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Author: awesomestockdude Big red star, 1000 posts Ticker Guide Supernova Odyssey 1
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Subject: Pepsi Write-Up Date: 6/12/2009 7:03 PM
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Okay, I finally finished my Pepsi write-up and here it is! Yes, it is very long, and I hope you won't fall asleep reading.

Business Description-

As you all know, Pepsi is a large snack and drink company. It sells its products all over the world and has several large brand name products that everyone loves. Pepsi operates in three parts: PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. The company is committed to sustaining growth by generating healthy financial returns while giving back to the communities they serve. Here is what the three business units contain-

PepsiCo Americas Foods-

Frito-Lay North America (FLNA) manufactures or uses contract manufacturers, markets, sells and distributes branded snacks. These snacks include Lay’s potato chips, Doritos tortilla chips, Cheetos cheese flavored snacks, Tostitos tortilla chips, branded dips, Fritos corn chips, Ruffles potato chips, Quaker Chewy granola bars, SunChips multigrain snacks, Rold Gold pretzels, Santitas tortilla chips, Frito-Lay nuts, Grandma’s cookies, Gamesa cookies, Munchies snack mix, Funyuns onion flavored rings, Quaker Quakes corn and rice snacks, Miss Vickie’s potato chips, Stacy’s pita chips, Smartfood popcorn, Chester’s fries and branded crackers. FLNA branded products are sold to independent distributors and retailers. In addition, FLNA’s joint venture with Strauss Group manufactures, markets, sells and distributes Sabra refrigerated dips. FLNA’s net revenue was $12.5 billion, $11.6 billion and $10.8 billion in 2008, 2007 and 2006, respectively, and approximated 29% of our total net revenue in both 2008 and 2007 and 31% of our total net revenue in 2006.

Quaker Foods North America (QFNA) manufactures or uses contract manufacturers, markets and sells cereals, rice, pasta and other branded products. QFNA’s products include Quaker oatmeal, Aunt Jemima mixes and syrups, Quaker grits, Cap’n Crunch cereal, Life cereal, Rice-A-Roni, Pasta Roni and Near East side dishes. These branded products are sold to independent distributors and retailers. QFNA’s net revenue was $1.9 billion in both 2008 and 2007 and $1.8 billion in 2006 and approximated 4% of our total net revenue in 2008 and 5% of our total net revenue in both 2007 and 2006.

Latin America Foods (LAF) manufactures, markets and sells a number of leading salty and sweet snack brands including Gamesa, Doritos, Cheetos, Ruffles, Sabritas and Lay’s. Further, LAF manufactures or uses contract manufacturers, markets and sells many Quaker brand cereals and snacks. These branded products are sold to independent distributors and retailers. LAF’s net revenue was $5.9 billion, $4.9 billion and $4.0 billion in 2008, 2007 and 2006, respectively and approximated 14%, 12% and 11% of our total net revenue in 2008, 2007 and 2006, respectively.


PepsiCo Americas Beverages-

PAB manufactures or uses contract manufacturers, markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands including Pepsi, Mountain Dew, Gatorade, 7UP (outside the U.S.), Tropicana Pure Premium, Sierra Mist, Mirinda, Tropicana juice drinks, Propel, Dole, Amp Energy, SoBe Lifewater, Naked juice and Izze. PAB also manufactures or uses contract manufacturers, markets and sells ready-to-drink tea, coffee and water products through joint ventures with Unilever (under the Lipton brand name) and Starbucks. In addition, PAB licenses the Aquafina water brand to its bottlers and markets this brand. PAB sells concentrate and finished goods for some of these brands to authorized bottlers, and some of these branded finished goods are sold directly by us to independent distributors and retailers. The bottlers sell our brands as finished goods to independent distributors and retailers. PAB’s volume reflects sales to its independent distributors and retailers, as well as the sales of beverages bearing our trademarks that bottlers have reported as sold to independent distributors and retailers. Bottler case sales (BCS) and concentrate shipments and equivalents (CSE) are not necessarily equal during any given period due to seasonality, timing of product launches, product mix, bottler inventory practices and other factors. While our revenues are not based on BCS volume, we believe that BCS is a valuable measure as it quantifies the sell-through of our products at the consumer level. PAB’s net revenue was $10.9 billion, $11.1 billion and $10.4 billion in 2008, 2007 and 2006, respectively, and approximated 25%, 28% and 29% of our total net revenue in 2008, 2007 and 2006, respectively.

Basically, they have a ton of different beverage products and let their bottlers sell the finished goods to others businesses. Pepsi’s two main bottlers are PepsiAmericas (PAS) and Pepsi Bottling Group (PBG). Right now Pepsi owns 33% of PBG and 43% of PAS, but because they own less than 50% of the bottlers, they don’t consolidate their results. There has been a lot of talk lately about the bottlers and how Pepsi wants to acquire them 100%. Pepsi made a deal with them, but they turned it down. The talking isn’t done yet and anything could happen, but for now there is no deal. Here’s an interesting article about this topic-

http://seekingalpha.com/article/131886-why-is-pepsico-buying...

PepsiCo International-

United Kingdom & Europe (UKEU) manufactures, markets and sells through consolidated businesses as well as through noncontrolled affiliates, a number of leading salty and sweet snack brands including Lay’s, Walkers, Doritos, Cheetos and Ruffles. Further, UKEU manufactures or uses contract manufacturers, markets and sells many Quaker brand cereals and snacks. UKEU also manufactures, markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands including Pepsi, 7UP and Tropicana. In addition, through our acquisition of JSC Lebedyansky (Lebedyansky), we acquired Russia’s leading juice brands. These brands are sold to authorized bottlers, independent distributors and retailers. However, in certain markets, UKEU operates its own bottling plants and distribution facilities. In addition, UKEU licenses the Aquafina water brand to certain of its authorized bottlers. UKEU also manufactures or uses contract manufacturers, markets and sells ready-to-drink tea products through an international joint venture with Unilever (under the Lipton brand name).
UKEU reports two measures of volume. Snack volume is reported on a system-wide basis, which includes our own sales and the sales by our noncontrolled affiliates of snacks bearing Company-owned or licensed trademarks. Beverage volume reflects Company-owned or authorized bottler sales of beverages bearing Company-owned or licensed trademarks to independent distributors and retailers (see PepsiCo Americas Beverages above). UKEU’s net revenue was $6.4 billion, $5.5 billion and $4.8 billion in 2008, 2007 and 2006, respectively and approximated 15% of our total net revenue in 2008 and 14% of our total net revenue in both 2007 and 2006.

Middle East, Africa & Asia (MEAA) manufactures, markets and sells through consolidated businesses as well as through noncontrolled affiliates, a number of leading salty and sweet snack brands including Lay’s, Doritos, Cheetos, Smith’s and Ruffles. Further, MEAA manufactures or uses contract manufacturers, markets and sells many Quaker brand cereals and snacks. MEAA also manufactures, markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands including Pepsi, Mirinda, 7UP and Mountain Dew. These brands are sold to authorized bottlers, independent distributors and retailers. However, in certain markets, MEAA operates its own bottling plants and distribution facilities. In addition, MEAA licenses the Aquafina water brand to certain of its authorized bottlers. MEAA also manufactures or uses contract manufacturers, markets and sells ready-to-drink tea products through an international joint venture with Unilever. MEAA reports two measures of volume (see United Kingdom & Europe above). MEAA’s net revenue was $5.6 billion, $4.6 billion and $3.4 billion in 2008, 2007 and 2006, respectively and approximated 13%, 12% and 10% of our total net revenue in 2008, 2007 and 2006, respectively.


That’s all the divisions that Pepsi has. I know that was really long just for a company description and outline, but Pepsi is a large company so it is necessary.

The beginning of this year Pepsi had a slight change in their organizational structure. Turkey and other Central Asia markets will become part of the Europe divisions when they were in the Asia, Middle East & Africa division. The company will adjust and this shifting shouldn’t have any large effect on the company.

Competition-

To put it simply, Pepsi has a lot of competition in a lot of different areas. As you’ve seen above Pepsi serves its customers many different products all over the world. Therefore, Pepsi has competition everywhere. Half of Pepsi’s business is in the United States and the other half is international As the annual report says: We compete against global, regional, local and private label manufacturers on the basis of price, quality, product variety and distribution. Pepsi’s management believes that they can compete effectively because they have strong brands, innovate and market well, have high quality products, and their distribution network is flexible. Also to compete successfully they have to make sure their current products sell well and they have to keep on coming out with new products.

Just because Pepsi can compete effectively doesn’t mean no one else can too. Pepsi’s number one competitor in and out of the United States is The Coca-Cola Company (KO). Coke’s market cap is about $30 billion larger than Pepsi’s which is at about $80 billion. Coke is also full of large brands too such as all the cokes, Canada Dry, Dasani, Dr. Pepper, Fanta, Hi-C, Minute Maid, Powerade, Sprite, etc. Almost all that Coke owns is beverages and they are the largest share of carbonated soft drinks. What Pepsi has that Coke doesn’t is snacks, but there is plenty competition elsewhere on that turf too. Anyways, Coke has a large carbonated soft drink share advantage in many countries, so it could be difficult to beat them in that. Pepsi does have a larger share in refreshment beverages consumption though.

Pepsi has many other competitors, but Coke is the main one. Another great thing that Pepsi does is that they buy out other companies to get them a larger market share, which pulls in more profits.

In my eyes, Pepsi does have an economic moat. Because of their size, they can easily lower costs in many products to undercut competition and take advantage. Pepsi also strengthens their moat with their brand name products. Many people will buy Pepsi products just because it is Pepsi. These two items are great to have in a company, but one thing that hurts the moat is that customers could easily switch to a competitor. If people started not liking Pepsi products and switched to a competitor, it would greatly harm the company. I do see a moat, but it is easily penetrable if management doesn’t keep giving out products people want. I don’t see this happening anytime soon, but if the brands start eroding, over time we could see Pepsi losing more and more market share.

Income Statement-

I’m using the latest annual report’s numbers for the past year.

-Revenue grew 9.6% this past year and 12.3% the year earlier.
-Cost of revenue grew 12.8% this past year and 14.4% the year earlier.
-Gross Profit grew 6.8% this past year and 10.6% the year earlier.
-Gross Profit Margin shrunk to 52.9% from 54.3% last year and 55.1% the year before.
-SG&A is 69.4% of Gross Profit, up from 66.3% last year and 65.6% the year before.
-In the Pepsi income statement the R&D is included in the SG&A expenses, but was $388 million for the past year.
-Interest Expenses is 4.7% of operating income.
-Net Income has shrunk 9.1% this past year and stayed flat the year before.
-Net Income is 11.9% of revenue this year down from 14.3% and 16.1% the past two years. (Profit Margin)
-Bottling Income has shrunk 33.2% this past year after rising 1.3% the year before.
-EPS has risen steadily the past decade, but has stumbled this past year.

While Revenue has grown quite nicely, the bottom line has fallen. This is mostly from the cost of sales and SG&A expenses rising at a faster rate than the sales. This shrinks the margins such as the profit margin, which is currently at 11.9% from 14.3% and 16.1% in the past two years and the operating margin, which is currently at 16% from 18.2% and 18.5% in the past two years. Much of this is from the rise in commodity prices which they depend on to make and deliver their products. As you know, in these past couple of years commodity prices have been crazy by reaching new highs and crashing down even lower than they started at. Pepsi buys most of their raw materials on the open market so the current prices of their materials could strongly affect their operating results.

Revenue Divided Up By Division- 29% FLNA, 4% QFNA, 14% LAF, 25% PAB, 15% UKEU, and 13% MEAA.

Operating Profit Divided Up By Division- 37% FLNA, 7% QFNA, 11% LAF, 26% PAB, 10% UKEU, and 9% MEAA.

Revenue Divided Up By Country- 52% U.S., 9% Mexico, 5% Canada, 5% United Kingdom, and 29% other countries.

They didn’t have operating profit divided up by division, but it is interesting to see how all this divides up. Half of the sales take place in the United States and half in another country, which is good because it allows the company to be more diversified so that if one country does bad it can be offset by another country. Obviously the Frito-Lay North America Segment and the PepsiCo Americas Beverages parts are the largest and take up 54% of the sales and 63% of the operating profit. What had grown the most in the past few years though are the international divisions. Latin America Foods this past year grew its sales up 21% and operating profit up 26%. United Kingdom & Europe grew sales up 17% and operating profit up 5%. Middle East, Africa & Asia grew sales up by 22% and operating profit up 25%.

Balance Sheet-

I am using the latest annual report for the numbers.

-Cash and Cash Equivalents grew to $2.064 billion from $0.91 billion last year.
-This past year earnings and inventory haven’t had a corresponding rise.
-Current ratio is 1.2 down from 1.3 last year.
-P,P&E is very high, but that is just part of their business from buying new machinery and equipment.
-Goodwill went down barely from last year.
-ROA is 14.3% down from 16.3% last year.
-Short term obligations are at $8.273 billion.
-Long term debt obligations are at $7.858 billion.
-Debt to Shareholder’s Equity ratio is 1.96 from 1.00.
-They have some preferred stock but not much.
-Retained Earnings rose to $30.638 billion from $28.184 billion.
-Repurchased back a lot of stock and plan to buy back $8 billion more by June 30, 2010.
-Return on Shareholder’s Equity ratio is 0.42 from 0.33 last year.

I don’t totally understand this balance sheet mostly because of the industry it’s in. I’m pretty sure that in Pepsi’s industry you have to take on more debt to make the products, but you more easily pay it back. Is having more debt fine? Would someone please clear this up for me?

Other than that, they increased their retained earnings, which is great! Just like the income statement, things have gotten worse, but that is partly because the economy has been bad and commodity prices have been going crazy. Pepsi increased shareholder value by buying back shares and they plan to buy back more, which is fantastic news too.

Cash Flow-

-A lot goes into their operating cash flow, but it went up a tad this past year.
-They spent $1.925 billion on acquisitions this past year.
-They paid $2.541 billion in dividends this year.
-Bought back both common and preferred shares but mostly common.
-CapEx at $2.446 billion.
-Has $4.553 billion in free cash flow

Anyways, how Pepsi uses their cash is confusing and changes every year, but they seem to be making good use of it. This past year by the looks of it they spent $4.762 billion buying back stock, $2.541 billion paying dividends, $1.925 making acquisitions, and $2.446 on capital spending. They also have an amazing $4.553 billion in FCF.

Comparison to Coke-

You can look at the numbers all you want and never understand if it is good and normal. The only way you can tell is by comparing it to similar companies, so of course I’m going to compare some simple numbers with Coke. As stated earlier, Coke is larger than Pepsi and focuses mainly on beverages. Even so, Coke is the closest company you can get to Pepsi. I’ll be using some more simple sights for these numbers such as CAPS and Yahoo Finance. Here are some basic comparisons-

Market Cap-
Coke- $114.45 billion
Pepsi-$85.44 billion

Revenue-
Coke- $31.994 billion
Pepsi- $42.251 billion

Earnings-
Coke- $5.807 billion
Pepsi-$5.142 billion

Gross Profit Margin-
Coke- 64.4%
Pepsi-52.9%

Profit Margin-
Coke- 18.2%
Pepsi- 11.9%

Operating Margin-
Coke- 26.4%
Pepsi- 16%

ROE-
Coke- 27.4
Pepsi- 42.7

ROA-
Coke- 13.1
Pepsi- 14.7

ROIC- A little help on this one!

Dividend Yield-
Coke- 3.3%
Pepsi-3.3%

Payout Ratio-
Coke- 63%
Pepsi- 53%

P/E Ratio-
Coke- 20.35
Pepsi- 16.97

P/S Ratio-
Coke- 3.61
Pepsi- 1.98

P/B Ratio-
Coke- 5.52
Pepsi- 7.1

P/CF-
Coke- 16.6
Pepsi- 12.8

FCF-
Coke- $5.603 billion
Pepsi- $4.553 billion

Most of the numbers on both companies look great! Coke is larger, but apparently Pepsi has more sales. Coke does though make more earnings making its margins higher than Pepsi’s. Even so, Pepsi has good margins by what I can tell. Pepsi does have a much larger ROE which is great! At the current moment both companies have the same dividend yield, but Pepsi has a lower payout ratio so it can most likely raise the dividend more than Coke can. By the simple valuing metrics I used above Pepsi looks more undervalued in all but one ratio, but you have to take some of this with a grain of salt. After all, there still are differences between the companies and the best way to look at these numbers is to compare them with the historical numbers going back a few years.

When looking at these numbers I don’t think you can easily tell which company is the best or worst. Both companies are great in their own way. Also, there is much more to the story than what these numbers portray. You also have to look at the qualitative viewpoints too, which we will get to more in a little while. (Don’t fall asleep yet! We’re somewhere around a little more than halfway done!)

Management-

As I’ve said in past write-ups, analyzing management is one of the hardest parts in evaluating a company, mostly because none of us individual investors can go talk to the management team. But as always we will try our best to understand anyways! Below is a list of the board of directors and some information about them. I know this takes a while to read through and is long, but I believe it is very important.

SHONA L. BROWN, 43, is Senior Vice President, Business Operations of Google Inc., a position she has held since 2006. From 2003 to 2006 she served as Vice President, Business Operations of Google Inc., where she led internal business operations and people operations. From October 1995 to August 2003, Ms. Brown was at McKinsey & Company, a management consulting firm, where she had been a partner since December 2000. She is a director of the following non-profit organizations: San Francisco Jazz Organization, The Bridgespan Group, and the Exploratorium. Ms. Brown was elected to PepsiCo’s Board in March 2009.

IAN M. COOK, 56, was named Chief Executive Officer and was elected to the board of Colgate-Palmolive Company in 2007 and became Chairman of the Board in January 2009. Mr. Cook joined Colgate in the United Kingdom in 1976 and progressed through a series of senior management roles around the world. In 2002, he became Executive Vice President, North America and Europe. In 2004, he became Chief Operating Officer, with responsibility for operations in North America, Europe, Central Europe, Asia and Africa. In 2005, he was named President and Chief Operating Officer, responsible for all Colgate operations worldwide. Mr. Cook was elected to PepsiCo’s Board in 2008.

DINA DUBLON, 55, is the former Executive Vice President and Chief Financial Officer, JP Morgan Chase & Co. serving in that capacity from December 1998 until her retirement at the end of 2004. She is a director of Microsoft Corp. and Accenture. She is also a director of the Global Fund for Women, co-chairs the Women’s Refugee Commission, and is a trustee of Carnegie Mellon University. Ms. Dublon was elected to PepsiCo’s Board in 2005.

VICTOR J. DZAU, MD, 63, is Chancellor for Health Affairs at Duke University and President and CEO of the Duke University Health System since July 2004. Prior to that he served as Hersey Professor and Chairman of the Department of Medicine at Harvard Medical School in Boston, Massachusetts from 1996 to 2004. He is a member of the Institute of Medicine of the National Academy of Sciences and the European Academy of Sciences and Arts. He was the previous Chairman of the National Institutes of Health (NIH) Cardiovascular Disease Advisory Committee and he served on the Advisory Committee to the Director of NIH. Dr. Dzau has been named 2004 Distinguished Scientist of the American Heart Association and was the recipient of the 2004 Max Delbruck Medal, Berlin, Germany, and the 2005 Ellis Island Medal of Honor. Dr. Dzau is also a director of Genzyme Corporation, Alnylam Pharmaceuticals, Inc. and Medtronic, Inc. Dr. Dzau was elected to PepsiCo’s Board in 2005.

RAY L. HUNT, 65, is Chairman and Chief Executive Officer of Hunt Oil Company and Chairman, Chief Executive Officer and President, Hunt Consolidated, Inc. Mr. Hunt began his association with Hunt Oil Company in 1958 and has held his current position since 1976. He is also a director of Bessemer Securities Corporation, Bessemer Securities LLC, King Ranch, Inc. and Verde Realty. Mr. Hunt was elected to PepsiCo’s Board in 1996.

ALBERTO IBARGÜEN, 65, has been President and Chief Executive Officer of the John S. and James L. Knight Foundation since 2005. Mr. Ibargüen previously served as publisher of The Miami Herald and of El Nuevo Herald. He is a member of the boards of AMR Corporation, American Airlines, Inc., ProPublica and The Council on Foreign Relations. Mr. Ibargüen is also the Chairman of the Board of The Newseum in Washington, D.C. Mr. Ibargüen was elected to PepsiCo’s Board in 2005.

ARTHUR C. MARTINEZ, 69, is the former Chairman of the Board, President and Chief Executive Officer of Sears, Roebuck and Co. Mr. Martinez was Chairman and Chief Executive Officer of the former Sears Merchandise Group from 1992 to 1995 and served as Chairman of the Board, President and Chief Executive Officer of Sears, Roebuck and Co. from 1995 until 2000. He served as Vice Chairman and a director of Saks Fifth Avenue from 1990 to 1992. He is also a director of Liz Claiborne, Inc., International Flavors and Fragrances, Inc. and Interactive Corp (IAC). Mr. Martinez is Chairman of the Supervisory Board of ABN AMRO Holding, N.V. Mr. Martinez is also Chairman of HSN, Inc. Mr. Martinez was elected to PepsiCo’s Board in 1999.

INDRA K. NOOYI, 53, has been PepsiCo’s Chief Executive Officer since October 2006 and assumed the role of Chairman of PepsiCo’s Board of Directors on May 2, 2007. She was elected to PepsiCo’s Board of Directors and became President and Chief Financial Officer in May 2001, after serving as Senior Vice President and Chief Financial Officer since February 2000. Ms. Nooyi also served as PepsiCo’s Senior Vice President, Corporate Strategy and Development from 1996 until February 2000 and as PepsiCo’s Senior Vice President, Strategic Planning from 1994 until 1996. Prior to joining PepsiCo, Ms. Nooyi spent four years as Senior Vice President of Strategy, Planning and Strategic Marketing for Asea Brown Boveri, Inc. She was also Vice President and Director of Corporate Strategy and Planning at Motorola, Inc.

SHARON PERCY ROCKEFELLER, 64, is President and Chief Executive Officer of WETA public stations in Washington, D.C., a position she has held since 1989, and was a member of the Board of Directors of WETA from 1985 to 1989. She was a member of the Board of Directors of the Corporation for Public Broadcasting until 1992 and is currently a director of Public Broadcasting Service (PBS), Washington, D.C. Ms. Rockefeller currently serves as a Trustee on the following non-profit boards: National Gallery of Art, The Museum of Modern Art, Johns Hopkins Medicine, Colonial Williamsburg Foundation and Rockefeller Philanthropy Advisors. Ms. Rockefeller was elected to PepsiCo’s Board in 1986.

JAMES J. SCHIRO, 63, became Chief Executive Officer of Zurich Financial Services in May 2002, after serving as Chief Operating Officer – Group Finance since March 2002. He joined Price Waterhouse in 1967, where he held various management positions. In 1994 he was elected Chairman and senior partner of Price Waterhouse, and in 1998 became Chief Executive Officer of PricewaterhouseCoopers, after the merger of Price Waterhouse and Coopers & Lybrand. Mr. Schiro is also a Director of Royal Philips Electronics. Mr. Schiro was elected to PepsiCo’s Board in 2003.

LLOYD G. TROTTER, 62, is Managing Partner at GenNx360 Capital Partners, a position he has held since February 2008. He served as Vice Chairman, General Electric, and as President and Chief Executive Officer of GE Industrial, from 2006 through February 2008. Between 1989 and 2006, he held various positions at GE, including Executive Vice President, Operations, from 2005 to 2006, President and Chief Executive Officer of GE Consumer and Industrial Systems from 1998 to 2005 and President and Chief Executive Officer, Electrical Distribution and Control from 1992 to 1998. Mr. Trotter is a former director of Genpact Limited. Mr. Trotter is also a director of Textron, Inc. Mr. Trotter was elected to PepsiCo’s Board in 2008.

DANIEL VASELLA, 55, became Chairman of the Board and Chief Executive Officer of Novartis AG in 1999, after serving as President since 1996. From 1992 to 1996, Dr. Vasella held the positions of Chief Executive Officer, Chief Operating Officer, Senior Vice President and Head of Worldwide Development and Head of Corporate Marketing at Sandoz Pharma Ltd. He also served at Sandoz Pharmaceuticals Corporation from 1988 to 1992. Dr. Vasella is also a director of Alcon Laboratories, Inc. Dr. Vasella was elected to PepsiCo’s Board in 2002.

MICHAEL D. WHITE, 57, has been Vice Chairman of PepsiCo and a member of PepsiCo’s Board of Directors since March 2006 and Chief Executive Officer of PepsiCo International since February 2003. Prior to that, he served as President and Chief Executive Officer of Frito-Lay’s Europe/Africa/Middle East division from 2000 until February 2003. From 1998 to 2000, Mr. White was Senior Vice President and Chief Financial Officer of PepsiCo. Mr. White has also served as Executive Vice President and Chief Financial Officer of PepsiCo Foods International and Chief Financial Officer of Frito-Lay North America. He joined Frito-Lay in 1990 as Vice President of Planning. Mr. White is also a director of Whirlpool Corporation.


I got this information from the most recent proxy statement-

http://www.sec.gov/Archives/edgar/data/77476/000119312509061...

Now that you are done reading those long, tedious, but important descriptions let’s summarize all up. Let’s do that by answering the five questions on how to analyze management from Million Dollar Portfolio.

1. Is the founder still active in the company? Is he or she building a legacy of leadership on sound core values?

First of all, I would hope it would be pretty obvious to know that the founder isn’t active anymore just based off of how long the company has been around. Even so, the leaders of Pepsi now keep on building up the leadership up in the company with great values such as meeting customer needs, reducing impact on environment, and by supporting employees.

2. Do insiders have an ownership stake in the company? How much? Have they been buying or selling?

The directors and executives own less than one percent of the common stock, but it is fine still because they still own a lot and it’s hard to base it off a percentage of a large company. If you look at it from a money amount view, when the latest proxy statement was written insiders owned a total of $325,645,432.40 (6,319,531 shares* the March 24 price of $51.53). That is still pretty darn incredible! There really hasn’t been much insider trading going on lately, except for one market sale a few months ago.

3. What’s their compensation? Is it reasonable? How is it determined?

Of course, the executive’s compensation is a whole lot, but I don’t see it extremely unreasonable. I would like to see it less, but at least a huge bulk of it is in common stock. The company does this so that it puts executive’s money along the lines of other shareholders. That’s always good to know! Anyways, the company bases compensation mostly around how the company performs, which is the way we want it to be. I won’t go into a lot of details here but they base the compensation on things such as EPS and revenue growth and certain business unit growth (for those in charge of that division). I do think they do get a little carried away with all the different awards they give them, but I think it’s okay as long as management thinks along the lines of shareholders., which they do right now.

4. How long is their tenure, and how good is their track record?

For tenure, I would say it’s mixed. Maybe about half of the board of directors came over five years. Even though they might have not been part of this company a long time, they have been part of other large name companies (like GOOG and JPM for example) so they do all have experience as leaders in companies. Track record is hard to determine. By looking at the list of positions all these people have had I would say they have had a great track record for the most part. Even while they have been at this company, great things have happened.

5. Are they smart?

This question is the most broad and most likely the hardest one to answer in detail, but since it is asked broadly I’ll answer broadly. Basically, I bet the members of the management team are very smart. I don’t see how they couldn’t be! I mean, these people have been parts of successful companies in the past, some run their own companies on the side, and they continue to succeed in the businesses they are part of. I don’t think you could do that if you weren’t smart.



When looking back at the management team I am extremely satisfied. They all have good values, own shares in the company, which makes them want the company to succeed, get paid based on how well the company does, all have experience, and are all very smart. Guys, I think we’ve found a good management team! (round of applause!)

Catalyst-

As usual with large companies, they might have many catalysts, but it might not have a huge impact on the business. All the catalysts added up are what makes even large companies grow larger and I think Pepsi has a few.

First of all, an improving economy would greatly help Pepsi along with every other American company. It would help Pepsi, because when people feel more comfortable spending money they should most likely buy more Pepsi products. This is also where Pepsi is good even in bad economic times. People tend to buy Pepsi products even in these bad times! Even if they still buy them now, they still should be able to sell more as things get better. Also, when the economy as a whole is down, even good company’s prices get pulled down even though nothing is wrong. As the economy improves, we should see the price rise some in Pepsi stock to bring it back up where it should be.

The next catalyst I see in Pepsi is all of their acquisitions. Pepsi has a strong history of buying out other companies to bring them into new markets and to increase their market share in the markets they are already in. This past year they made at least one big acquisition and I’m positive they are hoping to make more. As I stated earlier, they are still trying to buy out their bottlers and if they do it would be considered a catalyst.

Another catalyst I see is their program where they repurchase their own shares. By buying back shares they increase the value of the shares of shareholders. By June 30, 2010 the company’s goal is to buy back at least $6.4 billion dollars more of shares. They plan to spend up to $2.5 billion this year in 2009 buying back shares. I see this as a great way for shareholders to make money.

These catalysts are all great and added up it should reward Pepsi shareholders well as the company continues to succeed. Over time, more and more opportunities for catalysts should arise, but for now everything looks awesome!

Does it meet the criteria as a dividend stock?

Also in Million Dollar Portfolio they cover what is the main criteria for a dividend. I’ll run through the six points really quick-

Dividend and Payout Ratio-

Pepsi has a dividend yield of 3.3% and a payout ratio of 53%. The book wants the payout ratio below 65%, so we are in good shape! Pepsi should have no problem raising their dividend over time.

Capital Gain Potential-

In the past, Pepsi has grown a lot and the catalysts should let it be able to continue growing. On top of the dividend, this company should grow and make money for shareholders.

Financial Fortitude-

Even in the bad times, Pepsi continues to pay a dividend and even in a lot of bad times they end up raising it, which is fantastic. As we saw earlier in my quick comparison to Coke, Pepsi has an awesome ROE at 42.7. The balance is great with loads of cash.

Competitive advantage-

Pepsi is a huge leader and has a huge advantage in where it works. By acquiring other companies it makes its advantage even stronger. Also by building up its brand name it will gain a larger advantage because more people will buy their products.

Smart, Shareholder Friendly Management-

As we’ve already gone through, Pepsi has a great management team. They all own a lot of shares so they act for the good of shareholders. They are smart because they have had leading positions in other companies that have succeeded and their track record proves that they are.



Looking at the six points I would say Pepsi passes 100% of the test. They have all the needed qualities it takes to be a great dividend company. (We’re getting closer to being done! Just hang in there!)

Company Risks-

For this section I’ll be taking a few of the business risks from the latest annual report.

Demand for our products may be adversely affected by changes in consumer preferences and tastes or if we are unable to innovate or market our products effectively.

This is a biggie, yet I don’t see them having this problem. It would be a very bad problem to have, but I bet the company will continue to find ways to meet customer wants and needs. After all, they always have! I don’t see this as a problem now, but you never know what could happen. It still is possible, just not very likely.

Our operating results may be adversely affected by increased costs, disruption of supply or shortages of raw materials and other supplies.

This is another big one that is based on commodities and commodity derivatives. We have actually experienced this problem this year and always should have a problem with this is some way in the future. There is just no way of knowing what is going to happen, but it is likely that something will happen that will make the commodity prices rise. After all, Pepsi uses food commodities to make their products (fruits, nuts, sugar, etc.) and commodities such as gas and oil to deliver their products.

Any damage to our reputation could have an adverse effect on our business, financial condition and results of operations.

Having a good reputation is critical to having a successful business. At the moment, Pepsi has a strong reputation around the world and we want it to stay that way. To stay having a high reputation, they need to have high standards for productive quality, make the products safe and not harmful, maintain high ethical, social and environmental standards, and act responsibly with water use. If they don’t maintain a strong, healthy reputation there could be a decrease in the demand of their products, which would lead to losing money.

Trade consolidation, the loss of any key customer, or failure to maintain good relationships with our bottling partners could adversely affect our financial performance.

Right now between retail consolidation and the current economic environment it makes the importance of the major customers go way up. Losing these main customers could make a huge effect (in a bad way) to company earnings. Also, Pepsi needs to keep good relations through the bottlers by giving them advertising and marketing support. If they don’t there is a chance that the bottlers could do something that would harm the Pepsi brands and lead to less profitability.

If we are unable to hire or retain key employees or a highly skilled and diverse workforce, it could have a negative impact on our business.

This one is pretty much self-explanatory. If the company fails to keep and continue producing highly skilled workers the company could suffer. I don’t see this happening anytime soon, but these are the things that can jump out of nowhere and harm the company.

Unstable political conditions, civil unrest or other developments and risks in the countries where we operate may adversely impact our business.

This is a problem, but one where it might not cause much trouble unless it was a large country that Pepsi does a lot of sales with such as the United States, Mexico, Great Britain, etc. I know for the most part that these countries are doing fine for this matter, but you can never see the future for these things until they occur. Mexico does have more trouble with crime and corruption than most large countries, but Pepsi has been able to grow sales and it hasn’t been a problem yet. Something bad always could happen and that would be bad towards both the country’s economy and Pepsi. For now though, I don’t see anything to be worried about.




That is all the risks that I’ll talk about that were included in the annual report. While the company puts the risk of the company not being able to meet changes in consumer preference first I wouldn’t. Pepsi has always come out with new products people love, and through R&D they should continue to do so. The risk I would put as being most likely to happen with the largest effect is the one about the changes in commodity prices. This one always occurs off and on throughout time and with Pepsi depending on these derivatives to make their products, it could majorly change their costs. If these prices rise too much, it could really take a bite out of their earnings.

Many other of the mentioned risks could happen, but only a few of them would have a huge impact on the company unless it got out of hand. That always could happen, but we have to put our trust with the management knowing that they will do their best to solve the problem.

Balance-

As I’ve said in all my past write-ups, I believe balance is important. Checking balance basically is making sure both quantitative and qualitative aspects of the company are good. Let’s take a look-

For quantitative, it looks pretty nice. The company has always grown yet because of the bad economy they didn’t make as much as in years past. Costs have risen faster than sales so that makes margins lower, but the margins still are decent. I expect all this to change as the economy turns around. They have more assets than liabilities which is great and they keep on producing a lot of cash which they put to work in many great ways. This company produces a great ROE and pays a nice dividend that has the potential to keep on rising. They look pretty cheap compared to the past, so if you believe the company is good (which I do) around now could be a good time to pick up shares.

On the qualitative viewpoint things possibly look even better here than from the quantitative view. Pepsi keeps on diversifying on the products they sell and where they sell. They are the leader in snack foods and probably second in beverages. They have a powerful brand name that attracts customers, but they need to be careful that they don’t let something slip to make them not look as good. Pepsi does have competition everywhere they go, but they seem suited to be able to deal with them extremely well. The management by what I can tell looks great. They all have experience and a proven track record in leading different businesses, own a lot of stock (no trading action at all lately), seem smart, and also seemed committed to helping the company succeed. Also, Pepsi has some great catalyst such as using their cash to acquire other businesses to increase their market share in industries they are in and to get ground on new industries. The also use their cash to buy back stock, which increases the value of the shares that shareholders own. When the economy turns around, we should also see more improvement in the company through more sales and lower costs.

Looking back at both quantitative and qualitative together, I see a fantastic business. Pepsi may be large, but it still has a ton of potential to grow larger and more profitable.

Conclusion-

First of all, I want to say congratulations if you made it this far through my write-up. I worked long and hard writing this and I’m glad I’m about done!

The first thing I want to say is that Pepsi seems to be an amazing company. I know there is no perfect company, but I think Pepsi is pretty close. They do have some problems and troubles at times (such as natural disasters), but they have much more good than bad in the company. I am a proud shareholder and am down about 20% on my position, but I am almost positive that they will turn right back around and most likely leave me in the black when I sell (if I ever sell). Pepsi is a great blue chip company who should always reward investors in the long term through capital appreciation and also through the great dividends they produce.

Pepsi will still have problems in the future. After all they still have company risks. Management should pull through and set the company up for success, but nothing is certain. I don’t want you to take this bad, but like all companies, Pepsi could still loose money. The chances are low, but the chances are still there like all stocks. Even though there still is a chance, I believe Pepsi is one of the safest companies around and should be owned by everyone.

Fool on!

Aaron
Who is now going to take a nice long break from writing papers in his summer unless another company looks too intriguing to pass up. ;-)
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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2627 of 2675
Subject: Re: Pepsi Write-Up Date: 6/12/2009 8:51 PM
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Wow!

Great report Aaron!

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Author: Jognils One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2628 of 2675
Subject: Re: Pepsi Write-Up Date: 6/12/2009 11:08 PM
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I agree with desertdave, very well-written. I skipped over a lot of the quoted material, but read most of your commentary, and I definitely like your approach and agree with your conclusions. I know how long it must have taken to compile such a comprehensive analysis, and I'm especially impressed that you undertook such a time-consuming project in your first few weeks of summer! Well done!

P.S. I recently wrote a similar paper for Chevron Corp. (CVX) using analysis methods I learned in one of my finance classes. I'll try to reformat it for HTML and put it up in the next few days if anyone's interested.

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Author: awesomestockdude Big red star, 1000 posts Ticker Guide Supernova Odyssey 1
Mission Team Member CAPS All Star SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2629 of 2675
Subject: Re: Pepsi Write-Up Date: 6/13/2009 1:14 PM
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P.S. I recently wrote a similar paper for Chevron Corp. (CVX) using analysis methods I learned in one of my finance classes. I'll try to reformat it for HTML and put it up in the next few days if anyone's interested.

I definitely interested and it would be great to get this board back moving for a while!

Aaron

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Author: TMFSysun Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2633 of 2675
Subject: Re: Pepsi Write-Up Date: 7/17/2009 7:48 PM
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Aaron, great write-up again! TMFGebinr tells me you're still quite young--I wish I had been so focused at such a young age.

I wanted to comment on this:


Profit Margin-
Coke- 18.2%
Pepsi- 11.9%

Operating Margin-
Coke- 26.4%
Pepsi- 16%

ROE-
Coke- 27.4
Pepsi- 42.7


First of all, it's great that you understand the importance of these metrics in context. No company operates in a vacuum, and a wise-man once said (probably) that a company is only as successful as its competitors allow it to be. I want to comment in particular on the ROE figures.

You'll notice that Coke has better margins than Pepsi at both the net income level as well as the operating income level, which means Coke is doing a better job of cutting its operating expenses--it's running a more efficient company.

ROE is generally a great indicator of management efficiency as it measures the returns (profit) that the management is able to earn with a certain amount of equity. An ROE of 27.4%, for Coke, for instance, suggests that for every $1 of equity, the management at Coke can eke out 27.4 cents. An ROE of 42.7% means Pepsi is squeezing out 42.7 cents of profit for each $1 of equity--significantly better than Coke! This suggests that Pepsi is a much, much better managed/operated company, even though the margin levels suggest otherwise!

The reason for this contradiction is because ROE gets artificially inflated if a company has a high level of debt relative to its assets. A better indicator of management efficiency and operating ability is the ROC (Return on Capital), which is calculated as Net Income / Total Capital. Total Capital is often calculated as Total Equity + Total Debt. Debt is important to consider in understanding a business because even though eventually the company will have to return the money, in the meantime, they've used it to their advantage.

Now let's take a look at how Coke and Pepsi line up:

ROC
Coke - 19.1%
Pepsi - 24.5%

The returns are much closer, and even though Pepsi still seems to earn more profits for each $1 it uses, it seems that both are quite well-run. Remember, though, that these metrics are only guides. Further digging is going to be required to understand exactly why Coke is better than Pepsi in getting higher margins and why Pepsi is better than Coke in earning higher returns on capital. From the numbers alone, it's hard to tell which is the better company.

Anyway, keep up the great work Aaron, I really look forward to your next posts!

-sys

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Author: awesomestockdude Big red star, 1000 posts Ticker Guide Supernova Odyssey 1
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Subject: Re: Pepsi Write-Up Date: 7/17/2009 10:54 PM
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Sean, once again thanks for pointing that out! With me right now, I'm to the point to where I know what the number is, but I need to start learning what it means really well so I can fully understand it when I apply it to a company. It's the guys like you who help me move beyond that point. Thanks for the help!

Anyway, keep up the great work Aaron, I really look forward to your next posts!

Thanks! And it'll be at least a couple weeks before I do anything big again because I'm out of town these next two weeks.

I have a question for you: Do you work up at Fool HQ? I wondered when you brought up TMFGebinr. He's been a great help to me in many ways these past couple years.

Fool on!

Aaron

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Author: TMFSysun Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2635 of 2675
Subject: Re: Pepsi Write-Up Date: 7/20/2009 9:09 AM
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Yes I do, and TMFGebinr has been a big help to me as well.

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