Pepsi Company, Essay Example

Executive Summary

Pepsi Company is a globally recognized multinational soft drink company with a presence across the globe. Incorporated in Delaware in 1919 an later reincorporated in North Carolina in 1986, its presence spans across the globe and it has ventured into soft drinks, mineral water and foods. The company is has had to contend with the stiff competition from the tough rival in the form of coca cola. The Chief executive officer Indra K Nooyi is also the chairman and he has earned more than 9 million Dollars per annum in the last the years. The CEO is backed by a team of twelve directors several of who also hold high profile positions in various other institutions of reputable financial worth.

In the year 2009 the employees met in a general meeting and voted on four items among which was a review of the companies progress. The company has many shareholders among who are corporate bodies as well as private individuals among who is the CEO. The company has been involved in several corporate social responsibility events including sponsoring the Chinese Red Cross society. These activities have been used in giving back to the society as well as promoting the brand.

The company’s ratios are quite impressive with a good return on Equity specifically has been quite impressive in the last three years. The year 2008 return on equity for example was 34% as compared to that of Coca Cola at 29% implying ability to pay share holders high dividends for their investment into the company. The return on assets as is also quite impressive with the highest being 2007 at 16.88%. The company has also an enviable average collection period more so their current ration point towards a high degree of credit worthiness. The company has a high level of stability demonstrated by its high liquidity ratio of 1.23 as opposed to that of Coke at 0.95. This implies that their ability to service their debts is higher than that of their main competitor- Coke

The competitor’s ratios however do not paint such a good picture meaning the company is well placed to take over market leadership. The company is faced by the risk of the volatile market outlook as well as their competition trying to win over its chunk of the market shares. The major challenge that the company faces as far as business is concerned is that since they deal with consumer products, they need to ride on the customer demand to make profits. They must therefore ensure that they have products that are attractive to the consumer. Any sudden changes in the market would therefore mean a fall in demand and this could have serious impact on the market. To ensure that they remain a force in the market, Pepsi has dedicated sufficient resources to marketing and advertisement campaigns to ensure that they attract a sufficient number of customers and also ensure that they keep relevant in the market. However such investments call for a cautious approach since the changes in the market can not be accurately forecasted. The market Beta of the Pepsi share is at a quite stable level of less than one which indicates that it is a quite safe investment for the external investors as well as a clear sign of market stability.

Considering that no company is perfect, Pepsi also needs to diversify its product range to reach a more diverse market and make inroads in an effort to ensure that they can ward off any stiff challenges from the competition since their varied products will mean increased source of revenue. Despite all this the company is low risk and its equity is quite an attractive buy for most market speculators.

Describe the primary business of the company, including its products, customers and competitors.

The PepsiCo, Inc. was incorporated in Delaware in 1919 and was reincorporated in North Carolina in 1986. Pepsi Company is a global beverage, snack and food company. They manufacture and/or use contract manufacturers, market and sell a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods in roughly 200 countries.

Pepsi Company has organized the company into three business units, they are as follows:

Pepsi Company is well known for their other brands as well which includes and limited to offering to the world below is table lists products;

They hold long-term licenses to use valuable trademarks in connection with other products, including Lipton, Starbucks, Dole and Ocean Spray. In order to hold these licenses Pepsi Company must comply with the trademarks rules and regulations.

Their customers include authorized bottlers and independent distributors, including food service distributors and retailers.  Pepsi Company competitively in extremely competitive markets is up against global, regional, local and private label manufacturers based on price, quality, product variety and distribution. One of their major beverage competitors is the Coca-Cola Company.

Give the name and background of the CEO. What was the CEO’s compensation over the last three years and in what form was it (salary, stock, stock options, etc.)?

Indra K. Nooyi, 53 is the CEO of Pepsi Company, holds the positions as Chief executive Officer and Chairman of PepsiCo’s Board of Directors. Below is a table of Indra Nooyi’s Compensation package per yahoo.finace.com 2009 Annual Proxy report of her last three years.

 List the names and affiliations of the Board of Directors and discuss any individuals who stand out.

Below are listing of Pepsi Company Board of Directors and their membership.

Shona L. Brown, Senior Vice President, Business Operations of Google

Ian M. Cook, Chief Executive Officer and was elected to the board of Colgate-Palmolive Company

Dina Dublon, Director of Microsoft Corp. and Accenture, Director of the Global Fund for Women, co-chairs the Women are Refugee Commission, and a trustee of Carnegie Mellon University

Victor J Dzau, MD, Chancellor for Health Affairs at Duke University and President and CEO of the Duke University Health System

Ray L. Hunt, Chairman and Chief Executive Officer of Hunt Oil Company and Chairman, Chief Executive Officer and President, Hunt Consolidated, Inc.

Alberto Ibarguen, President and Chief Executive Officer of the John S. and James L. Knight Foundation

Indra K. Nooyi, PepsiCo’s Chief Executive Officer

Sharon Percy Rockfeller, President and Chief Executive Officer of WETA public stations

James J. Schiro, Chief Executive Officer of  Zurich Financial Services.

Lloyd G. Trotter, Managing Partner at GenNx360 Capital Partners

Daniel Vasella, Chairman of the Board and Chief Executive Officer

Michael D. White, Vice Chairman of PepsiCo

The one individual that stand out are Lloyd G. Trotter, he is the only African American that served on the Pepsi Company Board of Directors

Describe the items that were voted upon by shareholders at the last annual meeting.

Pepsi Company Annual Meeting of Shareholders they were asked to vote on these items as follows (Nooyi, 2009):

1. To elect the Board of Directors, to ratify the appointment of the independent registered public accountants, to approve the PepsiCo, Inc.
2. Executive Incentive Compensation Plan
3. Four shareholder proposals.
4. Review the progress of the Company during the past year and answer your questions.

Analyze the makeup of the company’s shareholders (pension funds, individuals, institutions, mutual funds, etc.). http://finance.yahoo.com/q/mh?s=PEP

The makeup of shareholders is broken down per yahoo. Finance; gives a detail breakdown of the shareholders. They are major holders, top institutions and top mutual funds holders.

Breakdown explains how the shares are divided up among the shareholders such as 0% is held by all insiders and the 5% owners, 68% is held by institutional and mutual fund. As well as float institutional and mutual funds hold 68%. They continue to show an additional breakdown on how shares is divided among the major direct holders, which are the CEO Indra Nooyi has 393, 545, Michael White 263,664, John Compton 204,364 and Albert Carey 107,900, Hugh Johnston 90, 434. The report goes on to further show the top institutions and top mutual funds holders.

How does this firm view its social obligations and manage its image in society?

Pepsi Company has pride and committed themselves of ways of giving back to society in varies the way such as through their humanitarian aid foundation has donated millions of funds to aid victims of Pakistan’s earthquake, central America’s ad Mexico Hurricane victims. Furthermore, what I have found amazing how Pepsi is continuing to give back to community such as providing assisting to the Red Cross Society of China. Pepsi Company goes along with the corporate contributions’ ways of giving back to the community in through providing programs for educations, health and wellness making donations to charitable organizations.

Ratio Analysis

I will be discussing six financial ratios for Pepsi Company and The Coca Cola Company are provided below. In evaluating years 2006 through 2008 for two companies my finding are as following. This information was found through yahoo.com/finance, Pepsi Company and The Coca Coke Company Income Statement and Balance Sheet and investopedia.com

• Return on Assets (ROA)

According to these numbers above Pepsi’s ROAs for 2008, 2007 and 2006 were 15.34%, 16.88% and 16.83% this explains that the positive returns on assets for those periods that Pepsi had generated earnings from the invested capital (assets). Pepsi is successfully converting assets at it disposal into net income.

Coke’s ROAs for 2008, 2007 and 2006 were 15.32%, 15.77% and 13.40% details to these numbers say Coke also has positive returns on assets for those years they are able to generate net income that is invested in their capital, which is consisting of both debt and equity.

For both companies after looking at the ROA they demonstrate can perform similarly in generating net income from invested capital.

• Return on Equity (ROE)

Pepsi’s ROEs for 2008, 2007 and 2006 were 34.37%, 37.82% and 37.71% explain their positive returns indicate that Pepsi generated positive net income from funds that were invested by their shareholders. Coke’s ROEs for 2008, 2007 and 2006 were 29.46%, 30.34% and 25.77% also show they had generated positive net income from shareholders’ funds’ investment.

The different between Pepsi and Coke the number shows that Pepsi could pay more earnings from the shareholders’ investment.

• Receivables Turnover

Pepsi’s receivable turnover ratios for 2008, 2007 and 2006 were as following 10.14, 9.25 and 8.24. These high ratios say Pepsi implies that their extension of credit and collections of the account receivable is very efficient.  In other words, if Pepsi shows a low ratio it will point toward perhaps Pepsi should review their current procedure on it’s credit policies in order to ensure the timely collection of extended credit that is not earning interest for the company. However, Coke’s receivable turnover ratios for 2008, 2007 and 2006 were 10.52, 9.5 and 7.93 states Coke has high ratios,’ which imply their credit policies are working efficiently.

• Average Collection Period

Pepsi’s having an average collection period for 2008, 2007 and 2006 were 36 days, such as 39 days and 44 days, tell you Pepsi could convert their receivables into cash at a short – term period if needed, in other words, Pepsi has access to cash for daily operation and can meet short-term obligations if necessary.

Coke’s having average collection period for 2008, 2007 and 2006 were 34 days, 38 days and 46 days. Coke has the same experience as Pepsi does that they are effective in turning their receivables into cash on a short-term period of time because their collections had not exceeded sixty days. Based on the information Pepsi and Coke performed in the same way in as far as collection of their receivables is concerned.

• Current Ratio

Current Ratio means: A liquidity ratio that measures a company’s ability to pay short-term obligations (www.investopedia.com/terms/c/currentratio.asp)

In essence, when a current ratio is greater than 1 this states that the company does currently have the ability to pay its expected financial obligations that will mature over the next year operation cycle.

Pepsi Company

Based on the ratios number they indicate that Pepsi’s liquidity (current ratio) for 2008, 2007 and 2006 was 1.23, 1.31 and 1.33. In, 2008 Pepsi current ratio of 1.23 stated that every dollar of current liabilities, Pepsi has only. $1.23 of current assets. This illustrates the 2008 current ratio is consistent with the ratios for 2007 and 2006.

Since for 2008 there was only $1.23 of current assets foe every dollar of current liabilities, Pepsi may have trouble in the following year, if unexpected needs for cash occur or if some current assets such as inventory become illiquid due to unexpected emergency. For instance Pepsi may have to look into additional financing in 2009, to meet its maturing obligations since its current ratio for 2008 are so close to 1.

The Coca Cola Company

Based on the ratios’ number they indicate that Coke’s liquidity (current ratio) for 2008, 2007 and 2006 was 0.94, 0.92 and 0.95. Coke’s ratio states they were less than 1, shows that the company does not currently have the ability to pay it expected financial obligations that will become due during 2009.

Coke’s current ratio of 0.94 shows that for every dollar of their current liabilities, Coke has only $0.92 of current assets. This show Coke will have difficulty paying its short-term maturing obligations and unexpected needs for cash, which explain Coke may needs some additional financing in 2009.

Pepsi vs. Coke

After carefully examining current ratios for Pepsi and Coke, I think Pepsi Company is in a better position to meet their short-term maturing obligations during 2009 than Coke. As stated in Coke portion they probable will need to obtain additional financing or perhaps look into selling some assets to meet its short-term obligations.

• Profit Margin Ratio (PMR)

Pepsi’s PMR ratios for 2008, 2007 and 2006 were as following 11.89%, 14.33% and 16.06%. For 2008, Pepsi for each dollar of sales was approximately $0.12, and 2007 was $0.14 and 2006 $0.16 each dollars of sales.

Pepsi’s receivable turnover ratios for 2008, 2007 and 2006 were as following 10.14, 9.25 and 8.24. These high ratios say Pepsi implies that their

Risk and Return Analysis

Describe the risk profile of the business.

PepsiCo’s (“Pepsi”) business involves inherent risks and uncertainties that could cause actual results to differ materially from those predicted. Following is a discussion of Pepsi’s risks partially excerpted from its 10K filed with the SEC on 2/19/2009.

Pepsi is a consumer products company operating in highly competitive markets and relies on continued demand for its products. To generate revenues and profits, Pepsi must sell products that appeal to its customers and to consumers. Any major changes in consumer preferences or any failure on its part to anticipate or react to such changes could result in reduced demand for its products and slow destruction of its competitive and financial position. Pepsi’s success depends on its ability to respond to consumer trends, including concerns of consumers regarding obesity, product quality and ingredients. In addition, changes in product category consumption or consumer demographics could result in reduced demand for its products. Consumer preferences could take a turn due to a combination of factors, these changes can include the aging of the general population, social trends, and changes in the way consumers commute, as well as how often consumers take vacations or leisure activity patterns, weather. It could be affected by negative publicity.

The economic, conditions or taxes specifically targeting the consumption of its products. Any of these changes may reduce the consumer’s’ willingness to purchase its products. Changes in the legal and regulatory environment could limit its business activities, increase its operating costs, and reduce demand for its products. Demand for Pepsi’s products may be badly affected by changes in consumer preferences and tastes, and perhaps Pepsi might not market their products effectively.

Pepsi’s continued success is also dependent maintaining a strong line of new products, and the effectiveness of its advertising campaigns and marketing programs. Although Pepsi devotes significant resources to meet these goals, they also want to keep in mind; there is no assurance as to its continued ability either to develop and embark on successful new products or departure of existing products, and be able to effectively execute advertising campaigns and marketing plans.

However, with the ongoing success of new products and advertising campaigns are basically insecure, especially as to how they appeal to consumers. If Pepsi’s failed to successfully promote new products could decrease demand for its existing products by negatively affecting consumer perception of existing brands, as well as the result in inventory write-offs and other costs.

Where do the company risks come from (market, firm, industry, currency, etc.)?

Pepsi uses several of raw materials and other supplies in their supplies, these supplies include aspartame, cocoa, corn, corn sweeteners, flavorings, flour, grapefruits and other fruits, juice and juice concentrate, oats, oranges, potatoes, rice, seasonings, sucrose, sugar, vegetable and essential oils, and wheat. Pepsi’s key packaging materials include PET resin used for plastic bottles, film packaging used for snack foods, aluminum used for cans, glass bottles and cardboard. Fuel and natural gas are also important commodities due to their use in the plants and in the trucks delivering products to their distributors.

The global economic crisis has resulted in unfavorable economic conditions in many of the countries in which Pepsi operates. Pepsi’s business or financial results may be highly impacted by how critical economic conditions. With the impact of how much interest rates or tax rates increase. As well as how unforeseeable commodity markets; contraction in the availability of credit in the marketplace probable impairing its ability to access the capital markets on terms commercially acceptable and the effects of the government plan to manage economic conditions; reduced demand for its products resulting from a slow-down in the general global economy.

Pepsi also; has assets and incurs liabilities, earns revenues, for instance, pays expenses in a variety of currencies other than the U.S. dollar. The financial statements of its foreign subsidiaries are translated into U.S. dollars. As a consequence, Pepsi’s profitability may be are impacted by an adverse change in foreign currency exchange rates. Pepsi also will want to maintain their key employees as well as their highly skilled and diverse staff. This allows Pepsi to continue to require it to hire and retain and develop good leadership within skilled diverse staffs. This will allow Pepsi to develop their skills and competencies.

Pepsi’s are prepared for any unplanned turnover, because they have a backfill of current leadership positions that could handle unexpected emergencies to be able to hire and train them and retain diverse work staffs, to continue to have the competitive advantage. Lastly; Pepsi will have been operating results that would be critically affected due to increased cost due to the increase their competition for employees because of their high employee turnover and due to increased employees benefit costs.

Pepsi Company Beta meaning to investors’

The concept of beta is a practical measure of individual stock risk in relation to the stock market risk as a whole.  It’s sometimes referred to as financial elasticity.  It is a tool common among stock market analysts that they use to establish market volatility.  The beta value is calculated using price movements of the stock that is under analysis and comparing those movements to an overall market indicator – as such the market index – over a given period of time. If the stock’s price experiences movements that are greater – more volatile – than the stock market, then the beta value will be greater than 1.  If a stock’s price movements, or swings, are less than those of the market then the beta value will be less than 1. The beta of Pepsi’s common shares is 0.51. In the chart above explains Pepsi’s having a beta of 0.51 points, the results imply that Pepsis common market share is stable and is not risky. It’s not subject to sudden changes.

Coca cola has a beta of 0.55 implying that its also a stable share hence a safe investment for any shareholders. However its beta is slightly higher that the Pepsi one implying that Pepsi share is slightly more stable.

What has been the performance of the company stock over the past two years compared with a key competitor and with the S&P 500?

Pepsi Market share price has increased albeit just slightly in the recent past while that of Coca-Cola has risen rapidly over the same period of time. This points towards the higher volatility of the coca cola share due to the fact that its beta is higher that that of Pepsi .

Capital Structure and Cost of Capital

Describe the various types of financing used by the company.

In the year 2008 pepsi spent a total of $3.0 billion for financing activities, mainly reflecting the return of operating cash flow to their shareholders through common share as a resolve of repurchasing $4.7 billion and dividend payments of $2.5 billion. To some extent using the cash proceeds to offset issuances of long-term debt, net of payments, of $3.1 billion, stock option proceeds of $620 million and net proceeds from short-term borrowings of $445 million.

They annually review of the capital structure with the Board, includes dividend policy and share repurchase activity.  The results of the 2008 second quarter meeting the Board of Director approved 13% dividend increase of $0.20 per share.

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6428069-75349-369919&type=sect&dcn=0001193125-09-033126  page 66, retrieved oct 20,09

Compare the debt ratio of the company against the competitor you analyzed in Modules 2 & 3.

Describe the risks and advantages of the company’s debt level and indicate whether you believe it could/should be higher or lower.

Pepsi Company:

PepsiCo’s Debt to Total Asset Ratio of 22.86% shows that its creditors required. $0.2286 of every dollar invested in assets. The ratio displays that PepsiCo has the long-term capability to pay interest as it comes due and to repay the principal balance of debt due at its maturity.

Coca Cola Company:

Coke’s Debt to Total Asset Ratio of 22.98% shows that its creditors provided. $0.2298 of every dollar invested in assets. The ratio displays that Coke has the long-term ability to pay interest as it comes due and to repay the principal balance of debt due at its maturity.

Pepsi Company vs. Coca Cola

Both companies have similar prospects of long-term survival.  As well as both companies have similar degrees of riskiness indicated by related Debt to Total Asset Ratio.

Financial Leverage/ROE – Both companies have a considerable cushion to obtain more debt financing to improve ROE. This approach is good when sales are expanding but can set declining pressure on ROE during times of slow or declining sales because the higher fixed interest payments will be incurred, regardless, of economic activity.

Determine the approximate yield to maturity of company debt and the after-tax cost of debt

Based on finance.yahoo.com Pepsi bond rating is Aa2. Based on Fitch rating according to AA between five to seven years their yield to maturity of are 4.52% Pepsi after tax cost of debt calculation by taking income tax expense divided by income before taxes

1,879.000,0000/7021000000=26.76 or 27%

Determine the approximate cost (required rate of return) of equity.

According to finance.yahoo.com Pepsi Beta is .57. Using the formula Re = Rf + B(Rm – Rf) risk free is 2% and return of the market is 11% Based on the calculating the required rate of equity is

Re= 2% + .57(11% -2%)

Re= 2% + 5.2 = 5.22%

Determine the market values of the company debt and equity

Pepsi Company:

Market value: stock price is $60.59 and shares outstanding is 1.56 billions

$60.59 (x) 1.56 billion = $94,520,400,000

Debt: Book value 9.04 (x) shares outstanding 1.56 billions = $14,102,400,000

Total asset of the company is $94,520,400,000 + $14,102,400,000 =  $108,622, 800,000

The proportion of company debt: $14,102,400,000 / $108,622, 800,000 = 12.98%

The proportion of company equity: $94,520,400,000 /$108,622, 800,000 = 87.02%

Calculate the weighted average cost of capital.

To calculate the Pepsi’s WACC calculation according to the Pepsi’s required rate of

return is 5.22%, equity 87% and debt13%.

Explain the significance of the company’s WACC to its management. The cost of debt and the required rate of return are measures of the riskiness of the cash flows to the bondholders and shareholders, respectively. The cost of capital is a measure of the riskiness of the cash flows generated by the company’s assets (in other words the risks of the business the company is in). Relate these numbers to your discussion of risk from Module 3.

WACC (extracted from Investopedia.com)- Generally speaking, a company’s assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, this displays a picture how much interest the company has to pay for every dollar it finances .A firm’s WACC is the overall required return on the firm as a whole and, as such, time after time are used for the sole purpose for a company director to determine the economic feasibility of growth opportunities and mergers. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula.

Conclusion

Pepsi Company has a bright future since they are backed by stable history and a strong financial background. The prospects for the company are good especially for their soft drink products and more with the oncoming international events such as the FIFA world cup. These events present opportunities for brand marketing and eventually strengthening sales.

The firm is doing well and the return on equity is quite impressive. To this end the firm is therefore not faced by any share holder activism and they are therefore not facing a restructuring or a takeover. They are also not faced with financial distress considering that the have a good current ratio which implies that they are not adversely affected by the credit crunch. They are therefore in a quite stable financial form.

The company needs to make no specific acquisitions to achieve strength however they need to diversify their product range. First and most convenient is investing in energy drinks. Since these are quite a rave with the current market, they need to invest in this quite well. The second investment that they need to undertake is fresh fruit juices. This will be quite a relevant investment since they already have a well established market as well as a good distribution network. The only other change that would be viable is the restructuring he only other compensation packages. This is by reducing the CEO pay and ensuring that the CEO earns his pay through bonuses for profits earned. By doing so they are able to ensure that the management does the best they can to earn high profits and hence get good bonuses for their efforts.

Reference

www.yahoo.finance.com

http://yahoo.brand.edgar-online.com/DisplayFiling.aspx?dcn=0001193125-09-033126

www.Pepsico.com

http://www.pepsico.com/Purpose/Corporate-Contributions/Humanitarian-Aid.html

http://finance.yahoo.com/q/mh?s=PEP

www.investopedia.com

www.valueline.com/freedemo/productsamples.html

www.finance.yahoo.com