Bus411 Pepsi Co Paper PDF

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Running head: PEPSICO

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PepsiCo Amanda Phillips, Rachel Judge, Beth Stepien, & Justin Gibbs Dr. Ballantyne Alvernia University

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PepsiCo, Inc., is one of the leading companies in the beverages and food processing industry. PepsiCo is a billion-dollar company that is expanding their product line. PepsiCo’s greatest competitor is Coca-Cola, they are the leading company in their industry. PepsiCo has a strong product, but no company is perfect. PepsiCo is analyzed through a horizontal and vertical analysis to show where their financials currently stand. There are certain ratios that were analyzed for PepsiCo and shows their standing compared to the industry average. PepsiCo’s stock prices are also analyzed to determine the current price and the estimated price. PepsiCo is a company that is changing to keep a competitive advantage, but this does impact their financials. History PepsiCo, Inc., is an American company that has expanded globally to over 200 countries. Caleb S. Bradham was the creator of Pepsi-Cola, he was a pharmacist located in New Bern, North Carolina. His goals were to strive and overcome Coca-Cola's recent success, by developing his own carbonated sweet colas in 1898. In 1902, Pepsi-Cola took off claiming its own success. It was not until World War I that Pepsi-Cola fell in devastation they reorganized and developed a new strategic plan. Charles G. Guth is the creator of what we know today to be Pepsi-Cola, he established a team of individuals to create a better beverage available in bottles and sold for only five cents. Guth became interested and decided to merge Pepsi-Cola again with loft, a candy manufacturer, still advertised as Pepsi-Cola. In 1950, Pepsi-Cola needed a marketing change. Vice president and chief executive, Alfred N. Steele refined PepsiCo's vision by creating a new advertising campaign and sales promotion, ultimately increasing Pepsi-Cola’s total net earnings. In 1965, Pepsi-Cola merged with Frito-Lay Inc., the founder of Fritos, Doritos, Lay's potato chips and Rold Gold Pretzels.

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This merge evolved into multiple chain restaurants such as, Pizza Hut (1977), Taco Bell (1978), Kentucky Fried Chicken Corp. (KFC in 1986), and Seven Up International. (1986). This fast and unhealthy food made great profits, but was not the direction PepsiCo wanted to go. PepsiCo decided to separate the company, and created Tricon Global Restaurants, Inc. Looking for a healthier vision, PepsiCo acquired Tropicana and Dole juice brands from Seagram Beverages. Merging again made PepsiCo become an even more outstanding company with a number of popular brands including, Pepsi Cola, Frito-Lay snacks products, Lipton Tea, Tropicana Juice, Gatorade sports drink, Quaker Oats Cereal, and Rold Gold Pretzels. PepsiCo’s current focus is expanding the company’s operations even further and developing more healthy alternatives. Horizontal Analysis The horizontal analysis shows the dollar and percentage change between corresponding years. In Exhibit 1 of the appendix, the horizontal analysis of the balance sheet can be viewed. PepsiCo has been changing their market presence by introducing a health food option within their products. This has impacted their overall performance. PepsiCo’s total current assets for the year of 2016 are about $27 billion. The horizontal analysis shows that there is a dollar change between 2016 and 2015 of $4 million. The total assets is what the company owns with economic value. The total assets increased to 17.62% in the year 2016. In the current assets, there were changes in the cash and cash equivalents and the inventory from 2014 to 2016. The horizontal analysis shows that there was a significant increase in the cash and cash equivalents. PepsiCo has increased the amount of cash they have on hand since 2014. The inventory has also decreased from 2014 to 2016. The decrease in inventory allows PepsiCo’s net income to increase, having a vice versa effect. The horizontal analysis also shows how the total current liabilities have increased in 2016. PepsiCo’s liabilities are about $21 billion, which have increased about $3.5

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billion from 2015. PepsiCo’s current short- term debt increased by $2 billion in 2016 from 2015 to be at about $6.9 billion. Most of the liabilities come from loans and expanding into the health food industry. PepsiCo’s long-term debt was around $23 billion in 2014, but it significantly jumped to $30 billion in 2016. The long-term debt consists of these loans and bonds PepsiCo has been borrowing. PepsiCo’s total liabilities are about $63 billion, which has increased by $5 billion at 9.16% from 2015. Retained earnings have been increasing slightly every year to total $52.5 billion in 2016. The horizontal analysis shows an increase of $2 billion, which is about 4.05%. The total stockholder equity has increased from the year 2014 to about $13 billion in 2015 and increased by $600 million in 2016. The 4.5% increase shows that shareholders are increasing the amount they are investing in the company. The total liabilities and shareholders’ equity is at $74 billion. The horizontal analysis shows this as a $4 billion increase from 2015. The horizontal analysis for the balance sheet shows how the assets, liabilities, and stockholders’ equity have decreased and increased within the past few years. The horizontal analysis for the income statement can be seen in Exhibit 2 of the appendix. The income statement shows a horizontal analysis for the total revenue. In 2014, the total revenue was at $66 billion and in 2015 it was at $63 billion. There was a decrease of 0.41% from 2015 to 2016 in total revenue. The cost of revenue, or the cost of goods sold, has been steady for the past two years at about $28 billion dollars and a change of 0.77% between the two years. The cost of goods sold shows the amount spent on manufacturing the products. PepsiCo did have a large decrease in their cost of goods sold from 2014 to 2015, as shown in Exhibit 2. PepsiCo’s gross profit is about $34.5 billion. PepsiCo’s total operating expenses decreased by 4.49%, with total operating expenses at $24 billion in 2016. PepsiCo’s expenses are decreasing due to less non-recurring expenses. The net income from continuing operations is $6.3 billion

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and increased 16.09% from 2015. The reason for the increase of continuing operations is due to the interest expense and the income tax expense. The interest expense has increased because of the amount of loans that PepsiCo has been borrowing, which can be seen in Exhibit 2, within the long-term debt. The horizontal analysis shows that the interest expense increased 38.35% from 2015 to 2016. The income tax expense is at $2 billion in 2016. PepsiCo was taxed this amount back in 2014, but the horizontal analysis shows that in 2015 the tax expense decreased to $1.9 billion. It then increased by 12.00%. In 2016, they increased their net income by 16.09% to earn about $6.3 billion. The horizontal analysis of the income statement shows how much the revenue, expenses, and net income have increased or decreased within 2015 and 2016. Vertical Analysis The vertical analysis for the balance sheet can be seen in Exhibit 1 of the appendix. The vertical analysis shows how much the total assets equal to total liabilities, and shareholders’ equity. The cash and cash equivalent accounts are 12.35% of the total assets amount in 2016. In 2015 the cash and cash equivalents were 13.06% of total assets, which is higher than in 2016. The total current assets in 2016 were 36.54% of the total assets. This amount of the total current assets has increased since 2015, where they were only 33.06% of total assets. PepsiCo’s longterm assets of property, plant, and equipment accounted for 22.38% of the total assets in 2016, and in 2015 these assets accounted for 23.42%. There was a much higher portion of property, plant, and equipment in 2014 than in 2015 and 2016, which have seen decreases in the total amount because PepsiCo’s assets are depreciating in value. The goodwill and intangible assets each account for about 19% of the total assets. Both have decreased since 2015, and can be considered a contributing factor to part of the decrease of the total asset amount. The total current liabilities account for 28.51% of the total liabilities and stockholders’ equity. The total liabilities

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are 85.03% of the total liabilities and stockholders’ equity in 2016 and 82.89% of the total liabilities and stockholders’ equity in 2015. The majority of the total liabilities consist of long term debt, which are 40% of the total liabilities and stockholders’ equity, but this amount has slightly declined. Other liabilities that are withstanding for PepsiCo consist of increasing percentages from 8.45% in 2015 to 9% in 2016. The stockholders’ equity is at 14.97% of the total amount in 2016. Part of the stockholders’ equity is the retained earnings, which have decreased from 2015 to 2016, but they still make up 70.85% of the total liabilities and stockholder's equity. The vertical analysis of the balance sheet shows how much the assets, liabilities, and stockholders’ equity are proportionally related. The vertical analysis of the income statement, found in Exhibit 2 of the appendix, shows the percentage that each aspect of the income statement relates to total revenue. The cost of revenue contributed to 44.92% of the total revenue in 2016, and 45.56% in 2015. PepsiCo has seen a decrease in their overall percentage of cost of revenue into the total revenue. PepsiCo’s gross profit was 55.08% of the total revenue in 2016, which is higher than the 54.44% in 2015. The operating expenses (selling, general and administrative costs) have increased, and in 2016 they were 39.50% of total revenue. All aspects of income from continuing operations saw an increase from 2015 to 2016, in relation to total revenue. Earnings before interest and taxes accounted for 15.76% in 2016, which has increased from 13.34% in 2015. PepsiCo’s income before taxes also increased to 13.62% of the total revenue in 2016, from 11.80% in 2015. Net income increased in 2016 to 10.08% from 8.65% in 2015. Although PepsiCo’s new projects for a healthier company have brought increases to expenses, they have also managed to increase net income, showing the projects have been successful.

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The ratio analysis for PepsiCo and the related industry averages (Coca-Cola’s) can be found on Exhibit 3 of the appendix. These ratios helped in understanding PepsiCo’s current financial position, and how they compare to the rest of the industry. Understanding the liquidity of a company is crucial in helping to determine whether or not that company is able to pay off its short-term debt obligations. At first glance, PepsiCo, Inc. appears to be in a good position to pay off its short-term debt, since the company’s current assets are at least $5 billion more than the current liabilities between 2015 and 2016. The current ratio for PepsiCo, Inc. is 1.2817:1, meaning there is $1.2817 in current assets for each dollar in current liabilities. This ratio verifies that PepsiCo is liquid, and is able to convert enough assets to cash each year to pay off short-term debts. PepsiCo’s current ratio is also higher than the industry average of 0.9049:1, showing they can pay off their short-term debts better than their competitor, Coca Cola. Along with the liquidity of a company, it is also important to look at the efficiency of a company, and how well they manage the expenses incurred throughout their business processes. The better the management of expenses in a company, the more efficiently that company can convert sales into profits. PepsiCo’s gross profit margin is 55.08%, which is slightly lower than the industry average of 60.67%. This ratio shows that about 55.08% of PepsiCo Inc.’s revenues are used for expenses not related to production. The industry average for gross profit margin is higher than PepsiCo’s, meaning the company’s competitors have more revenue amounts available for cost of goods sold. Likewise, PepsiCo’s net profit margin is also lower than the industry average by 5.00%. PepsiCo’s net profit margin is 10.08%, showing around 10.08% of

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the company’s revenues are turned into profits, which is lower than the 15.59% that Coca-Cola is able to turn into profits. After determining the efficiency of a company, looking at the productivity of the company also helps in figuring out the success a company is seeing financially. The productivity of a company shows how well the company generates revenues from its assets, like inventory. The inventory turnover of PepsiCo is 10 times per fiscal period, meaning the company creates and sells inventory about ten times per fiscal period. The industry average for inventory turnover is 6 times, showing PepsiCo, Inc. may be selling inventory faster than its competitor, which is better in helping to acquire more cash to pay off debts and other liabilities. Financial leverage serves the purpose of using debts or cash from investors to gain more assets. When profits are high, financial leverage can be helpful in increasing profits through financing new projects. The debt-equity ratio shows how much debt a company has to finance assets, in relation to its stockholders’ equity, or money received from investors. PepsiCo’s debtequity ratio is 3.29:1, meaning they borrow $3.29 for each $1 given by stockholders. This is higher than the industry average of 2.04:1, which signifies that PepsiCo, Inc. is borrowing more cash than other competitors to finance assets any new projects. PepsiCo has been implementing new projects to become a healthier company, which is why they are borrowing more money compared to their shareholders’ equity than competitors. Since PepsiCo appears to have more interest-bearing debt in comparison to shareholders’ equity than competitors, it is helpful to determine how much income they have available to pay interest and taxes, through the times interest earned or interest coverage ratio. PepsiCo’s times interest earned ratio is 7.37 times, which is lower than the industry average of 12.10 times. PepsiCo does not have as much net income available to cover interest expenses for their debt

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obligations as its competitors. Although the times interest earned ratio is lower than average, PepsiCo has been around long enough to ensure they pay off debts, and this lower amount should not be a concern to creditors. PepsiCo and Coca-Cola are both at the top of their industries, and have matured into thriving companies. Since they are matured, they are able to pay out a lot of dividends to shareholders’, which tend to show shareholders there are expectations of a strong and profitable future. PepsiCo’s dividend payout ratio is 60.33%, meaning they use over 60.33% of their earnings as dividends for their shareholders. This high ratio shows that PepsiCo will maintain the strength they currently have in the industry. This also shows the company needs less than half (40.00%) of their earnings kept as retained earnings for debts and other investments in the business, since they are paying out such a high amount of dividends. The reasoning behind the high dividend payout ratio is that the company is expecting growth as a result of becoming a healthier company. Coca-Cola’s dividend payout is at a very high 145.72%, meaning they are distributing more dividends to their shareholders than they are earning each year. Coca-Cola has been struggling financially, and is trying to maintain their weakening position in the stock market with this higher than normal payout ratio, to ensure they do not drop their stock prices. As a result of Coca-Cola’s high dividend payout, PepsiCo is actually given a stronger position, with a much healthier and proportionate payout ratio than their biggest competitor. PepsiCo, Inc.’s P/E ratio is almost half of Coca-Cola’s, which are 22.75 and 48.45, respectively. This large disparity in ratios arises solely from the artificial P/E ratio Coca-Cola has developed through the manipulation of their financials. Similar to the higher than average dividend payout ratio, Coca-Cola’s higher P/E ratio is the company’s way of trying to maintain their position in the market through the changing of their earnings per share (EPS) during their

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times of financial struggles. PepsiCo’s P/E ratio of 22.75 is at a healthy rate, and allows them to appear stronger in the market than their competitors, without the use of any manipulations. While all these ratios are necessary to aid in the awareness of PepsiCo’s financial standings, one of the most important aspects of a company is the levels of performance they have to help profitability, which can be looked at through the return on assets (ROA) and return on equity (ROE) ratios. PepsiCo’s ROA is 8.54%, and these assets are used to generate earnings. This is higher than Coca-Cola’s return on assets, which is only 6.71%. Since PepsiCo’s ROA is higher than the industry average, assets are used more efficiently to generate a profit than their closest competitors. Return on equity shows the profits a company gains from the cash shareholders’ have invested into the company. PepsiCo’s return on equity is also higher than the industry average of 28.30%, with a ROE of 56.28%. PepsiCo has a higher ROE than the industry average, and are able to gain more profits as a result of their shareholders’ investments than their competitors. The higher return on assets and return on equity for this company are a result of the diversity PepsiCo has in products over Coca-Cola. Through the analysis and comparison of PepsiCo and Coca-Cola’s financials, it is clear PepsiCo is in a better position. PepsiCo has implemented many new projects to benefit their earnings, and has a more diversified product selection than Coca-Cola. These ratios show that PepsiCo has been doing more in recent years to improve their financial position, while CocaCola has been forced to manipulate their numbers as a means of maintaining their stock price and place in the market. Stock Price PepsiCo’s stock price was analyzed for a one-year time frame from November 7, 2017 to November 7, 2018. The current stock price is $110.30 and is estimated to increase by $12.28

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next year, for a new stock price of $122.58. This would result in an increase of 11.13% in the stock price over the one-year span. The stock price will increase in the next year because of a couple different factors, including a predicted sales growth and an increase of estimated EPS. Analysts are estimating that the company is going to have a sales growth from $62.41 billion in 2017 to $65.62 billion, which is a sales increase of 3.50%. The estimated EPS has increased from 1.4 to 1.44, which is an increase of 2.86%. PepsiCo also has a history of estimating their quarterly earnings to be less than their actual earnings. These are all key indicators that the company will see an increase in stock price in 2018. Conclusion PepsiCo’s financials were analyzed to determine how the company stands compared to the industry average, which in this case is their biggest competitor, Coca-Cola. PepsiCo is expanding more products into their industry by creating healthier products. Due to this expansion of health food products, the company’s expenses and debts have increased, but they have also managed to simultaneously increase net income and assets, showing the projects have been a success for the company. After analyzing PepsiCo, it is recommended to buy stock in the company because they should be increasing their profits over the next year, and experience a rise in stock price, as a result. The company also appears to be in a better financial position than Coca-Cola, who has been struggling financially. Coca-Cola has been forced to manipulate their earnings per share and increase their dividend payout to an amount much higher than their ear...