PepsiCo is known for good management, steady growth, the defensive characteristics of the food and beverage industries, and significant international exposure. While famously locked in a battle with Coca-Cola for market share, PepsiCo's snack food business results in a more diversified company.
We used PepsiCo's recent 10-K submittal for 2006 to update our earlier analysis of this company. With data through 30 December 2006, our gauges now display the following scores:
- Cash Management: 3/25
- Growth: 19/25
- Profitability: 10/25
- Value: 8/25
- Overall: 39/100
Cash Management. This gauge dropped one point from September to December. The Current Ratio held steady at 1.3, which is rather low, but typical for PepsiCo. LTD/Equity edged up to 17 percent, which is still ideal. Inventory levels, as measured by Cost of Goods Sold, dropped from 46.2 days to 44.6 days. In the December 2005 quarter, Inventory/CGS was 42.9 days. The percentage of Inventory that is product ready for sale (i.e., Finished Goods) stayed at 48 percent. Accounts Receivable/Revenues dropped from 44 to 39 days, which pretty much erased a concern we had after September.
Growth. This gauge maintained its excellent 19 point score. Year-over-year Revenue Growth slowed to 8 percent, but Net Income Growth surged to an impressive 38 percent. Net Income benefited significantly from income tax changes. Also impressive was an increase in Revenue/Assets, which jumped to 117 percent from 108 percent. The growth story was marred only by a tepid 4 percent increase in CFO.
Profitability. This gauge moved up one point from September. ROIC increased to 32 percent, significantly above the 22 percent at the end of December 2005. FCF/Equity is now 26 percent, up from recent quarters, but down from the year-earlier 29 percent. Operating Expenses/Revenue continued their 13-quarter run at 81 percent. The Accrual Ratio was +5 percent at the end of December, compared to 0 percent one year earlier. This highlights that Net Income increases are not, unfortunately, being driven by corresponding increases in Cash Flow.
Value. This gauge doubled in the last quarter, from 4 to 8 points. The score benefited from the Net Income increase, which was at least partially due to tax changes. The P/E at the end of the year was 18.6, down substantially from recent quarters and suggesting some room for expansion. The current P/E corresponds to a 15 percent premium relative to the S&P 500, much less than PEP's 30 percent historical premium. The PEG ratio of 0.5 is the kind of figure typical of a cheap stock. The Price/Revenue ratio has been steady at 3.0.
Overall. This summary gauge moved up from 29 points in Sept to 39 in December.
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