calculated by the total profit of a company in a financial year divided by the number of common outstanding shares. EPS is used as an indicator of company’s profitability. The diluted EPS involves the inclusion of convertibles outstanding in the outstanding shares on the basic EPS. An increase in EPS means an increase in the company earnings making it attractive to investors as they will get better dividends on the shares they purchase. PepsiCo’s EPS has gradually increased from 2012 to 2016 with only a slight drop in 2015. 

The information of PepsiCo’s Balance Sheet was retrieved from Amigobulls (2017). The balance sheet information was from the past five financial years: from 2012 to 2016. Three of the most important information from a balance sheet are the total assets, total liabilities and shareholder’s equity. The table below displays the total assets, total liabilities and shareholder’s equity for PepsiCo for the past five years: 2012 to 2016. 

Table 3 (Amigobuls, 2017)

Elements 2012 2013 2014 2015 2016
Assets $74.64B $77.48B $70.51B $69.67B $74.13B
Liabilities $52.24B $53.09 $52.96B $57.64B $62.39B
SH. Equity $22.4B $24.39B $17.55B $12.03B $11.2B

 

The balance sheet is important as it shows what the company owns and owes others. The company’s liabilities have increased from 2012 to 2016 from $52.24B to $62.49B and this is primarily due to the increase in long-term debts and accounts payable in the period. The assets of PepsiCo have increased and decreased in the past five years but have remained relatively the same after the variations as they are valued at $74B for both 2012 and 2016. Using the balance sheet equation: Assets = liabilities + shareholder’s equity. An increase in the liabilities keeping the assets relatively constant as it is the case of PepsiCo, the shareholder’s equity decreases. Over the period of the past five years, the company’s shareholder’s equity has decreased from $22.4B in 2012 to $11.2B in 2016. 

In the past five years the company’s retained earnings have increased from $43.1B in 2012 to $52.52B in 2016, meaning the company is retaining more of the money that it is supposed to pay out a dividend and reinvesting it in business activities such as exploring new opportunities, expanding the business, research and development, paying debt, and other operations. 

PepsiCo’s cash flow statements for the past five years, from 2012 to 2016, were retrieved from Amigobulls (2017). The cash flow statement is the financial statement that records the cash and cash equivalent that enter and leave the company i.e. cash inflows and cash outflows. The three primary components of a cash flow statement are operations, investing and financing. The table below displays the net income cash flow (cash inflows – cash outflows) and the three primary components of a cash flow statement for PepsiCo for the past five years.

Table 4 (Amigobulls, 2017)

Elements 2012 2013 2014 2015 2016
Operating $8.48B $9.69B $10.51B $10.58B $10.4B
Investing $-3.01B $-2.63B $-4.94B $-3.57B $-7.51B
Financing $-3.31B $-3.79B $-8.26B $-3.83B $-2.94B
N.I. cash flow $6.21B $6.79B $6.56B $5.5B $6.38B

 

There has not been a significant change in the net income cash flow for PepsiCo in the past five years as the amount was $6.21B in 2012 and $6.38B in 2016 with the highest figure being 2013 and the lowest in 2015. There has been a steady increase in the cash inflow from the operating activities for the past five years from $8.48B to $10.4B which means there is increase in cash generated by the company over the past five years. The company has continued to increase its spending on investment as the amount increased from $3.01B in 2012 to $7.51B in 2016. Some of the areas that the company has increased in investment over the past year are purchase of plant and equipment, and increase in general investments. The is no consistent trend in the financing activities in the past five years as the company spent $8.26B in financing activities in 2014 which was the highest in the period and $2.94B in 2016 which was the lowest in the past five years. Some of the company’s financing activities include payment of dividends and other cash distributions, issuance of equity shares, and issuance of debt securities. 

From the cash flow statement, it is notable that the net income cash flow does not increase in tandem with the significant increase in the operating cash flows. The company increased spending in investment activities has negatively impacted the net income cash flow despite the increase in operating activities income. The company increase in investment activities is expected to increase the company’s net income cash flow in the future but may increase the company’s liabilities or debts in the short-term before the fruits of the investments are realized. 

Pro Forma Financial Statements

The pro forma financial statements are calculated for the years 2017 and 2018 with the base year being 2016.  The expected growth for the sales and cost of goods is 10% every year. The other items in the income statement and the balance sheet will be kept constant from the base year. Below is the pro forma financial statement for the next two years. 

All amounts are in US dollars

Income Statements

Details 2016 Pro forma (2017) Pro forma (2018)
Revenues

Cost of Goods Sold

Gross Profit

Selling General and Admn Expense

Income before depreciation depletion and amortization

Depletion Depreciation and Amortization

Non operating income

Interest Expense

Pre Tax Income

Provision for Income taxes

Minority Interest

Income Before Extraordinaire and Disc Operations

Net Income

Average Shares used to compute Diluted EPS

Average Shares used to compute basic EPS

Income before non-recurring items

Income from non-recurring items

PepsiCo Earnings Per Share Basic Net 

PepsiCo Earnings Per Share Diluted Net

62.8B

28.21B

34.59B

24.74B

9.86B

70M

110M

1.34B

8.55B

2.17B

50M

6.38B

6.33B

1.45B

1.44B

7.04B

-711M

4.40

4.36

69.08B

31.03B

38.05B

24.74B

9.86B

70M

110M

1.34B

9.4B

2.17B

50M

6.38B

6.96B

1.45B

1.44B

7.04B

-711M

4.83

4.8

75.98B

34.13B

41.85B

24.74B

9.86B

70M

110M

1.34B

10.35B

2.17B

50M

6.38B

7.65B

1.45B

1.44B

7.04B

-711M

5.31

5.46

 

Balance Sheets

Details 2016 Pro forma (2017) Pro forma (2018)
Cash

Marketable securities

Receivables 

Inventory

Prepaid expenses

Other current Assets

Total Current Assets

Property Plant & Equipment

Accumulated Depreciation

Net property Plant and Equipment

Investment and advances

Intangibles

Deposits and other assets

Total Assets

Notes Payable

Accounts Payable

Total Current Liabilities

Deferred taxes/income

Long-term debt

Other long-term liabilities

Total Liabilities

Preferred stock

Common stock 

Capital Surplus

Retained Earnings

Treasury Stock

Other liabilities

Shareholder’s Equity

Total liabilities and shareholder’s equity

9.16B

6.97B

5.70B

2.72B

1.55B

0.99B

27.09B

36.82B

20.23B

16.59B

1.95B

27.86B

636M

74.13B

6.89B

14.24B

21.14B

5.07B

30.05B

6.67B

62.93B

41M

24M

4.09B

52.52B

31.47B

13.92B

11.2B

74.13B

9.32B

7.2B

6.32B

2.66B

1.48B

1.1B

28.08B

36.82B

21.23B

15.59B

1.87B

26.33B

612M

72.48B

6.92B

14.78B

21.7B

5.22B

31.4B

7.14B

65.46B

41M

24M

4.11B

51.23B

33.82B

14.56B

7.02B

72.48B

9.51B

7.44B

6.12B

2.42B

1.32B

1.1B

27.91B

36.82B

22.44B

14.38B

1.81B

25.45B

592M

70.14B

6.99B

15.21B

22.2B

5.13B

32.2B

7.33B

66.86B

41M

23M

4.07B

51.30B

36.18B

15.97B

3.28B

70.14B

 

Ratio Analysis

All the ratios will be calculated from PepsiCo’s financial statements of 2016.

Liquidity 

Liquidity ratios measure the company’s ability to settle or meet its obligations. The first liquidity ratio is the current ratio which is a measure of the organizations current assets relative to the current liabilities.

Current ratio = current assets/current liabilities

= $27.09B/$21.14B

= 1.28

A positive current ratio is an indication that the company is able to meet its short-term obligations as its current assets are more than the current liabilities. The ratio is also an indication that the company can easily run its day-to-day operations. 

The second liquidity ratio is the quick ratio which measures the organization’s ability to meet its short-term obligation with its most liquid assets.

Quick ratio = (current assets – inventory)/ current liabilities

= ($27.09B – $2.72B)/$21.14B

= 1.15

PepsiCo has a positive quick ratio which means that the company is capable of meeting its short-term obligations with its most liquid assets. The most liquid assets include cash, cash equivalents, accounts receivables and marketable securities. Inventory is less liquid as it may take time to turn into cash. 

Financial Leverage

The financial leverage ratios are used to measure the organizations financing from equity and debt or how much capital comes from equity and from debt. The leverage ratios are used to assess the company’s capital structure and the solvency (which is a measure of the company’s ability to meet its long-term obligations). While the liquidity evaluates the short-term obligations the leverage ratios evaluate the long-term obligations. Two types of leverage ratios are the debt ratio and debt-to-equity ratio.

The debt ratio measures the company’s total liabilities as a percentage of the total assets. It measures the company’s ability to pay its liabilities with its assets.  

Debt ratio = total liabilities/total assets

= $62.93B/$74.13

= 0.85

PepsiCo is able to meet its liabilities as it has more total assets that total liabilities. A debt ratio that is less than one means the company can meets its obligations. It is important to note that despite the ability of PepsiCo to meet its obligations, the debt ratio is gravitating towards one meaning the company is risky due to the huge debts. Increase in debts by PepsiCo will make the company highly leveraged. 

The second leverage ratio is debt-to-equity ratio. This ratio measures the total debts relative to the total equity. The D/E ratio provides an insight on the percentage of the company is financed by creditors and investors.  

Debt-to-Equity ratio = total liabilities/total equity

= $62.93B/$11.2B 

= 5.62

PepsiCo has a very high D/E ratio making the company a risky venture. A D/E ratio of 5.62 means that the company is financed 5.62 to 1 by creditors to investors, or in other words, the creditors own much of the company assets (more than five times) than the investors. The company is at a high risk of meeting its obligations. 

Asset Management

Asset management ratios are used to measure how well the company uses its assets to generate sales. The ratio can be used to measure other successes in the management of the organization such as inventory management and credit policy management. Examples of asset management ratios include receivables turnover and total assets turnover. 

Receivables turnover is used to measure how well the organization implements its credit policy.  

Receivables turnover = sales/ accounts receivables

= $62.8B/$6.69B

= 9.39

PepsiCo has a high receivable turnover meaning that the company collects its accounts receivable sooner, and therefore it is properly implementing its credit policy. 

The second asset management ratio is total assets turnover which measures how good the organization manages all its assets to generate sales. 

Total assets turnover = sales/total assets

=$62.8/$74.13B

= 0.85

The company is performing fairly well with regards to it s ability to generate sales from the assets. PepsiCo generates 85 cents for every dollar of assets in 2016. Coca Cola, PepsiCo’s largest competitor, has an asset turnover of 0.47 for the year 2016 (Morningstar, 2017). A comparison with its competitor shows the PepsiCo’s ability to generate sales from its assets is better than that of Coca Cola. 

Profitability

Profitability ratios are used to assess the company’s ability to generate earnings or income with respect to costs and expenses. Examples of profitability ratios include return on assets and return on equity. 

Return on assets is a profitability ratio used to measure the net income relative to the total assets.

Return on assets = net income/total assets

= $6.33B/$74.13B

= 0.085 or 8.5%

The return on assets for PepsiCo is low at 8.5% in the year 2016 meaning there company is generating low returns with respect to the total assets. Coca Cola’s return on assets for the same financial year was 7.36% (Morningstar, 2017), meaning PepsiCo is performing better than its main competitor. 

Return on Equity (ROE) is a profitability ratio used to measure the amount of earnings relative to the shareholder’s equity. It is a measure of how much profit each dollar of the shareholder’s equity earns or generates. 

ROE = Net Income/ Shareholder’s equity

= $6.33B/$11.2B

= 0.57 or 57%

The company is performing fairly well on its ROE as every dollar of common shareholder’s equity earned about $0.57 in 2016: in the year, the shareholder’s earned 57% return on their investment. This is attractive for investors as they are able to break even on their investment within two years. The ROE of PepsiCo is above the consumer industry average of 30.08% (Stock Analysis on Net, 2016a). 

Market Value

Market value ratios are used by investors to evaluate the current share price of a company’s stock. The ratios are also used to determine if the share price of a company are over-priced or under-priced. Examples of market value ratios are Earnings Per Share and price/earnings ratio.

Earnings Per Share (EPS) is use to measure the amount of earnings or income per share of stock outstanding. What the EPS simply means is the amount that each share would earn if the profits were distributed equally among the outstanding shares. 

EPS = (net income – preferred dividends)/weighted average common shares outstanding

= $6.33B/1.44B

= $4.4

Each share in PepsiCo earns $4.4 per year. The investors do not look much at the EPS as it can be influenced by many variables in the income statement and may not reflect the true picture of the company’s profitability or risk. 

Price/earnings ratio (P/E ratio) is a measure of what the market is willing to buy a stock for based on its current earnings. Therefore, the P/E ratio calculates the market value of a stock with respect to its earnings.

P/E ratio = Market value per share/Earnings Per share

P/E ratio = $106/$4.4

= 24.09

The P/E ratio is a better metric to gauge the company’s performance than the EPS. In 2016, PepsiCo potential investors were willing to pay $24.09 for every dollar of earnings. Sock Analysis on Net (2016b) reported that the P/E ratio for the consumer industry and beverages sector are 18.96 and 25.89 respectively. This means that the company has a good performance in the consumer goods industry and the beverages sector. 

Return on Equity

Using the DuPont system the ROE is calculated by multiplying net profit margin, asset turnover and equity multiplier. 

ROE = Net Profit Margin x Asset Turnover x equity multiplier

Net profit margin = net income / revenue 

= $6.33B/$62.8B 

= 0.1

Asset turnover = Revenue/ assets

$62.8B/$74.13B

= 0.85

Equity multiplier = assets / shareholder’s equity

$74.13B/$11.2B

= 6.62

ROE = 0.1 x 0.85 x 6.62 

= 0.56

Economic Value Added

EVA is an estimate of a company’s performance by comparing the operating profit to the total cost of capital. 

EVA = net operating profit after taxes (NOPAT) – cost of capital x invested capital 

= $7,328,000,000 – 7.28% x $59,304,000,000

= $3,013,000,000

PepsiCo is generating a good economic value of $3.013B for the amount invested, $59.3B, in the company.

Financial Policies

The capital structure can be analyzed by looking at the debt ratios of the company that include debt-to-equity ratio, interest coverage ratio and cash flow-to-debt ratio. As calculated before, the D/E ratio for PepsiCo is 5.62 meaning the company is using a large amount of debt to finance its activities compared to equity financing. A 5.62 D/E ratio means the company uses 5.62 times debt financing compared to equity financing. The debt financing of the company has increased as the company has invested more funds in capital goods and other investment opportunities. The high D/E ratio makes PepsiCo a risky venture but the business is optimistic about the future due to the investments it has made. 

The interest coverage ratio is used to measure how a business can easily settle its outstanding debts. 

Interest coverage ratio = EBIT/interest expense

=$8.23B/$1.34B

= 6.14

PepsiCo has a low interest coverage ratio meaning the creditors may not have high comfort or confidence levels in lending to the company. The company is likely to have difficulties to service debt interest payments. 

Cash flow-to-debt ratio is used to measure the ability of a company to pay its outstanding debts from the operating cash flows only.

Cash flow-to-debt ratio = operating cash flow/total debts

= $10.4B/$62.39B

= 0.17 or 17%

The company has a low capacity of repaying its total debts with its operating cash flows as it stands at 17%. The company is highly leverage and may be risky to potential investors. 

PepsiCo is one of the few companies that have managed to increase it dividends for more than twenty five years in a row without interruption. In 2016, the company increased its dividend by 7% for the 44th consecutive year with the new annualized dividend at $3.01 per share (Clura et al., 2016). A consecutive increase in dividends is a manifestation of the company’s consistency with regards to maximizing the shareholder’s wealth. The increase in dividends increases the company’s attractiveness to investors.  

 

Conclusion

The diversified portfolio of PepsiCo makes it a strong brand and one of the leading ones in beverage and food industry. Unlike Coca Cola which heavily depends on its beverage brands, PepsiCo has a wide portfolio in the food processing industry making it have a competitive advantage over its competitors. The company is a profitable brand as it has registered increasing net income for the past five years even though the sales have remained relatively constant. The cash flows from the past five years have increased for the past five years which is a sign of healthy operations. The asset management ratio indicates that the company is doing a fairly good job in generating returns from its assets. 

The company’s debt management and capital structure as the company is highly dependent on debt financing than equity financing. The company has no major problems in meeting its short-term obligations using the liquidity ratio. The solvency ratios indicate that the company is highly leveraged as its debt-to-equity ratio is 5.62:1. The interest coverage ratio is also low meaning the company may have some issues in servicing its debts interest payments. 

The positive about the company’s huge debt obligation is that the biggest share of the funds is used in investment activities and only a little is used in the financing activities. The company is optimistic that the increase in debts due to increase in investment activities will see the company grow in the future. Nevertheless, the debt management of the company should be looked into carefully as it threatens the solvency of the company despite the investment activities.  The high leveraging of the company may hinder it achieving its intended goals. 

It is recommendable to purchase the stock of the company as the P/E ratio is better than that of the average in the consumer industry, the EPS of the company has been on the constant rise for the past five years, and the company has constantly increased the dividend of the company for a record 44 years without interruption. 

 

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