PepsiCo Research Paper

PepsiCo Research Paper

Table of Contents

Cover Page……………………………………………………………………………………1

Table of Contents …….………………………………………………………………………2

Introduction………………………………………………………………………………….3-4

Business Strategy Analysis…………………………………………………………………………4-5

Accounting Analysis…..………………………………………………………………….…5-7

Financial Analysis …….….…………………………………………………………………7-8

Prospective Analysis………………………………………………………………………..8-11

Summary……………………………………………………………………………………..11

Recommendations/Conclusion…………………………………………………………….11-13

References.………………..………………………………………………………………14-15

Appendix A ………………………………………………………………………………16-23

Introduction

In order for firms to satisfy clients, investors, and maintain success it must have mature leaders at every level of operation (Brigham & Ehrhardt, 2014). One vital area in a firm is its Corporate Finance department because it provides the necessary skills to measure all proposals which include marketing, production, and various strategies within the firm (Brigham & Ehrhardt, 2014). These areas are important because it adds value to a firm thus gaining an investors’ interest on whether to invest in the firm. Finance also provides the necessary insight on forecasting in a firm (Brigham & Ehrhardt, 2014). Forecasting is integral due to the knowledge that it provides management on how to plan and fund projects within the firm (Brigham & Ehrhardt, 2014).

PepsiCo, Inc. is a highly diversified well established combined food and beverage company (PepsiCo, 2015). Pepsi-Cola is a tested product that was created in the late 1890s by Caleb Bradham (PepsiCo, 2015).  In 1898, PepsiCo, Inc. was birthed in New York City and it grew into a well-known international organization (PepsiCo, 2015). PepsiCo currently stands as the second largest food and Beverage Company in the world (PepsiCo, 2015).  PepsiCo’s well known products include Pepsi, Diet Pepsi, Mountain Dew, Quaker, Lays, Doritos, Tropicana, and Lipton Green Tea, Starbucks ready to go drinks, Aquafina, and Gatorade to name a few (PepsiCo, 2015).

PepsiCo is currently headed by Chief Executive Officer (CEO) and Chairman, Indra K. Nooyi (PepsiCo, 2015). Nooyi follows PepsiCo’s mission and beliefs of guiding performances with purpose to respect its customers and investors (PepsiCo, 2015). Nooyi also believes in PepsiCo’s motto of “businesses and society thriving together” (PepsiCo, 2015). In this research paper the reader will gain knowledge in regards to PepsiCo’s business, financial, prospective, and accounting analysis. The decision whether to invest in or not in PepsiCo, Inc. will be supported and provided through this research.

Business Strategy Analysis

In order for an entity to maintain its competiveness it must possess a competition strategy that will center in on the competitors’ weaknesses as well as producing goods and services that are different from its rival. It is important for a firm to focus on the advantage of competition and not the competition process (Hofer, Cantor, & Dai, 2012). PepsiCo’s rival is Coca-Cola. It has gained a competitive advantage currently over Coca-Cola due to its genius strategies such as marketing, products produced, and ingredients.

PepsiCo’s competitive advantage is due to its low cost strategy and differentiation that it portrays and sells to the market. Even though Coca-Cola has various products, one usually thinks of Coke or Sprite when Coca-Cola is mentioned. PepsiCo is more diversified and its products are low in cost due to the many products that it produces. One may not be aware when using PepsiCo’s products due to its diversification. This allows PepsiCo to reap the benefits of having many products that are reasonably priced. The products for PepsiCo are performing well in the market and meeting expectations.

During the fiscal year 2014, PepsiCo has maintained its competitiveness by driving growth for its retail clients as well as becoming the largest contributor in the United States in 2014 regarding retail sales (Yahoo Finance, 2015). PepsiCo has continually risen with investments from global research and development projects (Yahoo Finance, 2015). PepsiCo’s key focuses are marketplace execution, building its brand, and finding ways to stay innovative (Yahoo Finance, 2015). The initiatives by PepsiCo have allowed the company to save $1 billion in productivity savings along with having 9% Innovation count for its total revenue in 2014 (Yahoo Finance, 2015).  $8.7 billion in the form of dividends and repurchases have been returned to PepsiCo’s shareholders in 2014 (Yahoo Finance, 2015). Research and development (R&D) and the competitive strategies utilized by the company have sustained its platform growth in all channels in fiscal year 2014 with $400 million in retail sales (Yahoo Finance, 2015).

     Accounting Analysis

PepsiCo’s accounting practices reflect overall good economic performance (Tables 1-2, Appendix A). Overall the financial statements for PepsiCo are aligned with the generally accepted accounting principles (GAAP) in the accounting policies in which registrants of the Securities Exchange Commissions (SEC) must follow.  Financial Accounting Standards Board (FASB) requires that financial reporting utilize a conceptual framework for GAAP practices (Freka, 2008). The guidelines of the framework include aim of financial reports, qualitative statement describing the accounting practices, accounting definitions that are included in the statements, and the evaluations of principles (Freka, 2008).

Although the GAAP report is in good standing the net revenue for 2014 declined 6% which reflected a 10% point adversely translated with foreign currency (PepsiCo, 2015). The gross margin still increased to 105 points and the Earning per Share (EPS) rose 3% to $1.33 (PepsiCo, 2015). Income statements will reflect the costs and expenses, so along with the revenue it should all be in accordance with the SEC guidelines (SEC, 2014).

It is essential for a firm to comply with SEC policies because the SEC has the authority over preparation of financial statements and determines whether the firm will be able to sell stock publically (Porter & Norton, 2015).  The SEC division’s aim is to act as an advocate for the investors which provides them with protection, sustain integrity for the market, and help in gaining capital so that the firm can grow (SEC, 2015). This protection allows continued expansion for the U.S. economy as well (SEC, 2015).

Gaining full knowledge of the income statement will require one to start with the total revenue and make the appropriate deductions in each step until the last step which would be referred to as the bottom line (SEC, 2015). In Table 1, Appendix A (Yahoo Finance, 2015) the 2014 fiscal year total revenues of $ 66,683,000 million less the cost of revenue $30,884,000 million equaled to the gross profit of $35,799,000 million. The Gross profit $35,799,000 million less the expenses and operations of $26,218,000 million equal $9,581,000 million in Operating Income (Yahoo Finance, 2015). The Income Earnings before interest is deducted from the Operating Income to get the total Net Income of $6,513,000 million (Yahoo Finance, 2015).

In Table 1 Appendix A (Yahoo Finance, 2015) PepsiCo’s income statement reveals that PepsiCo earned total revenue of $ 66,683,000 million in 2014 fiscal year compared to $66,415,000 million in 2013 which was .4% increase in revenue, but revenue decreased 1.4% in 2013 compared to 2012 (Yahoo Finance, 2015). The operating income of $9,581,000 was down 1.3% in 2014 compared to 2013 of $9,705,000 million, but it increased in 2013 6% from 2012 revenue of $9,112,000 million (Yahoo Finance, 2015). The net income for PepsiCo decreased 3.5% in 2014, but increased 8% in 2013 compared to 2012 (Yahoo Finance, 2015)

PepsiCo’s balance sheet in Table 2, Appendix A (Yahoo Finance, 2015) reveals that the combined liabilities and shareholders’ equity totaled $70,509,000 million which was a 10 % decrease compared to 2013. Looking at the balance sheet one will gain knowledge regarding the firms’ assets, liabilities and shareholders’ equity (SEC, 2015). When utilizing the accounting equation (Assets = Liabilities + Owner’s Equity) it will provide an overall basis for the accounting structure (Porter and Norton, 2015). The assets for the entity will be located on the left side of the equation and the individuals that have the right to claim the assets for the firm will be on the right side of the equation (Porter and Norton, 2015).  The key factor to gain when utilizing the accounting equation is that one side should always be equivalent to the opposite side (Porter and Norton, 2015). In Table 2 (Yahoo Finance, 2015) in fiscal year 2014 the total assets of $70,509,000 million are equivalent to the total liabilities and shareholders’ equity combined totaling $70,509,000 million.

Financial Analysis

The statement of cash flow has been required to be a part of the set of financial statements for almost 30 years (SEC, 2015).  Most financial institutions review income on the Cash Flow statement in depth, but the primary aim is to sum up the cash receipts and payments (SEC, 2015).  The accrual-based income is stabilized on the cash flow statement in regards to the firm’s operating, investing, and financial activities (Porter & Norton, 2015).  Top of Form

In Table 3, Appendix A (Yahoo Finance, 2015) the cash flow statement 2014 fiscal year revealed that there was an 8% increase in the total operating activities of $10,506,000 million which means there is enough capital set aside to pay creditors (Yahoo Finance, 2015).  There was also a 29% increase in cash flows from investment activities in fiscal year 2014 compared to 2013; thus funding pensions will not affect the cash flow (Yahoo Finance, 2015).

The net result of a number based on policies and decision is referred to as Profitability (Brigham & Ehrhardt, 2014). Profitability ratios provide insight on how a company is performing and the firm’s overall effectiveness in operations (Brigham & Ehrhardt, 2014). A dataset with 120 stocks that allows trades and quotes to occur is known as the NASDAQ (Carrion, 2013). The data reveals the market capitalization of any publically traded firm which can be equally reflected on the listings of NASDAQ and NYSE (Carrion, 2013). The symbol PEP is utilized by PepsiCo, Inc.  on the NASDAQ when trading common stocks. In Tables 4-6, Appendix A (Yahoo Finance, 2015) it is shown that PepsiCo is gradually approaching its 1 year Target Estimate of 105.67 (Yahoo Finance, 2015). 71% of PepsiCo’s shares are owned by institutional leaders and mutual fund owners which are excellent prospects for the firm.

It is also noticeable that the valuation methods are all in the positive which is good for PepsiCo. The Market Cap and the stock appear to be inversely proportional when the data is viewed. Price/Earning (P/E) is defined as the pay per dollar amount of the profit that investors are willing to pay (Brigham & Ehrhardt, 2015). The P/E is relatively high 23.09 which reveal PepsiCo has good growth prospect.  The Beta (β) is currently at 0.84 which lets one know that PepsiCo, Inc. is not volatile. Any time the β is over 1.00 the company is at risk and is volatile.

The Market Cap for PepsiCo is currently at $146.69 Billion which means that PepsiCo’s stock is rock solid and can withstand major turmoil within the average market. The valuation measurements still provide an investor with knowledge that PepsiCo, Inc.’s overall is in good standing. Table 7, Appendix A reveals how the stock is moving gradually but there is still evidence that it will reach its 1 year Target of 105.67 (Yahoo Finance, 2015). The trends of the past reveal that PepsiCo is slow to reach the target for example in October 2014 it was at its lowest at 89.82, but in February 2015 the stock was at its highest at 100.76. Looking at the 52-Week change for the stock there has only been an 8.37% difference (Yahoo Finance, 2015). The stock will reach its target by the end of the fiscal year 2015.

Prospective Analysis

Overall the forecast for PepsiCo, Inc. is promising. In Table 8, Appendix A the mean recommendation for buys are strong at 2.2 (Yahoo Finance, 2015). The range for buys are 1.0-5.0, the closer the number is to 1 it is considered strong, but the closer it is to 5.0 it is time to sell (Yahoo Finance, 2015). There are 21 brokers for PepsiCo, Inc. and the target summary for stock price is as follows: 105.67 for the mean, the median 108.00, the high target is 112.00, and the low target was 83.00 (Yahoo Finance, 2015).

Currently the stock is at 99.77 and this fluctuates daily in real time on the NYSE or NASDAQ listing. The stock is good and approaching its target, but it is wise for brokers to sell once the stock reaches its target. The issue for PepsiCo is not reaching the target by the end of the fiscal year, but what happens at the target?  The target is where greed can occur, because the stock will fall once it hits its estimated surplus. It is easy to become deceived in thinking that the stock will increase but it always decreases not long after it reaches its target.

Most companies have a stop-loss order limit which allows the stock to sell automatically once it reaches its target or sell when it goes below its low target (Plaehn, 2015). PepsiCo’s brokers are wise which allows them to deal with much discipline and this is why PepsiCo has been successful thus far. In Table 8, Appendix A it is also revealed that most investors recommended or purchased PepsiCo’s stock in the past 3 months (Yahoo Finance, 2015). There were no investors that recommended PepsiCo’s stock to be sold (Yahoo Finance, 2015). Investors are eager to own some of PepsiCo’s stock in this year (Motley, 2015). PepsiCo is known for rewarding its shareholders (Motley, 2015). The stock is trading at $100 per share on average which is considered an all-time high due to the fourth quarter results in fiscal 2014 (Motley, 2015). In 2015, PepsiCo will return $8.5- $9 billion in dividends for the shareholders and share buybacks (Motley, 2015). This is promising for the institutional and mutual owners at PepsiCo since they own 71% of the shares (Yahoo Finance, 2015).

According to recent quarter results PepsiCo’s stock is definitely worth owning due to its large and growing dividends (Motley, 2015). PepsiCo has a history of creating value in shareholders by paying out and repurchasing (Motley, 2015). In 2014, the shareholders of PepsiCo were rewarded a total of $8.7 billion in repurchases and dividends (Motley, 2015). This year the dividends have been raised to $2.81 per share at PepsiCo seen in Table 7, Appendix A (Yahoo Finance, 2015).

Further forecasting reveals in 2018, PepsiCo’s plans are to buy back approximately $12 billion of its stock (Low, 2015). This is due to PepsiCo’s aristocratic nature regarding increasing its dividends for the past 25 years (Motley, 2015). Since 1952, PepsiCo has dividends every year but increased its payback for 42 years consecutively (Motley, 2015). Looking at the cash flow strength it reveals that PepsiCo will continue to increase the dividend in the future years (Motley, 2015).

CEO Indra Nooyi addressed that the long-term aim for PepsiCo is to deliver consistent results of the past to meet the anticipated long-term goals (Low, 2015). PepsiCo should continue to thrive in spite of the volatile external economic conditions (Low, 2015). One of PepsiCo’s key priorities is to continue to return cash to its shareholders (Low, 2015).  PepsiCo’s PEG 3.68 for fiscal 2014 reveals that Pepsi is the preferred beverage stock to purchase this can be viewed in Table 4, Appendix A (Low, 2015). In 2015 PepsiCo plans to save $1 billion in cost saving as it did in 2014. This will allow room to give back through dividends and repurchases to its shareholders (Motley, 2015). This will be achieved through cost cutting and earnings (Motley, 2015). Shares continue to climb and there is no looking back for PepsiCo, Inc. (Low, 2015).

Summary

PepsiCo, Inc. is a sustainable company and is continuing to thrive. The company has focused on its customers through low pricing and remained diversified with its products globally. The stock is approaching its 1 year target with steadiness. Overall, the financial statements are aligned with the SEC and FASB guidelines. The operating total in the cash flow statement discloses that PepsiCo has enough capital to pay its creditors. The dividend and repurchases in 2014 alone is proof that PepsiCo is a mature company with knowledgeable management in place to guide the company towards its future goals.

Conclusion/Recommendations

Throughout the 2014 financial analysis for PepsiCo, Inc. it has been revealed that the company is vibrant and exceeding most of its targets. As a new graduate from Keiser University’s MBA program, I have been hired as a fund manager for a well-known investment banking house. I have $300 million of the banking house’s funds to manage and invest. This is a pension fund as well as a retirement fund that possess moderate risk and loss of capital so its return on investment is 9% annum. I must make 12 separate investments that consist of $25 million per investment. I have researched PepsiCo, Inc. financial analysis in fiscal 2014 to determine where the first investment of $25 million will be disbursed. This is my first assignment and I have to make a wise decision for my firm.

After careful evaluation of the financial analysis, trends, risk, and company growth for PepsiCo, I have decided to make my first investment of $25 million in PepsiCo, Inc. One of the selling points to invest was the company’s ability to give back in dividends to its shareholders. Being that my firm has moderate risk associated with loss of capital this will be a wise investment for my firm. The return on investments from PepsiCo will aid in increasing my firm’s profits in the long-term. The market for PepsiCo is not volatile due to low β of 0.84 seen in Table 5, Appendix A (Yahoo Finance, 2015). PepsiCo will reach its 1 year target of 105.67 by the end of fiscal 2015 (Yahoo Finance, 2015). The company did not suffer any major losses in capital for the fiscal years of 2014, 2013, or 2012, which reinforced my decision to invest.

Looking at Table 9, Appendix A (Yahoo Finance, 2015) I looked further into PepsiCo’s sales growth for the current quarters and the two quarters that followed and became somewhat concerned. Table 9, Appendix A reveals that the current quarter is -5.40%, the next two quarters are -3.20% and -4.60% respectively (Yahoo Finance, 2015). Compared to the industry growth estimate of 17.10% of this quarter, PepsiCo is still down -5.90% (Yahoo Finance, 2015). The sales growth is not expected to increase until December 2016 at 3.90% according to Table 9, Appendix A (Yahoo Finance, 2015).  The company was shorted $9.2 million in fiscal 2014 which raises further concern about the sales growth, because if the company wanted to buy it would have to cover (Yahoo Finance, 2015).

Recommendations for PepsiCo would be for management to do more marketing and hire in sales to aid in increasing the sales for PepsiCo before the end of fiscal 2016. It has been seen in the past that companies which lack in sales suffer in revenue eventually. The sales growth for PepsiCo is not being met in the industry. When this happens the company can easily make a 180º downturn which can diminish confidence from investors. Even though PepsiCo is reaching its target stock it will decrease again due to the sales decline. This could adversely affect the revenue for PepsiCo. Looking at Table 9, Appendix A in the quarter that sales is projected to decrease

-5.4%, revenue will take a hit as well. This will affect the market cap eventually causing it to decrease, which decrease stock causing investors to immediately sell. The company will then have to earn its way out of debt. PepsiCo’s first defense will be to layoff, increase sales, and reduce assets by selling the assets. This can all be avoided if the CEO, Indra Nooyi is adamant about keeping investors investing and their level of trust.  Management will have to drive sales in order for this to work. Hiring for representatives will need to be expedited. Sales are what drive revenue. CEO Nooyi should address the sales issues in Table 9, Appendix A as soon as possible to avoid potential downfall. The next three quarters appear to be troubling for PepsiCo, if the previous recommendations are not put into practice. Once this is improved investors’ sentiment and confidence will be restored and the CEO’s job will be more stable.

Despite these issues PepsiCo is a thriving organization that is worth investing in and I am proud to make my firm’s first $25 million investment with PepsiCo, Inc.

References:

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Management  (14^th ed.). Stamford, CT: South-Western College Publishing Company

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Hofer, C., Cantor, D. E., & Dai, J. (2012). The competitive determinants of a firm’s

environmental management activities: Evidence from US manufacturing

industries. Journal of Operations Management, 30(1), 69-84.

Low, E. February 2015. PepsiCo Gives Investors Dividend, Buyback Sugar Rush. Retrieved from

Investors Business Daily Website: http://news.investors.com/business/021115-738899-

Pepsico-stock-rises-eps-beat-share-repurchase.htm

Motley. February 2015. Why You Can’t Afford to Ignore PepsiCo Stock in 2015. Retrieved from

Motley Fool Website: http://www.fool.com/investing/general/2015/02/15/why-you-cant-

Afford-to-ignore-pepsico-stock-in-201.aspx

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http://www.pepsico.com/Home/Contact

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Retrieved from Finance Zacks website: http://finance.zacks.com/buy-stock-set-

Automatically-sells-after-price-drop-7144.html

References

Porter, G. A. & Norton C. L. (2015). In Porter, G.A. & Norton C.L. Financial Accounting: The

Impact on Decision Makers (9^th ed.). Stamford, CT: Cengage Learning.

Securities Exchange and Commission (SEC) (n.d.) Retrieved 2015 from the SEC

Website: http://www.sec.gov/about/whatwedo.shtml

Yahoo Finance. (2015). Retrieved August 2015 from Yahoo Finance website:

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10477871-143694-

492409&type=sect&TabIndex=2&dcn=0000077476-15-000012&nav=1&src=Yahoo

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