14 May 2010

PEP: Financial Gauge Analysis for the March 2010 Quarter

PepsiCo (NYSE: PEP) earned $0.89 per diluted share on a GAAP basis in the 12-week quarter that ended 20 March 2010.  PepsiCo made $0.17 more per share, 23 percent, than the $0.72 it earned in the March 2009 quarter.

Because PepsiCo's $7.8 billion acquisitions of Pepsi Bottling Group and PepsiAmericas occurred during the latest quarter, the financial statements for this period include many special items that affect the comparability of the results.  Core earnings, which exclude acquisition and other unusual gains and expenses, increased from $0.71 to $0.76 per share.

PepsiCo, Inc., is a leading global purveyor of beverages and snacks.  Additional background information about PepsiCo and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

In our earlier review of PepsiCo's Income Statement, we compared the actual results to our "look-ahead" estimates

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for PepsiCo and the associated financial gauge scores.  The metrics were calculated using data from PepsiCo's current and historical financial statements, including the latest 10-Q report.

After a major corporate reshaping, such as PepsiCo's bottler acquisitions, the gauge scores can be erratic and possibly misleading for several quarters or longer.  Caution (and patience) is warranted.  Until the transformed company establishes a new track record, we can't be certain of the extent, if it all, to which current and historical data can be compared and produce meaningful results.

With this important caveat, PepsiCo's latest quarterly results produced the following changes to the gauge scores:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management20 Mar 201026 Dec 200921 Mar 20095-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)49.648.648.046.1
Finished Goods/Inventory44.3%45.0%42.6%45.7%
Days of Sales Outstanding (days)42.641.143.141.1
Working Capital/Revenue7.4%6.9%5.7%5.5%
Cash Conversion Cycle Time (days)-47.4-54.4-49.6-52.9
Gauge Score (0 to 25)10141413

PepsiCo's debt level soared because of the bottler acquisitions, and the increase put downward pressure on the Cash Management gauge.  PepsiCo's Long-term Debt rose to $19.9 billion, from $9.2 billion in March 2009 and $4.9 billion in March 2008.  Short-term obligations also surged.

In January 2010, PepsiCo issued $4.25 billion of fixed and floating rate notes.  PepsiCo also acquired long-term debt having a face value of $7.5 billion from the bottlers.

The Inventory metrics did not change by substantial amounts.  We prefer to see declines in the days of inventory and the proportion of Finished Goods, when comparing one quarter with the same quarter of the previous year.  Inventory changes can be a signal that a company is using its cash more or less efficiently or that demand for its products is varying. 

The increase in Working Capital, relative to Revenue, could be a temporary consequence of the acquisitions.

Growth20 Mar 201026 Dec 200921 Mar 20095-Yr Avg
Revenue growth2.7%0.0%6.7%8.2%
Operating Profit growth4.8%11.7%10.0%10.0%
CFO growth17.5%-2.9%-9.0%22.8%
Net Income growth21.7%15.6%-10.2%16.2%
Gauge Score (0 to 25)127110
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The Cash Flow and Net Income trailing-year growth rates recovered strongly and pushed the Growth gauge up. 

Revenue growth was not as robust, but it was enough to get the growth rate back about zero.

The decrease in Revenue as a percentage of assets reflects the expansion of PepsiCo's Balance Sheet to include the bottlers.

Profitability20 Mar 201026 Dec 200921 Mar 20095-Yr Avg
Operating Expenses/Revenue83.4%81.2%83.7%82.2%
Free Cash Flow/Invested Capital17.8%24.2%19.2%22.2%
Accrual Ratio7.9%3.9%6.1%4.4%
Gauge Score (0 to 25)9151113

The Profitability gauge was adversely affected by the decrease in the Return on Invested Capital and the related Free Cash Flow return on Invested Capital.  The denominator of both metrics, Invested Capital, rose sharply as PepsiCo added more debt to its capital structure.

Similarly, the Accrual Ratio increased, which in other circumstances could trigger a warning about Earnings Quality, because of the large amount of Cash used in the bottler acquisitions. 

Operating Expenses as a percentage of Revenue did not change much when compared to the year-earlier figure.

Value20 Mar 201026 Dec 200921 Mar 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)17.114.813.816.8
Gauge Score (0 to 25)511176
Share Price ($)$66.56$60.96$50.02-

PepsiCo's price per share increased 9.1 percent in the first fiscal quarter of 2010, and the price increased 33 percent over the previous 12 months.  This rise was greater than the Revenue and Earnings gains, causing the Price/Earnings, Price/Sales and the other Value ratios to rise.

As a result, the Value gauge took a tumble.  However, when compared to longer-term averages, the figures for most Value metrics are not unreasonable.

Overall20 Mar 201026 Dec 200921 Mar 20095-Yr Avg
Gauge Score (0 to 100)32505140

Growth was the only gauge to rise as a result of the first quarter's results.  However, the two large bottler acquisitions that closed during the quarter have skewed the financial ratios that drive the gauge scores.  Before drawing any conclusions, we will wait for integration to proceed and for the ultimate financial structure of the transformed company to become more apparent.

Full disclosure: Long PEP at time of writing.

1 comment:

  1. I like the use of the gauges and your perspective on how it works. I will definitely apply those principles to my own stocks that I am investing in. I can see the potential that Pepsi has in the long term.