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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • PepsiCo Inc: Cash Flow Valuation Update 0 comments
    Mar 21, 2012 2:25 PM | about stocks: PEP
    Current Price: ~ $65/share
    Projected Yield: ~ 3.16%

    PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages. The company's broad portfolio of brands includes: Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's, Doritos, and Quaker. Pepsi owns most of its bottling infrastructure in North America, but typically utilizes independent bottlers in international markets. Food accounts for approximately 50% of Pepsi's revenue.

    Estimated WACC for the firm today is 5.46% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20023190
    20032983
    20043667
    20054116
    20064016
    20074504
    20084553
    20094668
    20105195
    20115605

    Average Annual Growth FCF: ~ 7%

    CAGR FCF: ~ 6%
    Consensus Forecast Industry 5-Year Growth: ~ 13% per year

    Consensus Forecast Company 5-Year Growth: ~ 6% per year

    Internal Growth Rate: ~ 5%

    Sustainable Growth Rate: ~ 18%

    Scenario 1
    Average FCF (2011, 2010, 2009) is $5156

    • Start at $5156 million FCF
    • Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    05156
    15465
    25793
    36141
    46509
    56900
    Terminal Value133902

    The firm's future cash flows, discounted at a WACC of 5.46%, give a present value for the entire firm (Debt + Equity) of $128814 million. If the firm's fair value of debt is estimated at $29800 million, then the fair value of the firm's equity could be $99014 million. $99014 million / 1570 million outstanding shares is approximately $63 per share and a 20% margin of safety is $50/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 6% per year, then 1.50% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    05156
    15465
    25793
    36141
    46509
    56900
    Terminal Value184595
    • Present Value of the entire firm (Debt + Equity): $167671 million
    • Value of Equity: $137871 million or $88/share
    • 20% margin of safety is $70/share

    Sources

    Morningstar.com

    Yahoo! Finance

    Pepsico.com

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: PEP
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