PepsiCo Inc.

Equity Research Report Analysis

ENKHTSETSEG 2009100496

ENKHTSETSEG [ENY] 2009100496

PepsiCo Inc.

ENKHTSETSEG BAT-ERDENE
KHU: 2009100496 (82-0)10-8061-6203 eny_hr@yahoo.com

COMPANY PROFILE
Name: PepsiCo Inc. Ticker: PEP (NYSE)

COMPANY OVERVIEW

Industry: Processed & Packaged Goods Number of Shares of Common Stock Outstanding: 1.58 Billion

PepsiCo is a world leader in convenient foods and beverages. The company’s revenue is more than $ 43.23 billion with net income of $5.95 billion (2009 annual report) and employs around 203,000 employees. The company’s products are sold in approximately 200 countries and they operate in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). PepsiCo (symbol: PEP) is a publicly traded company. Its shares are traded principally on the New York Stock Exchange in the United States (NYSE). The company is also listed on the Amsterdam, Chicago, Swiss and Tokyo stock exchanges. PepsiCo has consistently paid cash dividends since the corporation was founded in 1965. The stock currently trades $63.99 as of Friday, November 26, 2010.
5 YEAR SHARE PRICE PERFORMANCE ONE YEAR SHARE PRICE PERFORMANCE

Equity Research Report Analysis

 Page 2

ENKHTSETSEG [ENY] 2009100496

PepsiCo World Headquarters is located in Purchase New York approximately 45 minutes from New York City. Edward Durrell Stone designed the 7 building headquarters complex. The building occupies ten acres of 144 acre complex that includes the Donald M. Kendall Sculpture Gardens, “a world acclaimed sculpture collection in a garden setting” designed by Russell Page. PepsiCo’s success is the result of superior products, high standards of performance, distinctive competitive strategies and the high integrity of its people. The corporation’s mission is as follows: “Our mission is to be the world’s premier consumer products company focused on convenience foods and beverages. We seek to produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. An in everything we do, we strive for honesty, fairness and integrity.” PepsiCo consists of ① the snack businesses of Frito-Lay North America and Frito-Lay

BRANDS
Pepsi Cola Brands

Frito-Lay Brands

Tropicana Brands

Gatorade Brands

Quaker Brands

International, ② the beverage businesses of Pepsi Cola North America and PepsiCo Beverages International, ③ Gatorade/Tropicana North

America juice products, and ④ Quaker Foods North America, manufacturer and marketer of ready to eat cereals and other food products.

Equity Research Report Analysis

 Page 3

ENKHTSETSEG [ENY] 2009100496

Revenue Mix
  PepsiCo food brings in 63% of revenue while beverages bring in the remaining 37% PepsiCo has 52% of its revenue coming from the US and 48% coming from other countries. Besides the United States, the largest amount came from Mexico (7%), Canada (5%), and the United Kingdom (4%).

PepsiCo, Inc
Sector: Consumer Goods Sector: Consumer Goods Industry: Processed & Packaged Goods Industry: Processed & Packaged Goods Index Membership: S&P 100; S&P 500; S&P 1500 Super Comp Index Membership: S&P 100; S&P 500; S&P 1500 Super Comp Headquarter: 700 Anderson Hill Road, Purchase, NY 10577, United States Headquarter: 700 Anderson Hill Road, Purchase, NY 10577, United States Full Time Employees: 203,000 Full Time Employees: 203,000 Key executives: Indra Nooyi (Chairman, CEO); Hugh Johnston (CFO); Key executives: Indra Nooyi (Chairman, CEO); Hugh Johnston (CFO); Fiscal Year Ends: December Fiscal Year Ends: December Revenue: 43.23 billion (2009/12); 15.51 billion (2010/09) Revenue: 43.23 billion (2009/12); 15.51 billion (2010/09) Net Income: 5.95 billion (2009/12); 1.92 billion (2010/09) Net Income: 5.95 billion (2009/12); 1.92 billion (2010/09) Stock Type Classic Growth Stock Type: Classic Growth Stock Style: Large Growth Stock Style: Large Growth Website: http://www.pepsico.com Website: http://www.pepsico.com

MANAGEMENT
Indra K. Nooyi is the Chairman of the Board and Chief Executive Officer of PepsiCo, Inc since 2007. She is 54 years old, with sixteen years of service with company. Her total annual pay is $4.30million including salary, bonuses etc. as Dec 31.2009. Hugh Johnston is CFO since 2010 and his compensation and options compensation are not available now. John Compton is the CEO of PepsiCo Americas Foods since 2007. His compensation is $ 2.13M and he has exercised 1,381,085 options in the company and its value is $3.61M as Dec 31.2009.
FIGURE 1: Key Executives

Equity Research Report Analysis

 Page 4

ENKHTSETSEG [ENY] 2009100496

COMPETITION
BEVERAGES In the domestic beverage market, the Coca-Cola Company (KO) is PepsiCo’s main competitor. In 2008, Coca-Cola had 23% share of U.S nonalcoholic beverage volume, while PEP held a 25% share. KO has a higher worldwide share of carbonated soda beverages, but PepsiCo has a more diverse product line and leads the industry in non-carbonated soft drink innovations. PepsiCo’s revenues are also substantially higher than CocaCola’s, due to PepsiCo’s snack and convenient foods business, a market in which KO doesn’t participate. Pepsi also pays the Dr Pepper Snapple Group (DPS) for the rights to sell its products, along with KO. SNACKS and CONVENIENT FOODS PepsiCo’s Frito-Lay and Quaker brands compete in various parts of the larger food industry. Its snack foods manufactured by the Frito-Lay segment hold a commanding share of the U.S market, accounting for around 39% of domestic snack food sales in 2006. PepsiCo’s main competitor in the food market overall is Kraft Foods (KFT). Kraft’s products include snacks, chesses, diary, and cereal products, which puts it in competition both with Frito-Lay and Quaker products. Muck like the KO, Kraft doesn’t participate in both the food and soft drink markets, giving PEP the advantage of having a more diverse offering of products.
Figure4: COLA vs. Pepsi: 1year share price Performance Figure3: 2008 U.S Snack Market by volume Figure 2: 2008 U.S non-alcoholic beverage markets by volume

Equity Research Report Analysis

 Page 5

ENKHTSETSEG [ENY] 2009100496

Current statistics for Pepsi’s competitors are found below:
PepsiCo Current Price Market Cap Revenue (ttm) P/E (ttm) EPS (ttm) Net Income (ttm) Dividend Yield ROE 64.18 101.58B 52.92B 16.16 3.97 6.28B 2.94% 40.01 Coca-Cola 63.09 146.54B 32.14B 19.42 3.25 7.58B 2.79% 30.25 Dr. Pepper 36.27 8.27B 5.58B 17.13 2.13 530.00M 2.48% 19.06 257.57M 507.08B 16.26 0.61 N/A 3.2% 28.7% Industry

PepsiCo vs. Coca Cola market share by segment (2009)
Companies PepsiCo Coca-Cola Soft Drinks Pepsi 13.6% Coca Cola Classic 20.40% Orange Juice Tropicana > 40% Minute Maid <20% Bottled Water Aquafina 15.1% Dasani 8.7% Iced Tea Lipton 32.8% Nestea ~16% Specially Drinks Starbucks Frappuccino Sobe N/A

Figure 5: PepsiCo vs. Coca Cola market share by segment

While cola drinks have historically dominated the non alcoholic beverage segment, the last decade has seen a reversal of this trend in favor of non-carbonated drink growth benefiting Pepsi. Pepsi will seek to continue its diversification strategy through planned experimentation with the flavored water and energy drinks segments and healthier products in cola and snack segments. According to some researches there are several reasons why a diverse product strategy works for Pepsi. One, Pepsi’s products do not cannibalize from each other; revenues for both drinks and food products rose when they were paired each other at convenience store checkouts. Its products mix also balances the seasonality of their products lines as food products sell higher in the cooler months and drink sales sell higher in the warmer months. Last, Pepsi stands to gain as health conscious consumer’s switch from colas and soft drinks to water and tea because its non carbonated drink brands are category leaders.

Equity Research Report Analysis

 Page 6

ENKHTSETSEG [ENY] 2009100496

TRADING INFORMATION
Volatility (Beta): 0.53 Last Price: $64.54 52 Week Change: 2.88% 52 Week High (6 Oct): $68.11 52 Week Low (Feb8): $58.75 50 Day Moving Average: $65.08 200 Day Moving Average: $64.71 Shares Outstanding: 1.58B Payout ratio: 47%

VALUATION MEASURES

FINANCIAL HIGHLIGHTS

Market Cap: 102.54B P/E: 16.1 P/B: 5.1 P/S: 1.9 P/CF: 12.6 Dividend Yield%: 2.9

ROA (ttm): 10.70% ROE (ttm): 36.27% Revenue: 43.232M Net Income: 5.946M (Dec 2009)

Analyst Recommendations:

FIGURE 6: Analyst Recommendations trends

FIGURE 7: Analyst Recommendations trends

Equity Research Report Analysis

 Page 7

ENKHTSETSEG [ENY] 2009100496

Pepsi has seen over 8% average annual growth over the past five years. They have also seen 8% average earnings growth over the past five years. EPS (Earnings per share) growth for 2010 and 2011 is estimated by analysis to be 12% per year.

fact that for the last several years PepsiCo has been too highly valued and is now at a more reasonable stock price.

Dividend Growth
YEAR 2009 2008 2007 2006 2005 2004 DIVIDEND $ 1.775 $ 1.65 $ 1.425 $ 1.16 $ 1.01 $ 0.85 YEILD 3.10% 2.60% 2.20% 1.90% 1.85% 1.70%

Cash Flow Growth:
YEAR 2009 2008 2007 2006 2005 2004 CASH FLOW $ 6.8 billion $ 7.0 billion $ 6.9 billion $ 6.1 billion $ 5.8 billion $ 4.3 billion

Pepsi has grown their dividend by over 15% PepsiCo has seen nearly 10% annual cash flow growth over the past five years. annually over the last 5 years. One of the PepsiCo’s biggest draw is its dividend policy. A fierce competition between Coca-Cola and PepsiCo over the last decade has resulted in consistent dividend raises, regardless of economic, industry or firm climate. Using a simple linear prediction, Pepsi’s 2010 dividend will research $1.91 per share.

Profit Margin
PEP has a net profit margin of 14% which it has maintained over the last 5 years or more. This is lower that the profit margin of Coca Cola because PEP sells both snacks and beverages while Coke sells only beverages, which typically carry a higher profit margin.

Dividend growth
PEP is currently rocking an over 2.9% dividend yield. Looking through its dividend yield history, one sees that PepsiCo’s yield has steadily increased over the last several years. This is due in part to quickly increasing dividend, but is also due to the
FIGURE 8: PEP & KO Dividend Payout

Equity Research Report Analysis S

 Page 8

ENKHTSETSEG [ENY] 2009100496

SUMMARY
Five year average revenue growth: 8% Five year average earnings growth: 8% Five year average cash flow growth: 10% Current dividend yield: 2.9% Five year dividend growth 15% through this year’s dividend growth was 6%

CAPM k=rf + β (Erm-rf)
Risk free rate: 3.0% (10-year US. Treasuries in 2010.Dec, Bloomberg) Expected market return: 10.2% (S&P expected return as of Dec.2010 http://www.standardandpoors.com/ ) Beta: 0.53 k=rf + β (Erm-rf) = 3+0.53(10.2-3) = 6.816%

DDM model:
Five year dividend growth 15% through this year’s dividend growth was 6% Dividend of the previous year is $1.775 First 2 years: 15% Following 3 years: 7% Growth rate forever: 3% I believe that for the next 5 years PepsiCo will have a growth a growth rate somewhere between 6-7%. Afterwards, PepsiCo will ultimately grow at the rate of the economy (GDP) which I set at 4% or 3%.

Equity Research Report Analysis

 Page 9

ENKHTSETSEG [ENY] 2009100496

1

According to my Excel Spreadsheet that I made: V=$65.982

After this evaluation and valuation of the DDM I estimate the market price for a share of PepsiCo is somewhere in between $65.982 (3%) and $86.54 (4%). Current price of PEP is $64.18 on November 31 The recommendation at this time is buy or a strong hold.

1

FIGURE 1: Key Executives from http://uk.finance.yahoo.com FIGURE 2: 2008 U.S non-alcoholic beverage markets by volume www.wikinvest.com/stock/Pepsico_(PEP) FIGURE 3: 2008 U.S Snack Market by volume www.wikinvest.com/stock/Pepsico_(PEP) FIGURE 4: COLA vs. Pepsi: 1year share price Performance http://quote.morningstar.com TABLE 1: PepsiCo vs. Coca Cola market share by segment http://www.wikinvest.com/stock/Pepsico_(PEP) FIGURE 5: Analyst Recommendations trends http://uk.finance.yahoo.com FIGURE 6: Analyst Recommendations trends http://quote.morningstar.com FIGURE 7: PEP & KO Dividend Payout

Equity Research Report Analysis

 Page 10