PepsiCo: Much more than a soft drink company

PepsiCo owns some of the most known brands in the beverage and snack industry. Often well-known brands mean good investments but is it also the case with PepsiCo? In this analysis, I will have a look into PepsiCo as an investment.

This is not a financial advice. I am not a financial advisor and I only do these post to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

I have wanted to make an analysis of PepsiCo since I made my analysis of Coca-Cola that you can find here. These companies have pretty much created a duopoly in the U.S. refreshment beverage market, as Coca-Cola has a 22 % of the market share, while PepsiCo has 20 % (Coca-Cola has a share advantage in most markets outside of the U.S.). However, while Coca-Cola thrives to be a "total beverage" company, PepsiCo has chosen another strategy. For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in PepsiCo (or Coca-Cola for that matter).

While the Pepsi-Cola has been around since 1893, PepsiCo was formed in in 1965 because of the merger of the Pepsi-Cola company and Frito-Lay. I believe that most people know PepsiCo. The company is probably most known for their beverages such as Pepsi-Cola, 7up and Mountain Dew. However, they have many other famous brands in their portfolio, both within the beverage industry such as Rockstar Energy, Gatorade and SodaStream but they also own snack brands such as Lay's, Cheetos, and Doritos while they also own Quaker foods. In the end of 2022, convenient foods contributed with 58 % of the revenue, while beverages contributed with 42 % of the revenue. PepsiCo generates 61 % of their revenue in North America and 39 % of revenue internationally, where Europe is the largest market contributing with 15 % of revenue. PepsiCo's wide range of brands means that their products are enjoyed by consumers one billion times a day in more than 200 countries around the world. Needless to say, PepsiCo has a huge brand moat.

Their CEO is Ramon Laguarta. He has been the CEO since 2018. He is the sixth CEO in the company's history. He has bachelor's and master's degrees in business administration from ESADE Business School in Barcelona, while he also has a master's degree in international management from Thunderbird School of Global Management at Arizona State University. He joined PepsiCo in 1996 and has held various positions such as CEO of the Europe and Sub-Saharan Africa sector, President for the Eastern Europe region, and Vice President for PepsiCo Europe, until he in 2017 became the global President of the company. He is described as one of the hardest-working and most humble global leaders. He is also known for being a leader that knows the business inside and out. His vision for PepsiCo is to be the global leader in convenient foods and beverages, to achieve this, he set the aspirations to be faster, stronger, and better. Faster by winning in the marketplace by being more consumer-centric and accelerating investment for topline growth. Stronger by transforming their capabilities, cost, and culture by operating as one PepsiCo, leveraging technology, winning locally and globally enabled. Better by integrating purpose into their business strategy and doing even more for the planet and people. I should also mention that he implemented a mission that is "create more smiles with every sip and every bite", and for shareholders that means "delivering sustainable top-tier total shareholder return and embracing best-in-class corporate governance". I obviously like that part. Finally, I should mention that Ramon Laguarta according to Comparably has a CEO rating of 72/100, which place him in top 25 % of similar size companies. I like the mission and I like the vision, and I think Ramon Laguarta has the experience and credentials to deliver. All in all, I'm very confident in the management at PepsiCo.

I believe that PepsiCo has a brand moat. We like the management as well. Now let us investigate the numbers to see if PepsiCo lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. The numbers are pretty much the way we like them. Only once in the last 10 years did PepsiCo does not manage to top a 10 % ROIC. However, as they still managed to deliver a 9,7 % ROIC, it is hardly something to be worried about. It is interesting to see that while the pandemic years of 2020 and 2021 delivered lower ROIC than the year before and after, PepsiCo still managed to deliver a high ROIC in those years. It tells you something about the quality of the company.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The numbers are a bit mixed throughout the years, which could be explained by the many acquisitions and sells they have made over the years (such as acquiring Rockstar energy in 2020 and selling Tropicana in 2021). Thus, I don't give too much importance to these numbers.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Free cash flow, levered free cash flow margin, and free cash flow yield have all decreased since 2017. I would like to see the trend reversing moving forward.

Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation in PepsiCo, I can see that PepsiCo has 4 years earnings in debt, which is more than you would like to see. I'm not staying away from PepsiCo due to this, as it is a company that has existed for a long time, and I'm quite confident that they won't go bankrupt anytime soon. I still believe that the debt should be monitored though.

Like with all other investments, investing in PepsiCo comes with some risks. I believe that reading through the annual report is a good way to get an overview of the risks of the company. One thing that PepsiCo mentions is competition. In their annual report they write that the beverage and convenient food industries are highly competitive, as they compete against products of international beverage and convenient food companies that operate in multiple markets as well as regional, local, and private label manufacturers. Especially private label manufacturers could be something that will cause problems for PepsiCo in the short-term if we see a recession. Another risk that PepsiCo mentions is reduction in future demand for their products. In their annual report they write that consumer preferences continuously evolve due to a variety of factors. One such factor that could be a threat to PepsiCo is that consumers are getting more health conscious, as obesity and other health-related concerns are increasing. And while PepsiCo may be able to adjust their beverage division to focus on products without sugar, it is more difficult to make a healthier alternative to most of their convenient food division. Another risk I believe it worth mentioning is the decreasing margins. PepsiCo delivered their lowest gross profit margin in 9 years in 2022, while their operating margin, EBITDA margin, and EBIT margin were the lowest in 10 years. Obviously, 2022 was a challenging year, but it is something worth monitoring. Especially, if we see a shift in consumer preferences towards a healthier lifestyle, as their Frito-Lay business is their highest margin business.

However, it isn't all bad and there are plenty of reasons to invest in PepsiCo as well. One is that PepsiCo still have plenty of room to grow. In their investor presentation at the Consumer Analyst Group of New York conference, PepsiCo showed that the Global convenient foods market has an addressable market of $599 billion, and that it is expected to grow by a 5 % CAGR in the next five years. PepsiCo currently has a 8 % market share in the convenient foods market, so there are plenty of run way moving forward. The same goes for the global beverages market that has an addressable market of $626 billion and is expected to grow by a 5 % CAGR over the next five years as well. PepsiCo's current market share in the global beverages market is 9 %. PepsiCo could work as a recession and inflation hedge. PepsiCo's strong brand recognition means that they can pass on extra inflationary costs to their consumers, which is exactly what PepsiCo did in 2022, which result in a record revenue. PepsiCo could also fare better than Coca-Cola if we see a longer recession, because Coca-Cola has a higher market share in away from home channels like restaurants, theme parks, and cinemas, while consumers mainly drinks PepsiCo at home. The short recession we saw in 2020 that Coca-Cola sales decreased by 11,4 %, while PepsiCo's sales increased by 4,8 %. Of course it was during a pandemic as well, but I believe that PepsiCo could do well during a shorter recession. In the latest earnings call, management mentioned that they wouldn't be shocked to see a mild recession in the second half of 2023, so they are certainly prepared. A growing dividend. PepsiCo just reached the status of Dividend King, as they have raised their dividend in 50 consecutive years. Since 2010 to the end of 2023, PepsiCo have raised their dividend by a 7,7 % CAGR. In the latest earnings call, management mentioned that one of their biggest priorities is growing their dividend moving forward, which should be a good sign if you are a dividend investor.

All right, we have gone through the numbers, potential and risk regarding PepsiCo, and now it is time for us to calculate a price for PepsiCo. To calculate a price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 6,42 (which is the one from 2022). I chose an Estimated future EPS growth rate of 8 (management expects to grow EPS by 8 % a year), Estimated future PE 16 (which is the double of growth rate, as the historical highest PE is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $54,82, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy PepsiCo at price of $27,41 (or lower obviously), if we use the Margin of Safety price.

Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 10.811. The Capital Expenditures was 5.207. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 3.645 in our further calculations. The Tax Provision was 1.727. We have 1.377 outstanding shares. Hence, the calculation will be like this: (10.811 - 3.645 + 1.727) / 1.377 x 10 = $64,58 in TEN CAP price.

The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 4,02 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $46,18.

I believe that PepsiCo is a great company with a huge brand moat. I like management as well and feel confident that they will be able to grow PepsiCo moving forward. I'm slightly concerned on how margins have decreased, and while management believes that operating margin will increase by 20-30 bps annually moving forward, it is something I would like to see. I'm not too concerned about consumer preferences changing, as PepsiCo has operated in more than a century and seen plenty of consumer preferences changes along the way. The total addressable market for PepsiCo is huge, and they have plenty of runway internationally, and it will be interesting to see if they manage to grow their market shares internationally. I see PepsiCo as a great company, and I would love to own the company in my portfolio at the right price. PepsiCo will probably never trade at a 50 % discount to intrinsic value but as Warren Buffett said, it is better to buy a wonderful company at a fair price than a fair company at a wonderful price. For me to open a position, PepsiCo will need to trade below intrinsic value in the calculation with the highest price. Thus, it would be the TEN CAP price x 2 = $129,16.

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