23 November 2008

PEP: Financial Analysis through September 2008 (Update)

More than a month ago, we posted an analysis of PepsiCo's press release announcing third-quarter earnings.  This period consisted of the 12 weeks that ended on 6 September 2008.

The company's more detailed 10-Q was filed on 15 October, but we hadn't had a chance to review it until now.

PepsiCo, Inc., (NYSE: PEP) is a leading global purveyor of beverages and snacks

The additional data in the 10-Q did not significantly alter the analysis, nor did it alter the gauge scores.

  • Cash Management: 11 of 25 (down from 12 in June)
  • Growth: 10 of 25 (down from 14)
  • Profitability: 10 of 25 (down from 12)
  • Value: 4 of 25 (down from 10) -- see below for the effect of the recent share price drop

The GCFR standard practice is to compute the Value gauge using the share price at the end of the subject quarter.  For PepsiCo, which has three 12-week quarters and one 16-week quarter, we use the share price on the last day of March, June, September, and December.  On 30 September 2008, the closing price of PepsiCo shares was $71.27.  This price resulted in the 4-point Value gauge score listed above. 

The price subsequently fell all the way to $50, before closing at $54.59 of 21 November.  The price decline would add a substantial 11 points to the Value gauge, lifting the score to 15 points.  This increase would, in turn, bring the Overall gauge up to an appealing 49 points.

The following table shows how the recent price drop affects the Value metrics:

Value21 November 2008
30 September 200830 June 2008
30 September 2007
P/E 15.3
P/E to S&P 500 average P/E 91
Price/Revenue 2.0
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)
Overall Score (0 to 100)

During the third quarter, PepsiCo and Pepsi Bottling Group, Inc. (NYSE: PBG) closed on their joint acquisition of 81 percent of Lebedyansky, a Russian juice company, for $1.5 billion.  The purchase was announced in March 2008.  PepsiCo owns 75 percent of this stake.  Both companies have offered, in accordance with Russian law, to buy the remaining shares of Lebedyansky.  PepsiCo's Cash Flow Statement includes $297 million of cash restricted for use in future acquisitions, which "primarily relates" to the Lebedyansky deal.

When the third-quarter results were announced, PepsiCo announced a "Productivity for Growth" program involving the closure of six plants and the elimination of 3300 jobs.  This program will result in a $550 million to $600 million pre-tax charge in the fourth quarter.  Cash will be expended in the fourth quarter and in the first quarter of 2009.

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