Current Price: ~ $65/share
Projected Yield: ~ 3.16%
PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages. The company's broad portfolio of brands includes: Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's, Doritos, and Quaker. Pepsi owns most of its bottling infrastructure in North America, but typically utilizes independent bottlers in international markets. Food accounts for approximately 50% of Pepsi's revenue.
Estimated WACC for the firm today is 5.46% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
|
Year
|
FCF
$Millions
|
|
2002
|
3190
|
|
2003
|
2983
|
|
2004
|
3667
|
|
2005
|
4116
|
|
2006
|
4016
|
|
2007
|
4504
|
|
2008
|
4553
|
|
2009
|
4668
|
|
2010
|
5195
|
|
2011
|
5605
|
Average Annual Growth FCF: ~ 7%
CAGR FCF: ~ 6%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year
Consensus Forecast Company 5-Year Growth: ~ 6% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 18%
Scenario 1
Average FCF (2011, 2010, 2009) is $5156
Average FCF (2011, 2010, 2009) is $5156
- Start at $5156 million FCF
- Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 5.46%, give a present value for the entire firm (Debt + Equity) of $128814 million. If the firm's fair value of debt is estimated at $29800 million, then the fair value of the firm's equity could be $99014 million. $99014 million / 1570 million outstanding shares is approximately $63 per share and a 20% margin of safety is $50/share.
|
Year
|
FCF
$Millions
|
|
0
|
5156
|
|
1
|
5465
|
|
2
|
5793
|
|
3
|
6141
|
|
4
|
6509
|
|
5
|
6900
|
|
Terminal
Value
|
133902
|
The firm's future cash flows, discounted at a WACC of 5.46%, give a present value for the entire firm (Debt + Equity) of $128814 million. If the firm's fair value of debt is estimated at $29800 million, then the fair value of the firm's equity could be $99014 million. $99014 million / 1570 million outstanding shares is approximately $63 per share and a 20% margin of safety is $50/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 6% per year, then 1.50% growth in FCF per year forever:
Discounted Cash Flow Valuation
|
Year
|
FCF
$Millions
|
|
0
|
5156
|
|
1
|
5465
|
|
2
|
5793
|
|
3
|
6141
|
|
4
|
6509
|
|
5
|
6900
|
|
Terminal
Value
|
184595
|
- Present Value of the entire firm (Debt + Equity): $167671 million
- Value of Equity: $137871 million or $88/share
- 20% margin of safety is $70/share
Sources
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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