Sunday, January 11, 2009

Pepsi (PEP) Analysis

Pepsi has the following business segments which generate most of its profits.

Dominant in salted foods market
•36% profit from north america

Pepsi beverages
•28% of profits from north america

Pepsico International
•29% profits

Quaker Foods
•7% profits

In the last ten years, Pepsi has performed impressively. Its EPS has increased from $1.23 to $3.55 (expected ) this year. The cash flow per share has increased from $1.98/share to $4.70/share. ROE has remained stable and EBT margin has also remained stable. Overall, Pepsi has performed well in the past ten years. It has also taken the lead in US with 38% of savory snacks market and 25% of US liquid beverage market.

In FY09, the profit growth has stalled into the third quarter. From Pepsi's 10-Q:

Total operating profit increased 5% and margin decreased 1.4 percentage points. The unfavorable mark-to-market impact of our commodity hedges reduced operating profit growth by 2 percentage points and reduced margin by 0.4 percentage points. Leverage from the revenue growth was offset by the impact of higher commodity costs. The impact of foreign currency contributed 2 percentage points to operating profit growth and the impact of acquisitions contributed 1 percentage point.
Other corporate unallocated expenses decreased 2%. Lower deferred compensation costs and the favorable impact of certain other employee-related items were partially offset by higher costs associated with our ongoing business transformation initiative, increased research and development costs and foreign transaction losses. The decrease in deferred compensation costs is offset (as a reduction to interest income) by losses on investments used to economically hedge these costs.

Also, the profit growth for the first 36 weeks of the year increased 4% compared to the year before. The fourth quarter is expected to be tough with rough economic conditions worsening the down draft.

Pepsi is cheap now with a price to cash flow ration of 13 with stable cash flows. The cash flow growth may be limited for the next couple of years but may increase there after. Most of the growth will probably will come from outside the US.

I expect Pepsi to report lesser earnings after Q4 as the north america segment should see some declines given the hard Q4. Investors may be able to get Pepsi stock at better prices once the Q4 results are out.

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