PepsiCo is a leading global purveyor of beverages and snacks. The company is known for good management, steady growth, significant international exposure, and the defensive characteristics of the food and beverage industries. While famously locked in a battle with Coca-Cola for the soft-drink market, PepsiCo's snack food business results in a more diversified company. In the North American markets, the Frito-Lay division takes in more revenue and contributes more to operating profit than the Pepsi Bottling division.
When we analyzed PepsiCo after the June quarter, the Overall score was a good (for PepsiCo) 42 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 20 points. Value was weakest at 5 points.
Now, with the available data from the September 2007 quarter, our gauges display the following scores:
- Cash Management: 13 of 25
- Growth: 23 of 25
- Profitability: 13 of 25
- Value: 3 of 25
- Overall: 39 of 100
| ($M) | | Sept 2007 (actual) | Sept 2007 (predicted) | (actual, restated) |
| Revenue | | 10171 | 9740 | 9134 |
| Op expenses | | | | |
| | CGS | (4627) | (4383) | (4108) |
| | SG&A | (3467) | (3506) | (3129) |
| | Amortization | (15) | (40) | (41) |
| Op income | | 2062 | 1811 | 1856 |
| Other income | | | | |
| | Equity income | 218 | 220 | 204 |
| | Interest, etc. | (36) | (20) | (12) |
| Pretax income | | 2244 | 2011 | 2048 |
| Income tax | | (501) | (549) | (554) |
| Net income | | 1743 | 1462 | 1494 |
| | | $1.06/sh | 0.89/sh | 0.89/sh |
| | | | |
Sales, General, and Administrative (SG&A) expenses were 34.1 percent of Revenue, compared to our forecast of 36 percent. PepsiCo did a good job controlling these costs.
The net effect of the higher Revenue and lower expenses was Operating Income 13.9 percent above the forecast value.
Non-operating income was $18 million less than expected. The Income Tax Rate was 22.3 percent, instead of the predicted 27.3 percent. One reason for the lower rate was a $115 benefit related to the resolution of foreign matters. This benefit, which was unpredictable, went right to the bottom line. As a result, Net Income exceeded our prediction by a fabulous 19.2 percent.
Cash Management. This gauge held steady at June's 13 points.
The measures that helped the gauge were:
- LTD/Equity = 18.2%, up from 15.8 percent a year ago, but quite manageable
- Finished Goods/Inventory = 43 percent, down sharply from 48 percent in Sept 2006
- Cash Conversion Cycle Time (CCCT) = -56 days; we're not sure what to make of a negative value for this measure of efficiency, but it has to be good.
- Debt/CFO = 0.4 years, an insignificant level that compares to 0.6 years 3 and 12 months ago.
- Current Ratio =1.2; weaker than we like, but matching the 5-year median
- Inventory/CGS = 46 days, compared to 51 and 43 days 3 and 12 months ago, respectively.
- Days of Sales Outstanding (DSO) = 43 days, greater than the 42-day level one year earlier
- Working Capital/Market Capitalization = 1.5 percent, down from 2.1 percent.
The Inventory decrease from June confirmed our earlier view that the inventory increases in the second quarter merely signified preparations for the summer selling period. Output clearly was not piling up unsold.
Growth. This gauge increased from 20 points in June to 23 points.
The measures that helped the gauge were:
- Revenue/Assets = 116 percent, up from 107 percent in a year; sales efficiency is improving
- Net Income growth = 26 percent (!), up from 25 percent in a year
- CFO growth = 25 percent, up from -5 percent in a year
Net income benefited greatly from a 11 percent drop in the income tax rate from 28 to 17 percent.
The measure that hurt (slightly) the gauge was:
- Revenue growth = 9.2 percent, down from 9.9 percent in a year.
Profitability. This gauge held steady at the 13 points it achieved in June.
The measures that helped the gauge were:
- ROIC = 32 percent, up from 26 percent in a year
- FCF/Equity = 29 percent, up from 22 percent in a year
- Accrual Ratio = +4.4 percent, up a speck from +4.3 percent in a year
- Operating Expenses/Revenue = 81.2 percent, essentially unchanged from 81.3 percent.
The measures that helped the gauge were:
- Enterprise Value/Cash Flow = 17.5, down from 19.7 in September 2006
- P/E = 19.6, down from 22.5
- P/E to S&P 500 average P/E = 21 percent premium, lower than the five-year median premium of 28 percent
- Price/Revenue ratio = 3.2, above the five-year median of 3.0.
The average P/E for the Non-alcoholic Beverages industry is currently a more expensive 23. The average Price/Revenue for the industry is currently 4.0.
Now at a solid (for PepsiCo) 39 out of 100 possible points, the Overall gauge had been trending up until giving back 3 points in the recent quarter. We've noticed an anomaly with our gauge scoresfor PepsiCo. The figures never get very high and, therefore, make the company appear weak. However, the scores over a seven-year period (28 quarters) actually correlate well (corr. coefficient = 0.62) with future stock price gains. On an operational basis, the company clearly had another excellent quarter, somewhat abetted by a one-time tax-related gain. PepsiCo shares are getting more expensive, compared to historic results; however, the shares are not as expensive as its peers in the Non-alcoholic Beverages industry.
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