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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: of 2675  
Subject: Re: Stock of Week: Pepsi Date: 4/3/2008 12:02 PM
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Thanks mrparrotfez! I love your witty approach to looking at PepsiCo., both as an individual company and as a Coke competitor. I personally only drink soda about once every other month because I can't stand the thought of what that kind of junk does to my teeth and my body as a whole. I understand, though, that I am the rare exception, which is a good sign that PEP, KO, and other soft drink companies have succeeded tremendously in their marketing strategies. I would wager that at least one person in each of my college classes always has a soda in hand, regardless of the time of day! Mountain Dew (a Pepsi product!) seems to be the drink of choice, even at 8 or 9 in the morning. Now that's product loyalty!

Getting into financial analysis a little bit, I was very impressed by PEP's ratios, especially profitability ratios such as gross margin, operating margin, and profit margin, which tend to be lower in companies that sell mostly consumer goods. Here are a few examples:

Gross margin (Trailing Twelve Months): 54.30%
Gross margin (5 Year Average): 55.31%
Operating margin (TTM): 18.16%
Operating margin (5 Yr. Average): 18.10%
Net profit margin (TTM): 14.33%
Net profit margin (5 Yr. Average): 14.15%

The management effectiveness ratios such as Return on Investment were also impressive. ROI trailing twelve months for PEP is 22.66%. In other words, for every dollar that has been invested in the company, it earned close to 23 cents in the past year. At that rate, it would only take about 4 years for the company to pay for itself!

Pepsi also seems to be efficient in its receivables collection and use of inventory. A company with a high receivables turnover makes a lot of its sales in cash and is efficient in its collection of money owed by customers. PEP's Receivable Turnover this year was a respectable 9.73.

Inventory turnover is a measure of how quickly a company sells its existing inventories. Inventory is expensive to keep and store, so lower inventories and higher turnover are great as long as potential sales aren't sacrificed because of out-of-stock products. Current inventory turnover for Pepsi is 8.56, indicating that the company made enough sales to clear their inventories more than 8 times in the past year.

I hope this helps! So far Pepsi is looking like a great potential investment!

Jognils
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