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PepsiCo Inc: Cash Flow Valuation Update

|Includes:PepsiCo Inc. (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:

Year FCF $Millions
2002 3190
2003 2983
2004 3667
2005 4116
2006 4016
2007 4504
2008 4553
2009 4668
2010 5195
2011 5605
Click to enlarge

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

Year FCF $Millions
0 5156
1 5465
2 5793
3 6141
4 6509
5 6900
Terminal Value 133902
Click to enlarge

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

Year FCF $Millions
0 5156
1 5465
2 5793
3 6141
4 6509
5 6900
Terminal Value 184595
Click to enlarge
  • 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