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:
- Cash Management: 10 of 25 (down from 14 in December)
- Growth: 12 of 25 (up from 7)
- Profitability: 9 of 25 (down from 15)
- Value: 5 of 25 (down from 11)
- Overall: 32 of 100 (down from 50)
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 Management||20 Mar 2010||26 Dec 2009||21 Mar 2009||5-Yr Avg|
|Days of Sales Outstanding (days)||42.6||41.1||43.1||41.1|
|Cash Conversion Cycle Time (days)||-47.4||-54.4||-49.6||-52.9|
|Gauge Score (0 to 25)||10||14||14||13|
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.
|Growth||20 Mar 2010||26 Dec 2009||21 Mar 2009||5-Yr Avg|
|Operating Profit growth||4.8%||11.7%||10.0%||10.0%|
|Net Income growth||21.7%||15.6%||-10.2%||16.2%|
|Gauge Score (0 to 25)||12||7||1||10|
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.
|Profitability||20 Mar 2010||26 Dec 2009||21 Mar 2009||5-Yr Avg|
|Free Cash Flow/Invested Capital||17.8%||24.2%||19.2%||22.2%|
|Gauge Score (0 to 25)||9||15||11||13|
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.
|Value||20 Mar 2010||26 Dec 2009||21 Mar 2009||5-Yr Avg|
|P/E vs. S&P 500 P/E||1.0||0.8||0.8||1.1|
|Enterprise Value/Cash Flow (EV/CFO)||17.1||14.8||13.8||16.8|
|Gauge Score (0 to 25)||5||11||17||6|
|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.
|Overall||20 Mar 2010||26 Dec 2009||21 Mar 2009||5-Yr Avg|
|Gauge Score (0 to 100)||32||50||51||40|
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.