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Pepsico: cash flow valuation

|Includes: PepsiCo, Inc. (PEP)

Current Price: ~ $63/share
Projected Yield: ~ 3%



I believe Pepsico Inc. ($PEP) is fairly valued at $51/share on a cash flow valuation basis.    


PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages and foods. The firm's organizational structure comprises three primary business units: PepsiCo Americas foods, PepsiCo Americas beverages, and PepsiCo international. The company's broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Lay's, Doritos, and Quaker.


I estimated the firm's WACC today at 7.59% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2001
2877
2002
3190
2003
2983
2004
3667
2005
4116
2006
4016
2007
4504
2008
4553
2009
4668
2010
5195
Average Annual Growth FCF: approx. 7%
CAGR FCF: approx. 7%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
 
Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year
FCF $Millions
0
5195
1
5663
2
6172
3
6728
4
7333
5
7993
Terminal Value
114772
 
 
The firm's future cash flows, discounted at a WACC of 7.59%, give a present value for the entire firm (Debt + Equity) of $106,621 million. If the firm's fair value of debt is estimated at $25,900 million, then the fair value of the firm's equity could be $80,721 million.  $80,721 million / 1590 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.


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