This paper presents a comprehensive valuation of PepsiCo (NYSE: PEP) using five distinct methods: the constant dividend growth model, the residual income model, and three price-ratio approaches (P/E, P/CF, and P/S). The analysis begins with an overview of PepsiCo's business segments and the macroeconomic conditions — including unemployment, CPI, GDP growth, and personal income — relevant to a consumer discretionary company. It then assesses PepsiCo's competitive strengths and weaknesses before applying each valuation model. The paper concludes that while the dividend discount and residual income models yield impractical results under current low-interest-rate conditions, the three price-ratio methods converge on an average valuation of approximately $82.04, suggesting PepsiCo is fairly valued relative to its share price.
PepsiCo (ticker: PEP on the NYSE) is the subject of this stock analysis. PepsiCo is a major blue-chip stock in the food and beverage industry. The company manufactures, bottles, and distributes soft drinks and snacks. According to its annual report, the company's revenue is split approximately 51% food and 49% beverage, with a similar split between U.S. and non-U.S. revenue. Two-thirds of the company's business comes from the Americas. Frito-Lay is the major food subsidiary, and Pepsi is the major beverage brand. The company also owns Quaker Oats, which in turn owns Gatorade and Tropicana — considered the "healthy" segment of the PepsiCo portfolio. The stock price at the time of this analysis was $85.31.
The overall economy can be measured using data from various agencies. The Bureau of Labor Statistics reported a 7.6% unemployment rate and a 0.5% consumer price index (CPI) increase, indicating that unemployment was fairly high but declining, while inflation was low but rising. These are signs of a recovering economy. The Bureau of Economic Analysis reported GDP growth of 1.8%, a relatively slow rate. Personal income grew only 0.5% in May 2013 — a figure especially relevant to PepsiCo, since it sells discretionary consumer products. The more disposable income consumers have, the more they are likely to spend on items like soda and snacks. Growth in emerging markets also represents an opportunity for PepsiCo, though two-thirds of its revenue comes from the Americas, making that region the most critical driver.
PepsiCo is a major player in the food and beverage industry, holding either the leading or second-place market position in many categories. Because PepsiCo's products are discretionary purchases, the company stands to benefit directly from rising personal income and an improving economy. PepsiCo is also actively pursuing growth in emerging markets, positioning itself for long-term revenue diversification.
PepsiCo's brand portfolio is a significant source of competitive strength. Interbrand ranked Pepsi as the 22nd best brand in the world. While this is notable, Coca-Cola holds the number-one spot, making Pepsi's brand advantage only moderate relative to its primary competitor. Nevertheless, Pepsi's brand recognition far exceeds that of any other rival, delivering several tangible market advantages: brand extensions are easier to launch because consumers already know the name; retailers are readily willing to stock new products or allocate more shelf space to existing ones given their proven sales history; and strong incumbents generally deter new competitors from entering the market. Few companies would attempt to compete head-to-head with both Pepsi and Coca-Cola, and the same holds true for Frito-Lay in the snack category.
At the firm level, PepsiCo recently completed a restructuring intended to improve operational flexibility. It reacquired key distributors, a move designed to "save money and get new products to market more quickly" (Fredrix, 2010). The company's management and marketing capabilities have also contributed to its strong market position and billions in annual sales. Areas where PepsiCo can still improve include innovation and operational efficiency.
"CAPM, WACC, and two intrinsic value models"
"P/E, P/CF, and P/S ratio comparisons and projections"
"Final valuation synthesis and buy/hold recommendation"
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