Projected Yield: ~ 3%
I believe Pepsico Inc. ($PEP) is fairly valued at $51/share on a cash flow valuation basis.
PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages and foods. The firm's organizational structure comprises three primary business units: PepsiCo Americas foods, PepsiCo Americas beverages, and PepsiCo international. The company's broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Lay's, Doritos, and Quaker.
I estimated the firm's WACC today at 7.59% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year | FCF $Millions |
2001 | 2877 |
2002 | 3190 |
2003 | 2983 |
2004 | 3667 |
2005 | 4116 |
2006 | 4016 |
2007 | 4504 |
2008 | 4553 |
2009 | 4668 |
2010 | 5195 |
Average Annual Growth FCF: approx. 7%
CAGR FCF: approx. 7%
Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 9% per year
Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
Discounted Cash Flow Valuation
Year | FCF $Millions |
0 | 5195 |
1 | 5663 |
2 | 6172 |
3 | 6728 |
4 | 7333 |
5 | 7993 |
Terminal Value | 114772 |
The firm's future cash flows, discounted at a WACC of 7.59%, give a present value for the entire firm (Debt + Equity) of $106,621 million. If the firm's fair value of debt is estimated at $25,900 million, then the fair value of the firm's equity could be $80,721 million. $80,721 million / 1590 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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