Pepsico Morningstar Report

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:16, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 21
PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
179.84 USD 176.00 USD 1.02 249.48 USD Bil Wide 2 Large Blend Low Exemplary ;;;;;
15 Sep 2023 27 Apr 2023 17:49, UTC 15 Sep 2023 6 Sep 2023 05:00, UTC
Price vs. Fair Value
Last Close: 179.84

200 Fair Value: 176.00
27 Apr 2023 17:49, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.91 1.03 1.06 1.13 1.06 1.02 Price/Fair Value
-4.88 27.14 11.45 20.00 6.61 1.58 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 27 Apr 2023 17:49, UTC.
Contents
Business Description Favorable Snack Trends and Beverage Innovation Should
Business Strategy & Outlook (27 Apr 2023)
Bulls Say / Bears Say (27 Apr 2023) Continue to Fuel Growth at Wide-Moat PepsiCo
Economic Moat (27 Apr 2023)
Fair Value and Profit Drivers (27 Apr 2023)
Business Strategy & Outlook Dan Su, CFA, Equity Analyst, 27 Apr 2023
Risk and Uncertainty (27 Apr 2023)
Following years of anemic growth due to operational missteps and underinvestment, management has
Capital Allocation (27 Apr 2023)
Analyst Notes Archive worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think
Financials there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth
ESG Risk initiatives in select attractive beverage subcategories (energy drinks, for one) and regional markets
Appendix
(Africa and Asia-Pacific), and an integrated business model facilitating more effective commercialization.
Research Methodology for Valuing Companies
Important Disclosure Thanks to the strong snack and beverage brands underpinning close retail relationships combined with
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
its massive scale and bargaining edge, we rate the firm as wide-moat and don’t foresee this position as
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please wavering. For one, we see Pepsi’s convenient snack lineup as well placed to bolster its share by
visit: http://global.morningstar.com/equitydisclosures.
leveraging unrivalled brand awareness, operational scale, and retail relations. Within its beverage mix
The primary analyst covering this company does not own its stock.
the firm is exploring a variety of options from nascent, in-house brands to brand licensing from third-
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. party category leaders to expand its revenue base in nonsparkling categories, adding to its distribution
clout and augmenting its carbonated drinks that have struggled thus far to narrow the gap with wide-
moat Coca-Cola.
Demand for snacks and beverages tends to remain resilient throughout economic cycles, and a large
end-to-end supply chain gives Pepsi better control over execution, helping to shield its operations from
© Morningstar 2023. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:16, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 21
Sector Industry
s Consumer Defensive Beverages - Non-Alcoholic exogenous shocks. Risks and uncertainties abound, nonetheless, including inroads from e-commerce
and hard discounters that introduce more competition and disrupts the pricing structure; consumption
Business Description
PepsiCo is a global leader in snacks and beverages, pattern shifts driven by health awareness; and cumbersome regulations and taxes that discourage the
owning well-known household brands including Pepsi, use of plastic packaging and the intake of sugar, sodium, and saturated fat. That said, a nimble and
Mountain Dew, Gatorade, Lay’s, Cheetos, and Doritos, pragmatic approach, coupled with inherent brand prowess and manufacturing/distribution scale, should
among others. The company dominates the global savory
enable the firm to navigate the evolving competitive landscape while enhancing its returns.
snacks market and also ranks as the second-largest
beverage provider in the world (behind Coca-Cola) with
Bulls Say Dan Su, CFA, Equity Analyst, 27 Apr 2023
diversified exposure to carbonated soft drinks, or CSD, as
u Demographic and lifestyle shifts could further fuel snack consumption globally beyond our expectations.
well as water, sports, and energy offerings. Convenience
foods account for 55% of its total revenue, with u Even as CSD volumes wane in mature markets, the diversity of Pepsi’s beverage portfolio should offer
beverages making up the rest. Pepsi owns the bulk of its growth opportunities in both developed and emerging markets.
manufacturing and distribution capacity in the United u Despite its close relationships with brick-and-mortar retailers, PepsiCo has invested in omnichannel
States and overseas. International markets make up 40%
capabilities and a digitally enhanced supply chain that positions the firm for growth even as consumer
of total sales and one third of operating profits.
shopping patterns bifurcate further.
Bears Say Dan Su, CFA, Equity Analyst, 27 Apr 2023

u Shifting consumer preference to healthier snacks and beverages may impede the firm’s ability to pass
on higher costs in price increases thus weighing on margins and returns.

u Integration of acquisitions in regions that PepsiCo has less experience (such as Africa) may distract
management attention from its long-term strategic course.

u The shortage of bottlers with sufficient scale and experience in international markets will continue to
handicap PepsiCo’s efforts to narrow the gap with rival Coca-Cola.
Economic Moat Dan Su, CFA, Equity Analyst, 27 Apr 2023

We surmise that PepsiCo has built a wide economic moat around its global snacks and beverage
operations, thanks to an impressive ensemble of household brands underpinning consumer loyalty and
close retailer relationships, as well as significant scale benefits ($86 billion revenue base, global
manufacturing and distribution capacity) that bring bargaining power and lower operational costs. We
expect the strong intangible assets and cost advantage to enable the firm to deliver investment returns
that exceed its cost of capital for more than 20 years. On our estimate, PepsiCo will generate returns on
invested capital, or ROICs, including goodwill, averaging in the mid-20s over our explicit 10-year forecast
period, compared with our weighted average cost of capital at 7.1%.
Evidencing its dominant standing, PepsiCo ranks as number one in the $200 billion global savory snacks
market, controlling 22% of the market per Euromonitor through well-known brands such as Lay's,
Cheetos, and Doritos. Consistent brand investments ($5 billion, 6.0% of sales), similar to the level of
spending by wide-moat peers Mondelez and Kellogg (5.2% and 5.5% of sales, respectively) have
reinforced the image of these snacks as affordable treats in today's fast-paced life, thus allowing the
ß
Competitors
PepsiCo Inc PEP Coca-Cola Co KO General Mills Inc GIS Keurig Dr Pepper Inc KDP
Fair Value Fair Value Fair Value

Last Close 60.00 78.00 35.00
179.84 Uncertainty : Low Uncertainty : Low Uncertainty : Medium
Fair Value Last Close Last Close
176.00 Last Close
57.94 33.30
Uncertainty : Low 65.85
Economic Moat Wide Wide Narrow Narrow

Currency USD USD USD USD
Fair Value 176.00 27 Apr 2023 17:49, UTC 60.00 13 Sep 2023 21:21, UTC 78.00 6 Apr 2023 18:08, UTC 35.00 12 Sep 2023 16:54, UTC
1-Star Price 220.00 75.00 97.50 47.25
5-Star Price 140.80 48.00 62.40 24.50
Assessment Fairly Valued 15 Sep 2023 Fairly Valued 15 Sep 2023 Under Valued 15 Sep 2023 Fairly Valued 15 Sep 2023
Morningstar Rating QQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC QQQQ15 Sep 2023 21:18, UTC QQQ15 Sep 2023 21:18, UTC
Analyst Dan Su, Equity Analyst Dan Su, Equity Analyst Jaime M. Katz, Senior Equity Analyst Dan Su, Equity Analyst
Capital Allocation Exemplary Exemplary Standard Standard
Price/Fair Value 1.02 0.97 0.84 0.95
Price/Sales 2.76 5.70 1.97 3.25
Price/Book 14.00 9.63 3.66 1.84
Price/Earning 31.50 24.04 15.28 29.47
Dividend Yield 2.69% 3.14% 3.36% 2.40%
Market Cap 249.48 Bil 252.80 Bil 38.57 Bil 47.05 Bil
52-Week Range 160.98—196.88 54.02—64.99 64.70—90.89 30.47—39.73
Investment Style Large Core Large Core Mid Core Large Core
snack provider to fetch pricing gains above inflation while maintaining healthy volume growth. As an
example, over the past five years, the Frito-Lay North America business unit (about half of PepsiCo's
snack sales) grew price/mix at an average annual rate of 2.8% excluding the extraodinary price hikes in
2022, ahead of snack price inflation at 0.9% (per U.S. Bureau of Labor Statistics), while keeping volume
growth at 2%. We believe trends are similar in major international markets. As Pepsi continues to focus
on innovation in areas such as ingredients and packs to meet consumers' evolving snacking habits and
preferences, we expect its snack brands will remain top of mind for a wide variety of consumer
occasions and maintain pricing power.
Further, as the world's second-largest beverage provider behind Coca-Cola, PepsiCo owns a broad
portfolio of strong brands in carbonated soft drink, or CSD, and nonsparkling categories and operates
the bulk of bottling capacities in-house to better control the commercialization process. The company
has kept a firm grip on its number two position in the CSD category—roughly half of total beverage
volume sold by PepsiCo—which we believe still offers room to grow through higher penetration
primarily in emerging markets. Beyond this global growth potential, we posit Pepsi has built strong
ß
brand loyalty on taste preferences and emotional connections, and when juxtaposed with the low 5%
private-label penetration that categorizes the space, we think PepsiCo's well-known CSD brands are
poised to continue to extract strong investment returns through its pricing power. Outside of the CSD
category, the company has successfully diversified its reach by bringing strong brands into the fold,
realizing volume share gains in structural growth areas such as sports and energy drinks. For one, the
Gatorade brand dominates the sports category with a 40%-plus volume share globally per Euromonitor
and continues to broaden its brand appeal and reach with smart advertising and innovation in
ingredients and flavoring. In energy drinks, while its current volume share at 11% per Beverage Digest
ranks the firm third after entrenched leaders Monster and Red Bull, PepsiCo is poised to narrow the gap
utilizing a multi-brand approach with Rockstar and Mountain Dew at the core to score some share gains
in a market increasingly segmented by lifestyle needs. Top volume shares in the ready-to-drink coffee
and tea categories, under the Lipton and Starbucks brands licensed from Unilever and Starbucks, also
help fortify PepsiCo's competitive edge by augmenting its beverage lineup, adding to its distribution
scale, and further deepening its relationship with retailers with extra touchpoints during delivery and
shelf planning.
A strong portfolio of top-selling brands that drives traffic and purchase in both the snack and beverage
aisles makes PepsiCo an indispensable partner to most retailers from grocers to gas station stores.
Equipped with a full suite of beverages in both CSD and nonsparkling categories, a variety of snack
brands catering to different budget sizes and regional preferences, and a technology enhanced direct-
to-store logistics system, PepsiCo provides an efficient, one-stop solution to retail chains for inventory
planning, stocking, and replenishment that is hard to match. The reliability and flexibility of a proven
distribution giant like PepsiCo should be deemed particularly valuable now, as many retailers are still
reeling from logistics bottlenecks. In return for these benefits, PepsiCo earns favorable shelf allocation/
placement and some liberty in designing and implementing in-store promotions that reinforce brand
awareness and pricing power. Close retailer collaboration also enables PepsiCo to derive valuable
insights on consumers and retail dynamics from transaction and logistics data analytics, which should
inform timely and precise commercial plans and execution to keep the firm at the top of its game.
We see cost advantage as a second pillar to our wide economic moat rating on PepsiCo. With a massive
revenue base at $86 billion, the firm commands significant bargaining power in a wide range of
procurement negotiations ranging from raw materials to advertising services. Purchases for key
ingredients such as sugar, sweeteners, seasoning, and cooking oil each take only a single-digit-percent
of a dispersed basket for PepsiCo, allowing the firm to tightly manage procurement costs even during
periods of high inflation. We also see a cost edge stemming from its massive distribution scale, allowing
the firm to reach more retailers and consumers faster and at a lower cost. The scale benefit allows
PepsiCo to not only accelerate its own product commercialization to maximize profitable share gains in
new and existing categories, but also attract desirable partners to license their brands to the firm's
ß
distribution platform, adding to its scale and distribution clout. We would point to PepsiCo's 30-years
long successful distribution partnerships with wide-moats Unilever and Starbucks (both topnotch
operators in and of themselves) in the tea and coffee categories as strong examples of PepsiCo's
distribution scale and prowess.
Fair Value and Profit Drivers Dan Su, CFA, Equity Analyst, 27 Apr 2023
We are raising our fair value estimate for PepsiCo to $176 per share (from $170), which implies a 2023
EV/adjusted EBITDA multiple of 16.6 times. The increase is primarily driven by higher growth projections
for 2023 revenue and adjusted earnings per share (to 6.1% and 8.0%, respectively, from 4.8% and 6.6%
previously) on our optimistim in product innovation and productivity gains for the year, though our long-
term top-line and margin assumptions remain unchanged.
We forecast the topline to grow at 5% annually over the next 10 years. We see broad-based strength in
its snack revenue growth, whereas trends are more mixed in the beverage business. We expect its
strong brands, coupled with secular tailwinds in convenience food consumption, to drive solid, mid- to
high-single-digit growth in snack revenue. A diverse beverage portfolio should also enable PepsiCo to
garner an expanding share in the non-CSD categories such as sports, water, and ready-to-drink coffee,
but its CSD business will likely remain flattish with healthy emerging market growth offsetting soft
demand in the U.S. and Western Europe. We forecast overall beverage sales to grow at a low-single-
digit clip over the next 10 years. Historically, PepsiCo has augmented organic growth with strategic
acquisitions, and we expect the two-pronged growth strategy to continue. However, we have refrained
from incorporating M&A into our explicit forecast until we gain better visibility surrounding its deal
pipeline.
On the profitability front, we have modeled operating margins that widen by 400 basis points to 17.1%
at the end of our 10-year forecast period, relative to 2022. In addition to gross margin expansion of
roughly 130 basis points over the period thanks to manufacturing efficiency gains in the snack business
and a slightly higher mix of international beverage business with an outsourced model, we forecast
better leverage of marketing and advertising expense (5.6% of sales by 2032 versus 6.0% in 2022) and
more efficient, technology-enabled distribution spending (15.8% of sales by 2032 versus 17.4% in 2022).
Risk and Uncertainty Dan Su, CFA, Equity Analyst, 27 Apr 2023
We award a Low Morningstar Uncertainty Rating to PepsiCo. With the ubiquity of smartphones and
social media, food and beverage brands are constantly under the scrutiny of consumers. Any
messaging, consumer experience, social, or sustainability practice that is perceived to be inconsistent
with the company’s positioning could be brought under the limelight, and without timely and
appropriate response, result in brand damage, and a temporary or long-term hit to volume demand and
pricing power.
ß
Exposure to international markets with divergent economic and demographic trends put to the test
PepsiCo’s ability to adapt to a rapidly evolving operating environment and address issues ranging from
currencies and cost inflation to labor relations and geopolitical unrest. That said, with 60 of revenues
from North America, PepsiCo is more insulated compared with beverage peer Coca-Cola.
With growing health awareness among consumers, PepsiCo also faces the challenge of keeping a
delicate balance between taste appeal and health considerations. Reformulation and recipe
modification efforts notwithstanding, consumer concerns regarding the health impact from savory snack
and beverage products may persist, or PepsiCo’s efforts to assuage such concerns may become cost
inefficient and weigh on margins.
Capital Allocation Dan Su, CFA, Equity Analyst, 27 Apr 2023

We assign an Exemplary capital allocation rating to PepsiCo, based on our view that the company has a
sound balance sheet, a good track record of investments for long-term value creation, and an
appropriate shareholder distribution practice blending cash dividends and share repurchases.
First, we view PepsiCo as in excellent financial health. It has a strong balance sheet, with net debt to
EBITDA of 2.4 times in 2022 and projected to fall below 2 times in 2023 and onward. As such, we don’t
foresee any problem for the firm to maintain its Tier 1 commercial paper access to short-term funding at
competitive rates when necessary. In addition, the firm has a solid cash position and a projected strong
free cash flow to equity generation ($10.4 billion on average per year, 10.5% of sales) over the next five
years. All in, we believe the company is well-equipped financially to withstand external shocks and to
fund its growth plans.
On the investment front, we give the company credit for heavy spending over the years behind its snack
brand portfolio, distribution system, and research and development that has driven and should continue
to result in solid organic growth, underpinning its global dominance in the structurally attractive snack
business, where its market share is 9 times ahead of its closest competitor. While the beverage
business underwent a period of underinvestment, the situation was rectified since current CEO Ramon
Laguarta took the helm in 2018, as the company stepped up spending to refresh its core brands, while
bringing to market versions of its classic recipes to cater to a growing health-conscious crowd. Mergers
and acquisitions have always been a part of the firm’s growth roadmap, with PepsiCo scoring successes
with deals such as the Quaker Oats acquisition in 2001, which gave PepsiCo dominant sports drink
brand Gatorade and a long runway of growth in the nonsparkling category. Its more recent acquisitions
in food (Pioneer Foods, Be & Cheery) and beverage (Rockstar), though smaller in size, fit a similar
strategic profile and offer the firm exposure to attractive categories (energy drinks, nuts and seeds) and
attractive emerging markets (Africa and China). The transactions for Be & Cheery and Pioneer Foods
deals valued the two businesses at price/sales multiples of roughly 1 times and 1.2 times, respectively,
ß
which strikes us as reasonable. However, we view the Rockstar acquisition as richly valued, with price/
sales at over 20 times. We appreciate the strategic value of Rockstar (2% global volume share in energy
drinks per Euromonitor, popular in the convenience store channel) to PepsiCo (roughly 4% global volume
share prior to the Rockstar deal, according to Euromonitor). Still, we believe the company overpaid in its
push to refresh its sleepy energy drink lineup. In the coming years, we expect strategic M&A to remain
part of PepsiCo’s long-term growth strategy.
On shareholder distributions, PepsiCo has returned cash to shareholders consistently with a

combination of cash dividends and share buybacks. It maintained a payout ratio averaging more than
70% over the past three years, with dividends per share growing at an average of 6% each year. Over
our 10-year explicit forecast period, we forecast the payout ratio to stay at 70% and the dividend
payment to grow 8% annually. Share buybacks have fluctuated from year to year, which we believe has
been prudent, as we believe management should consider buybacks only when the stock trades below
its intrinsic value, without committing to a yearly target at a fixed amount.
Analyst Notes Archive
PepsiCo Earnings: Innovation and Productivity Gains Fuel Profit Growth; Shares No Bargain Dan Su,
CFA, Equity Analyst, 13 Jul 2023
We plan to raise our fair value estimate for wide-moat PepsiCo by a low-single-digit percentage after
digesting better-than-expected second-quarter results driven by snack and beverage innovations, brand
investments, and productivity gains. Organic revenue grew 13% and core EPS was up 15%, both edging
our estimates (12% and 13%, respectively). The firm revised up 2023 organic revenue and EPS growth
guidance to 10% (from 8%) and 12% (from 9%), respectively, which we view as attainable, and we plan
to tick up our own 2023 forecast to approximate the updated outlook. Our 10-year projections for mid-
single-digit sales growth and high-single-digit EPS expansion remain in place. We see shares trading at
a slight premium to our fair value estimate after the planned increase, and suggest investors wait for a
better entry point.
We attribute the strong sales growth to brand investments, innovation and commercial initiatives that
reinforce PepsiCo’s differentiated value proposition even as consumers turn more cautious about their
grocery spending amid macro uncertainties. Despite a 15% price increase (in line with commodity cost
inflation), volume was resilient (down 2.5%), with the snack business a bright spot, delivering volume
expansion (up 0.5%). We view snack innovation in flavors, portion size, and packaging for on-the-go
consumption as adding variety, convenience, and consumption occasions, which should bode well for
growth in years to come. Meanwhile, popular zero-sugar sodas, new sports drinks, and progress in malt
beverages (with licenses obtained to distribute Hard Mountain Dew in the U.S.) should help maintain
the firm’s competitive edge in the beverage aisle. We are impressed by productivity gains from
ß
automation, data-driven route optimization, and standardized commercial operations, which allowed the
firm to raise advertising spending by double digits in the quarter (true to its commitment to branding)
while eking out a 44-basis-point operating margin gain.
PepsiCo Earnings: Innovation and Productivity Initiatives To Power Profit Growth; Shares No Bargain
Dan Su, CFA, Equity Analyst, 26 Apr 2023
We plan to raise our $170 fair value estimate for wide-moat PepsiCo by a low-single-digit percentage
after absorbing better-than expected first-quarter results driven by snack and beverage innovations and
strong in-market execution. Organic revenue grew 14% with strength across major geographical
markets, and adjusted EPS (excluding one-time gain from juice assets divestiture in early 2022) rose
18%, both ahead of our estimates (10% and 12%, respectively). In light of the strong performance, we
are ticking up our 2023 revenue growth forecast to 6.5% (from 4.8%) and adjust EPS growth to 9% (from
8.4%), though our 10-year projections for mid-single-digit top-line growth and high-single-digit EPS
expansion remain unchanged. We see shares trading at a premium to our fair value estimate after the
planned increase, and suggest investors wait for a better entry point.
Despite midteens price increases across snacks and beverages, we attributed resilient volume (down
2% due in part to temporary Gatorade inventory reduction amid a distribution strategy shift) to the
strength of PepsiCo’s brand portfolio, which is underpinned by constant innovation and point-of-sale
execution. Notable innovations in the snack sphere included bite-size chip snacks in easy-to-pour
canisters and chili and garlic flavored versions of classic Cheetos, Doritos and Tostitos chips that added
to flavor varieties and snacking occasions. Meanwhile, no-sugar sparkling soft drinks and alcoholic
beverages (including Hard Mountain Dew and Lipton Hard Iced Tea) remained research and
commercialization priorities, which we believe can help reinforce the firm’s competitive standing in the
beverage aisle. Management expects little further price hikes in the coming quarters, which we view as
a prudent decision to protect the firm’s value proposition, now that consumers have become
increasingly cautious about their grocery spending amid macroeconomic headwinds.
Wide-Moat PepsiCo Delivers Stellar Q4, Focuses on Organic Expansion in 2023; Shares Fairly Valued
Dan Su, CFA, Equity Analyst, 10 Feb 2023
The strong fourth-quarter results from wide-moat PepsiCo reinforced our confidence in the firm’s growth
strategies around brand investment, product innovation, and channel expansion. The firm delivered a
15% increase in organic revenue (powered by an 18% snack sale expansion), and 10% growth in
adjusted EPS, slightly ahead of our 9% and 5% respective estimates. After incorporating the better-than-
expected results, we plan to raise our $170 fair value estimate by a low-single-digit percentage and
view the shares as fairly valued.
We attributed the strong top line to a sharper focus on branding, research, and channel relations. We
ß
view creative marketing on localized content, coupled with innovation around new ingredients (for
example, high-protein chickpeas) and package offerings (bite-size fare in easy-to-pour canisters), as
crucial to driving double-digit volume growth in core brands Doritos, Cheetos, and Lay’s. We’d also
point to Pepsi Zero Sugar volume growth (28%) and accelerating sales for energy drink brands Rockstar
and Celsius as evidence that thoughtful marketing and consumer-centered innovations are a powerful
combination to fuel sales expansion. While less quantifiable, we’d also call out investments in retailers
and foodservices with data analytics collaboration and cooler placements as contributing to the firm’s
long-term prospects.
On margins, we are impressed by PepsiCo’s ability to fully offset double-digit commodity cost inflation
with pricing, point of sale execution and manufacturing efficiency gains, holding fourth-quarter gross
margin (52%) flat year over year. Higher investments in advertising and channel partners hurt operating
margins in the quarter (down 240 basis points, to 8.5%), though the full-year margin remained solid at
13.3%. We expect the firm to keep investing at these levels, which should bode well for its long-term
competitive position. Our midteens operating margin assumptions remain in place over the 10-year
forecast period.
Wide-Moats Coca-Cola and PepsiCo Showcase Pricing Power Amid Inflationary Pressure; Shares
Not Cheap Dan Su, CFA, Equity Analyst, 2 Nov 2022
Concerns abound as it pertains to inflation and the ultimate consumer response, but we continue to
believe wide-moats Coca-Cola and PepsiCo are well positioned to navigate the uncertain landscape. Our
confidence in their durable competitive advantage stems from stout brand portfolios, which underpin
strong pricing power and close retailer relationships, and from scale benefits due to the expansive
global footprint each maintains. This pricing power has been evidenced this year as Coke and Pepsi
have realized low-double-digit benefits from price/mix amid cost inflation and currency headwinds, but
this has not impeded volumes, and we don’t see this ability to unearth gains in pricing and volumes
faltering long-term.
While we’re sticking to our $58 fair value estimate for Coca-Cola (our mid-single-digit top-line projection
intact), we’re raising our intrinsic valuation for Pepsi to $170 from $164 to reflect a more robust midcycle
sales growth outlook (5.2%, versus 4.2% prior). This is driven by our more optimistic expectations for
global snacks, as we think investments in data and analytics should enable it to more effectively cater to
consumers’ penchant for convenient, on-trend fare. To a lesser extent, we also surmise Pepsi is
positioned to accelerate international diversification of its previously U.S.-focused beverage portfolio,
leveraging recent tie-ups. Alongside top-line growth, we expect both companies to bolster profits by
extracting efficiency gains, with Coke widening operating margins to 30.1% in fiscal 2026 (up by 140
basis points relative to 2021), and Pepsi lifting its margins by 220 basis points over the same period to
16.2%.
ß
Even as we believe both Coke and Pepsi are equipped to withstand evolving macroeconomic and
competitive challenges over the long term, we don’t see current share prices offering a compelling value
to investors. In this context, both operators trade at a modest premium (of 4% and 7%, respectively) to
our fair value estimates.
Pepsi Shows Robust Pricing Power in Third Quarter Despite Weak Macro Climate; Shares Fairly
Valued Erin Lash, CFA, Sector Director, 12 Oct 2022
Wide-moat PepsiCo displayed its brand strength in the third quarter, chalking up impressive marks.
Organic revenue popped 16% (17% from higher prices and favorable mix, slightly offset by a 0.8%
drawdown in volume), while core constant-currency EPS grew 14%. We think the profit gains are quite
notable as the company faced mammoth inflationary headwinds, which management thinks will result
in a high-teens negative hit in fiscal 2022. We don’t think Pepsi is relying only on pricing for these gains;
it also remains committed to unearthing cost savings to offset the cost pressures it is facing.
In our view, consumers have shown an affinity for Pepsi’s beverage and snacking fare because of the
company's unwavering commitment to funneling resources toward innovation (as it pertains to
packaging and flavor) and marketing. We expect this will continue, with a mid-single-digit level of sales
directed to research, development, and advertising annually over our explicit forecast. In our view, this
spending has helped Pepsi align its mix with evolving consumer trends (convenience, health and
wellness), blunting the hit to volume caused by the higher prices it is charging at the shelf.
In light of its year-to-date results, the company raised its full-year guidance to 12% organic sales growth
(from 10% prior) and core EPS of $6.73 (from $6.63). While we intend to incorporate the recent results,
which could boost our $164 fair value estimate modestly, we don’t anticipate making any material
changes to our longer-term forecast for mid-single-digit top-line growth and high-teens operating
margins. This reflects our perspective that the current sales trajectory won't endure, as well as our
expectation that Pepsi will continue investing in supply chain automation and digitization to unlock
productivity enhancements. With the shares popping 5% after the earnings release, we suggest
investors await a more compelling risk/reward.
Inflationary Challenges Fail to Cease Wide-Moat Pepsi’s Growth Momentum; Shares Rich Erin Lash,
CFA, Sector Director, 12 Jul 2022
We think wide-moat Pepsi’s pricing power combined with the benefits of its scale and diverse portfolio
were on display in the second quarter. The firm delivered 13% organic revenue growth, which strikes us
as impressive when lapping 12.8% organic revenue growth in the same period a year ago. Further,
although pricing was up 12.1%, aggregate volumes ticked up at a low-single-digit rate, evidencing the
stout brand intangible assets Pepsi boasts. However, this strength was concentrated in the firm’s
international arms, which clocked 7%-14% volume gains, in contrast to nearly no volume gains in its
ß
home turf. We attribute this languished unit growth in North American segments to the rash of cost
pressures facing consumers at the pump and throughout the grocery store, trends we don’t perceive
abating in the near term. However, we posit that Pepsi’s unwavering commitment to invest in research
and development as well as marketing (which we model at around 6.5% and 1% of sales by 2026,
respectively) should serve to buoy its competitive prowess over time.
Despite pronounced cost pressures, Pepsi’s stringent cost management manifested in 40 basis points of
adjusted operating margin improvement (to 16.9%). We think that the firm can hold margins in the high-
teens as it continues to enhance its cost profile through portfolio/channel optimization, price/pack
architecture, and cost-saving initiatives, which we view as prudent.
Taken together, management edged up its fiscal 2022 top-line expectations (to 10% organic sales
growth from 8% prior) but held in line on its 8% core constant currency EPS growth (implying core EPS
of $6.63). We may adjust our near-term forecast based on results through the first six months of the
year but see little to warrant a material change in our long-term forecast (which includes a mid-single-
digit rate top-line growth). With shares trading near our existing $164 fair value estimate, we suggest
investors await a more attractive entry point. K
ß
Competitors Price vs. Fair Value
Coca-Cola Co KO
Fair Value: 60.00

13 Sep 2023 21:21, UTC
200
Last Close: 57.94
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.97 1.03 1.02 1.00 1.10 0.97 Price/Fair Value
6.60 20.27 2.04 11.03 10.40 -6.74 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 13 Sep 2023 21:21, UTC.
General Mills Inc GIS
Fair Value: 78.00

6 Apr 2023 18:08, UTC
200
Last Close: 65.85
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.68 0.99 1.11 1.01 1.15 0.84 Price/Fair Value
-31.02 42.58 13.48 18.06 27.56 -19.48 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 6 Apr 2023 18:08, UTC.
ß
Keurig Dr Pepper Inc KDP
Fair Value: 35.00

12 Sep 2023 16:54, UTC
200
Last Close: 33.30
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
1.19 1.11 1.19 1.21 1.05 0.95 Price/Fair Value
34.06 15.25 12.61 17.30 -1.19 -4.94 Total Return %
Morningstar Rating
Total Return % as of 15 Sep 2023. Last Close as of 15 Sep 2023. Fair Value as of 12 Sep 2023 16:54, UTC.
ß
Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 66 67 63 63 64 65 67 70 79 86 40 90
Revenue Growth % 1.4 0.4 -5.4 -0.4 1.2 1.8 3.9 4.8 12.9 8.7 10.3 10.1
EBITDA (USD Bil) 12 12 11 12 13 13 13 13 15 15 8 14
EBITDA Margin % 18.8 18.4 17.2 19.5 20.7 19.8 19.5 18.8 18.8 17.3 19.7 15.5
Operating Income (USD Bil) 9.71 9.58 9.71 9.80 10.28 10.11 10.29 10.12 11.16 11.36 6.29 12.04
Operating Margin % 14.6 14.4 15.4 15.6 16.2 15.6 15.3 14.4 14.0 13.2 15.7 13.4
Net Income (USD Bil) 6.74 6.51 5.45 6.33 4.86 12.52 7.31 7.12 7.62 8.91 4.68 7.90
Net Margin % 10.1 9.8 8.6 10.1 7.6 19.4 10.9 10.1 9.6 10.3 11.7 8.8
Diluted Shares Outstanding (Mil) 1,560 1,527 1,485 1,452 1,438 1,425 1,407 1,392 1,389 1,387 1,384 1,384
Diluted Earnings Per Share (USD) 4.32 4.27 3.67 4.36 3.38 8.78 5.20 5.12 5.49 6.42 3.38 5.71
Dividends Per Share (USD) 2.24 2.53 2.76 2.96 3.17 3.59 3.79 4.02 4.25 4.53 2.42 4.72
Valuation as of 31 Aug 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 2.0 2.2 2.3 2.5 2.7 2.4 2.9 3.0 3.1 3.0 2.9 2.7
Price/Earnings 19.5 20.9 29.7 22.9 24.8 31.7 15.6 29.3 29.6 25.8 38.9 31.2
Price/Cash Flow 12.9 14.9 14.1 14.7 17.9 18.3 19.8 19.3 21.7 22.2 24.2 22.5
Dividend Yield % 2.7 2.68 2.76 2.83 2.64 3.25 2.77 2.71 2.45 2.5 2.55 2.71
Price/Book 5.7 6.1 10.8 11.9 12.9 15.1 13.5 15.2 15.1 13.1 15.0 13.9
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 8.9 8.8 7.8 8.8 6.3 15.9 9.4 8.3 8.2 9.7 5.0 8.4
ROE % 29.0 31.2 37.2 55.1 44.3 98.7 49.9 50.4 51.7 53.7 26.9 43.6
ROIC % 14.1 14.2 13.4 15.6 11.0 27.6 17.1 15.2 15.8 17.1 8.5 14.5
Asset Turnover 0.9 0.9 0.9 0.9 0.8 0.8 0.9 0.8 0.9 0.9 0.4 1.0
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 50.1 57.7 71.0 73.0 75.6 66.1 66.4 75.0 69.2 67.5 67.1 —
Equity/Assets % 31.3 24.7 17.1 15.0 13.6 18.7 18.8 14.5 17.4 18.6 18.4 —
Total Debt/EBITDA 2.4 2.4 3.1 3.0 3.0 2.5 2.5 3.4 2.7 2.7 5.5 —
EBITDA/Interest Expense 13.7 13.5 11.2 9.1 11.4 10.5 14.0 11.7 8.0 15.9 19.8 16.2
Morningstar Analyst Historical/Forecast Summary as of 26 Apr 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 3.0 2.9 2.7 2.6 2.4
Revenue (USD Mil) 79,474 86,392 91,649 96,436 101,149 Price/Earnings 27.7 26.6 24.5 22.9 21.3
Revenue Growth % 12.9 8.7 6.1 5.2 4.9 Price/Cash Flow 34.4 44.4 25.1 26.6 24.3
EBITDA (USD Mil) 14,003 14,406 16,608 18,198 19,290 Dividend Yield % 2.5 2.5 2.8 3.1 3.3
EBITDA Margin % 17.6 16.7 18.1 18.9 19.1 Price/Book 15.0 14.6 12.8 11.7 10.9
EV/EBITDA 19.6 19.5 17.1 15.6 14.8
Operating Income (USD Mil) 11,162 11,357 13,547 14,688 15,608
Operating Margin % 14.0 13.2 14.8 15.2 15.4
Net Income (USD Mil) 8,689 9,420 10,133 10,792 11,538
Net Margin % 10.9 10.9 11.1 11.2 11.4
Diluted Shares Outstanding (Mil) 1,389 1,387 1,381 1,372 1,364
Diluted Earnings Per Share(USD) 6.26 6.79 7.34 7.86 8.46
Dividends Per Share(USD) 4.25 4.53 4.95 5.50 5.92
ß
ESG Risk Rating Breakdown
Exposure Subject Subindustry (55.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 57.8 risks driven by their business model
57.8
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 53.5 High
2 0 55+ specified at the company level
Unmanageable Risk 4.3
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 53.5 ESG risks through its commitments and actions
66.7%
– Managed Risk3 35.7 Strong
u Management assesses a company's efficiency on ESG
Management Gap4 17.8 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 22.1 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

22.06
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Sep 06, 2023. Highest Controversy Level is as of Sep 08,
2023. Sustainalytics Subindustry: Packaged Foods. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 66.7% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 06 Sep 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
PepsiCo Inc 57.8 | High 0 55+ 66.7 | Strong 100 0 22.1 | Medium 0 40+
General Mills Inc 53.0 | Medium 0 55+ 64.7 | Strong 100 0 21.1 | Medium 0 40+
Coca-Cola Co 44.4 | Medium 0 55+ 56.7 | Strong 100 0 21.6 | Medium 0 40+
Kellogg Co 54.5 | Medium 0 55+ 51.5 | Strong 100 0 28.4 | Medium 0 40+
Keurig Dr Pepper Inc 44.5 | Medium 0 55+ 52.9 | Strong 100 0 23.2 | Medium 0 40+
ß
Appendix
Historical Morningstar Rating
PepsiCo Inc PEP 15 Sep 2023 21:18, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- - - QQQ QQQ QQ QQ QQ QQ QQQ QQQ QQQ
QQ QQ QQ QQQ QQ QQQ QQQ QQQ QQ QQ QQ QQ
QQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQ QQQQ QQQ QQ
QQQ QQQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ
QQQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
Coca-Cola Co KO 15 Sep 2023 21:18, UTC
- - - QQQ QQ QQ QQ QQ QQ QQQ QQ QQ
QQ QQ QQQ QQQ QQ QQ QQ QQ QQ QQQ QQQ QQQ
QQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ
QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQ
QQQ QQQ QQQ QQ QQ QQ QQ QQQ QQQ QQQ QQQQ QQQ
QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
General Mills Inc GIS 15 Sep 2023 21:18, UTC
- - - QQQQ QQQQ QQQ QQQ QQ QQ QQ QQQ QQ
QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQ QQQ QQQ QQQ
QQQ QQQ QQQQ QQQQ QQQ QQQ QQQ QQ QQQ QQ QQQ QQQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQQ QQQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQQ QQQQQ
QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQQ QQQQ QQQ
ß
Keurig Dr Pepper Inc KDP 15 Sep 2023 21:18, UTC
- - - QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQ QQ QQQ QQ QQ QQQ QQQ QQ QQ QQ QQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ QQ QQQ QQQ QQ QQ QQQ QQQ QQQ QQQ QQ QQQ
QQ QQ QQQ QQQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ QQ QQ QQ QQQ QQ QQQ QQQ QQQ QQQ QQQ -
ß
Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. sue documents (e.g., prospectus) pertaining to the secur-
and shareholder distributions. Analysts consider compan- ity concerned, including without limitation, information
ies’ investment strategy and valuation, balance sheet Risk Warning relevant to its investment objectives, risks, and costs be-
management, and dividend and share buyback policies. Please note that investments in securities are subject to fore making an in vestment decision and when deemed
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- necessary, to seek the advice of a legal, tax, and/or ac-
are likely to materially impact shareholder value, though antee that the intended investment objectives will be counting professional.
either the balance sheet, investment, or shareholder dis- achieved. Past performance of a security may or may not
tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per- The Report and its contents are not directed to, or inten-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor’s ded for distribution to or use by, any person or entity who
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an is a citizen or resident of or located in any locality, state,
termined on a forward looking and absolute basis. The investor’s shares may be worth more or less than their country or other jurisdiction where such distribution, pub-
Standard rating is most common as most managers will original cost. A security’s current investment performance lication, availability or use would be contrary to law or
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance regulation or which would subject Morningstar, Inc. or its
ation. noted within the report. Morningstar’s Uncertainty Rating affiliates to any registration or licensing requirements in
serves as a useful data point with respect to sensitivity such jurisdiction.
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair
or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
sidered execution, compensation, related party transac- General Disclosure lish version will control and supersede any ambiguities
tions, and accounting practices in the rating. associated with any part or section of a report that has
Unless otherwise provided in a separate agreement, re-
cipients accessing this report may only use it in the coun- been issued in a foreign language. Neither the analyst,
Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a tees the accuracy of the translations.
stated otherwise, the original distributor of the report is
Morningstar company.
Morningstar Research Services LLC, a U.S.A. domiciled
financial institution. This report may be distributed in certain localities, coun-
Sustainalytics’ ESG Risk Ratings measure the degree to tries and/or jurisdictions (“Territories”) by independent
which company’s economic value at risk is driven by en- third parties or independent intermediaries and/or distrib-
This report is for informational purposes only and has no
vironment, social and governance (ESG) factors. utors (“Distributors”). Such Distributors are not acting as
regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This agents or representatives of the analyst, Morningstar,
Sustainalytics analyzes over 1,300 data points to assess a Inc. or the Equity Research Group. In Territories where a
publication is intended to provide information to assist in-
company’s exposure to and management of ESG risks. In Distributor distributes our report, the Distributor is solely
stitutional investors in making their own investment de-
other words, ESG Risk Ratings measures a company’s un- responsible for complying with all applicable regulations,
cisions, not to provide investment advice to any specific
managed ESG Risks represented as a quantitative score. laws, rules, circulars, codes and guidelines established by
investor. Therefore, investments discussed and recom-
Unmanaged Risk is measured on an open-ended scale
ß
local and/or regional regulatory bodies, including laws in Limited. Morningstar Investment Adviser India Private
For a list of securities which the Equity Research Group
connection with the distribution third-party research re- Limited is registered with SEBI as a Portfolio Manager (re-
currently covers and provides written analysis on please
ports. gistration number INP000006156) and as a Research En-
contact your local Morningstar office. In addition, for his-
tity (registration number INH000008686). Morningstar In-
torical analysis of securities covered, including their fair
Conflicts of Interest vestment Adviser India Private Limited has not been the
value estimate, please contact your local office.
u No interests are held by the analyst with respect to the subject of any disciplinary action by SEBI or any other leg-
security subject of this investment research report. al/regulatory body. Morningstar Investment Adviser India
For Recipients in Australia: This Report has been issued
u Morningstar, Inc. may hold a long position in the se- Private Limited is a wholly owned subsidiary of Morning-
and distributed in Australia by Morningstar Australasia
curity subject of this investment research report that star Investment Management LLC. In India, Morningstar
Pty Ltd (ABN: 95 090 665 544; ASFL: 240892). Morning-
exceeds 0.5% of the total issued share capital of the Investment Adviser India Private Limited has one asso-
star Australasia Pty Ltd is the provider of the general ad-
security. To determine if such is the case, please click ciate, Morningstar India Private Limited, which provides
vice (‘the Service’) and takes responsibility for the produc-
http://msi.morningstar.com and http://mdi.morning- data-related services, financial data analysis, and soft-
tion of this report. The Service is provided through the re-
star.com ware development. The research analyst has not served
search of investment products.
u Analysts’ compensation is derived from Morningstar, as an officer, director, or employee of the fund company
Inc.’s overall earnings and consists of salary, bonus within the last 12 months, nor have they or their asso-
To the extent the Report contains general advice it has
and in some cases restricted stock. ciates engaged in market-making activity for the fund
been prepared without reference to an investor’s object-
u Neither Morningstar, Inc. or the Equity Research Group company.
ives, financial situation or needs. Investors should con-
receives commissions for providing research nor do sider the advice in light of these matters and, if applic-
they charge companies to be rated. *The Conflicts of Interest disclosure above also applies to
able, the relevant Product Disclosure Statement before
u Neither Morningstar, Inc. or the Equity Research Group relatives and associates of Manager Research Analysts in
making any decision to invest. Refer to our Financial Ser-
is a market maker or a liquidity provider of the security India # The Conflicts of Interest disclosure above also ap-
vices Guide (FSG) for more information at http://
noted within this report. plies to associates of Manager Research Analysts in In-
www.morningstar.com.au/fsg.pdf
u Neither Morningstar, Inc. or the Equity Research Group dia. The terms and conditions on which Morningstar In-
has been a lead manager or co-lead manager over the vestment Adviser India Private Limited offers Investment
For Recipients in New Zealand: This report has been is-
previous 12-months of any publicly disclosed offer of Research to clients, varies from client to client, and are
sued and distributed by Morningstar Australasia Pty Ltd
financial instruments of the issuer. detailed in the respective client agreement.
and/or Morningstar Research Ltd (together ‘Morning-
u Morningstar, Inc.’s investment management group star’). This report has been prepared and is intended for
does have arrangements with financial institutions to For recipients in Japan: The Report is distributed by Ib-
distribution in New Zealand to wholesale clients only and
provide portfolio management/investment advice some botson Associates Japan, Inc., which is regulated by Fin-
has not been prepared for use by New Zealand retail cli-
of which an analyst may issue investment research re- ancial Services Agency. Neither Ibbotson Associates Ja-
ents (as those terms are defined in the Financial Markets
ports on. However, analysts do not have authority over pan, Inc., nor its representatives, are acting or will be
Conduct Act 2013).The information, views and any recom-
Morningstar’s investment management group’s busi- deemed to be acting as an investment professional to any
mendations in this material are provided for general in-
ness arrangements nor allow employees from the in- recipients of this information.
formation purposes only, and solely relate to the compan-
vestment management group to participate or influ- ies and investment opportunities specified within. Our re-
ence the analysis or opinion prepared by them. For recipients in Singapore: For Institutional Investor
ports do not take into account any particular investor’s
u Morningstar, Inc. is a publicly traded company (Ticker audiences only. Recipients of this report should contact
financial situation, objectives or appetite for risk, meaning
Symbol: MORN) and thus a financial institution the se- their financial professional in Singapore in relation to this
no representation may be implied as to the suitability of
curity of which is the subject of this report may own report. Morningstar, Inc., and its affiliates, relies on cer-
any financial product mentioned for any particular in-
more than 5% of Morningstar, Inc.’s total outstanding tain exemptions (Financial Advisers Regulations, Section
vestor. We recommend seeking financial advice before
shares. Please access Morningstar, Inc.’s proxy state- 32B and 32C) to provide its investment research to recipi-
making any investment decision.
ment, “Security Ownership of Certain Beneficial Own- ents in Singapore.
ers and Management” section https:// For Recipients in Hong Kong: The Report is distributed
shareholders.morningstar.com/investor-relations/fin- by Morningstar Investment Management Asia Limited,
ancials/sec-filings/default.aspx which is regulated by the Hong Kong Securities and Fu-
u Morningstar, Inc. may provide the product issuer or its tures Commission to provide services to professional in-
related entities with services or products for a fee and vestors only. Neither Morningstar Investment Manage-
on an arms’ length basis including software products ment Asia Limited, nor its representatives, are acting or
and licenses, research and consulting services, data will be deemed to be acting as an investment profession-
services, licenses to republish our ratings and research al to any recipients of this information unless expressly
in their promotional material, event sponsorship and agreed to by Morningstar Investment Management Asia
website advertising. Limited. For enquiries regarding this research, please con-
tact a Morningstar Investment Management Asia Limited
Further information on Morningstar, Inc.’s conflict of in- Licensed Representative at https://shareholders.morning-
terest policies is available from https:// star.com
shareholders.morningstar.com Also, please note analysts
are subject to the CFA Institute’s Code of Ethics and For recipients in India: This investment research is is-
Standards of Professional Conduct. sued by Morningstar Investment Adviser India Private
ß

Pepsico Morningstar Report

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pepsico Morningstar Report

Uploaded by

Copyright:

Available Formats

Morningstar Equity Analyst Report | Report as of 16 Sep 2023 04:16, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 21

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Price vs. Fair Value

Last Close: 179.84

150 Over Valued

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Bears Say Dan Su, CFA, Equity Analyst, 27 Apr 2023

on higher costs in price increases thus weighing on margins and returns.

management attention from its long-term strategic course.

handicap PepsiCo’s efforts to narrow the gap with rival Coca-Cola.

Economic Moat Dan Su, CFA, Equity Analyst, 27 Apr 2023

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Fair Value Fair Value Fair Value

Economic Moat Wide Wide Narrow Narrow

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Capital Allocation Dan Su, CFA, Equity Analyst, 27 Apr 2023

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

On shareholder distributions, PepsiCo has returned cash to shareholders consistently with a

Analyst Notes Archive

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Competitors Price vs. Fair Value

Fair Value: 60.00

General Mills Inc GIS

Fair Value: 78.00

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Keurig Dr Pepper Inc KDP

Fair Value: 35.00

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

Morningstar Historical Summary

Valuation as of 31 Aug 2023

Morningstar Analyst Historical/Forecast Summary as of 26 Apr 2023

PepsiCo Inc PEP QQQ 15 Sep 2023 21:18, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (55.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 17.8 100 0 programs, practices, and policies

Overall Unmanaged Risk 22.1 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Coca-Cola Co KO 15 Sep 2023 21:18, UTC

General Mills Inc GIS 15 Sep 2023 21:18, UTC

Keurig Dr Pepper Inc KDP 15 Sep 2023 21:18, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

You might also like