Jacob Barrett, Marlon Fader, Bektemir Ysmailov BAFN 379 FALL 2014 | UNIVERSITY OF NORTHERN COLORADO

PepsiCo Inc. ANALYSIS PROJECT

1

Table Of Contents Executive  Summary……………………………………………………………………………………………………2

Business Description………………………………………………………………………………………………….3

Economic  Analysis  &  Outlook…………………………………………………………………………………….4

Industry  Overview  and  Competitive  Positioning…………………………………………………..…….6

Valuation…………………………………………………………………………………………………………………10

Financial Analysis…………………………………………………………………………………………………….12

SWOT  Analysis…………………………………………………………………………………………………………13

Corporate  Governance  and  Social  Responsibility………………………………………………………14

Investment  Risks  &  Upside  Potential………………………………………………………………………..15

Project  Reflection…………………………………………………………………………………………………….15

Appendices………………………………………………………………………………………………………………17

x Discounted  Dividend  Model…………………………………………………………………………17 x Relative  Valuation………………………………………………………………………………………..19 x Income  Statement……………………………………………………………………………………….20 x Balance  Sheet………………………………………………………………………………………………22 x Cash  Flow  Statement……………………………………………………………………………………24 x Common  Size  Income  Sheet………………………………………………………………………….25

References………………………………………………………………………………………………………………27

2

Executive Summary We issue a BUY recommendation on PepsiCo (PEP) based on an estimated fair price of USD109.90 using Discounted Dividend Model and Relative P/E Valuation. This implies a 9.5% upside from its closing price of USD100.39 on December 2nd, 2014. PEP has a highly diversified portfolio in beverage and food industry which positions it well relative to its competitors. The company has many opportunities in the emerging and developing markets around the world as well as in new product categories based on changing consumer tastes towards more healthy products. Brand Recognition and Brand Building PepsiCo is the largest food and beverage business in the United States. It is the second largest beverage company in the world behind only Coca-Cola and the number one distributor of salty snacks. Its current brand recognition can be attributed to its aggressive marketing which continues to build brand awareness. Commercials, social responsibility and athlete/celebrity endorsements are just a few methods used by the PepsiCo marketing team. With its continued investments in marketing PepsiCo market share is likely to continue to grow. Position in Emerging/Developing Markets PepsiCo generates 49% of its revenue internationally. Recently growth in emerging markets such as India, China, Brazil, and developing nations such as Russia and Mexico are outpacing that of developed nations such as the United States. Although the international beverage industry is saturating, the salty snacks industry is relatively untapped. PepsiCo revenue from emerging/developing markets today is triple of what it was in 2006. PepsiCo management plans on continuing expansions and expects its revenue from emerging/developing markets to eventually be two-thirds of the total revenue. Product Mix and Innovation PepsiCo has a diverse portfolio of marketed products some of the bigger names include well-known brands such as Pepsi, Mountain Dew, Gatorade, Lays Cheetos, and Quaker. PepsiCo has 22 products that individually generate over a billion dollars of revenue per year. They have a variety of products to attract many different demographics.  PepsiCo’s  nutritious  products  currently  make  up  20%  of  their  overall  revenue. In 2013, PepsiCo was the industry leader in successful product launches. The company continues to broaden its product mix for both domestic and international demographics to stimulate sales, revenue, and growth.

Market Profile Closing Price (USD) 100.39

52-Week Price Range (USD) 77.01-100.7

Average Daily Volume (mm)

3.89

Shares Outstanding (mm) 1,496.60

Market Cap (USD Millions) 150,244.30

Dividend Yield 2.60%

P/E 22x

EV/EBITDA 13.2

Sources: Capital IQ

Target Price Breakdown DDM (1) Price 107.8

DDM (2) Price 119.4

Weighted DDM Price 113.6

P/E (1) Price 103.2

P/E (2) Price 109.2

Weighted P/E Price 106.2

Weighted Fair Price 12/14 109.9

Source: Team Estimates

Key Financial Ratios

2009 2010 2011 2012 2013 2014 Return on Equity % 39.8% 32.6% 30.5% 28.7% 29.0% 30.6%

EBIT Margin % 18.8% 16.4% 15.6% 14.4% 14.9% 15.5%

Net Income Margin % 13.8% 10.9% 9.7% 9.4% 10.1% 10.4%

Fixed Asset Turnover 3.6x 3.6x 3.4x 3.4x 3.5x 3.7x

Current Ratio 1.4x 1.1x 1.0x 1.1x 1.2x 1.2x

LT Debt/Capital 29.2% 43.1% 43.1% 46.4% 45.0% 42.0%

EBIT / Interest Exp. 20.5x 10.5x 12.1x 10.5x 10.8x 11.6x

EPS $3.81 $3.97 $4.08 $3.96 $4.37 $4.57

0

1

2

3

2009 2010 2011 2012 2013 2014

PEP Dividends per Share

Source: Company Data

50.00

60.00

70.00

80.00

90.00

100.00

Share Price Movement

3

Business Description PepsiCo, Inc. is one of the largest beverage and snack companies in the world. Established in 1961 from the merger of Frito Company and Pepsi-Cola, PepsiCo has operations in more than 200 markets with a portfolio of products that includes 22 billion-dollar brands. The company is a market leader with 36.6% share of the U.S. snacks industry (Figure 1) and 24.3% share of the U.S. beverage industry (Figure 2). PepsiCo’s  beverage  business  accounts  for  48%  of  its  revenue,  the  remaining 52% comes  from  its  food  products.  Geographically,  51%  of  the  company’s  revenue  is  domestic with the rest 49% coming from global sales.

Company Segments The company is organized in six reportable segments:

x Frito-Lay North America (FLNA) – is in the production and sales of snack foods in the U.S., including Lays potato chips, Stacy’s  pita  chips, Tostitos tortilla chips, Cheetos and others. Their net revenue in 2013 was $14.1 billion  comprising  21%  of  Pepsi’s  total  revenue.  

x Quaker Foods North America (QFNA) – is  the  remainder  of  PepsiCo’s  snacks, selling cereals, rice, pasta, dairy and other branded products including: Quaker oatmeal, and Aunt Jemima mixes and syrups. Their net revenue was $2.6 billion in 2013 and accounted for approximately 4% of the company’s  total  revenue.  

x Latin America Foods (LAF) – is responsible for the selling of snacks in Latin America. Some of the brands sold are Cheetos, Doritos, and Ruffles. The net revenue for this segment in 2013 was $8.3 billion or 12% of the company’s  total  revenue.  

x PepsiCo Americas Beverages (PAB) - makes, markets, and sells beverage concentrates, fountain syrups and many carbonated and noncarbonated beverages in North and Latin America. The brands include: Pepsi, Mountain Dew, Diet Pepsi, Diet Mountain Dew, 7UP, Gatorade, Tropicana, and many more. This segment also sells products under license agreements with Unilever, Starbucks, and Dr. Pepper Snapple Group. The revenue for this segment  in  2013  was  $21.1  billion  and  approximated  32%  of  the  company’s  total revenue.

PepsiCo24.30%

Coca-Cola

21.10%

DPSG8.90%

Private Label8.00%

Monster4%

Red Bull4.20%

Nestle5.20%

Other24.40%

Figure 2: U.S. Beverage Industry Market Share

PepsiCo36.60%

Private Label10%

Kraft3.60%

Kellogg's 6.90%

Conagra3.30%

Synder's-Lance3.50%

Mondelez5.60%

Other30.40%

Figure 1: U.S. Snack Industry Market Share

FLNA21% QFNA

4%

LAF12%

PAB32%

PepsiCo Europe

21%

PepsiCo Asia10%

Figure 5: PepsiCo Revenue by Segment

Snacks 52%

Beverage 48%

Figure 3: Beverage vs. Snacks Revenue

Domestic51%

International49%

Figure 4: Domestic vs. International Revenue

4

x PepsiCo Europe – attends to the selling of PepsiCo products in Europe, and South Africa (SA).  Europe’s  net  revenue  was  $13.8  billion  in  2013  and  was  21% of total revenue.

x PepsiCo Asia, Middle East and Africa (AMEA) - manages all beverage sales, food and snack businesses in AMEA excluding SA. Their net revenue was  $6.5  billion  in  2013  and  approximated  10%  of  PepsiCo’s  total  revenue.  

Economic Analysis and Outlook US Economic Performance Improving U.S. GDP Growth The US economy has been on a steady growth path since the financial crisis of 2008-2009 with occasional disruptions caused by non-fundamental factors such as extreme weather conditions (Figure 6). This comes at a time of slow economic growth in Europe and Japan, both of which have been struggling to reach their target inflation, employment and GDP growth rates. In 2013 the US GDP grew by 1.9% which is very close to its long-term average growth rate of 2%. The growth rate is expected to remain around that level. Between the World Bank, United Nations, International Monetary Fund, and the Economist Intelligence Unit, the average projected growth rate for the U.S. GDP in 2014 is 2.3% and 3.1% in 2015. Deceleration in Personal Expenditure Consumption, Still Remains at Good Levels In the last two quarters, the GDP growth was spurred by personal expenditure consumption (PEC). In the second quarter of 2014, the growth rate of PEC was equal to 2.5%. It has fallen down to 1.8% in the third quarter which is still a strong pace. The nondurable goods component of PEC growth rate has fallen down to 1.1% in the third quarter from 2.2% in the second. Despite the fact that all  of  PepsiCo’s  products belong to this segment, the company has managed to post strong results in the third quarter with a 2% year-over-year revenue growth. Exports & Imports, Widening Trade Deficit The exports of goods and services increased 7.8% in the third quarter while the imports have decreased 1.7%. In the previous quarter the exports grew at a higher rate of 11.1% and so did the imports at 11.3%. The trade deficit in September of 2014 increased to $43.03 billion from a revised $39.99 billion in August (Figure 5). While the widening trade gap reflected a decrease in exports it is important to note that exports of foods, feeds, and beverages increased by $1.3 billion.

-9.0%-7.0%-5.0%-3.0%-1.0%1.0%3.0%5.0%

Figure 6: U.S. GDP Quarterly Growth

-50000

-40000

-30000

-20000

-10000

0

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14

Figure 7: U.S. Trade Deficit (USD Millions)

0

0.5

1

1.5

2

2.5

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep-

14O

ct-1

4

Figure 8: % Change in U.S. Inflation Rate

5 Steady Inflation and Falling Unemployment rates Inflation rate was recorded at the same rate of 1.7% over the past three months beginning in August (Figure 8). Falling energy prices weighed down the index the most by falling 1.6% year-over-year. Food and shelter prices were the biggest gainers in October with 3.1% and 3% rates respectively. The unemployment rate reached a six-year low of 5.8% in October of 2014 marking a positive trend since the financial crisis (Figure 9). Low Interest Rate Environment and Changing Monetary Policy The interest rates in the US are at all-time lows with the FED Funds rate sitting at 0.25% and a 10-year Treasury rate of around 2.4%. This environment has allowed companies to borrow cheap on the long-term. On October 29th, the US Federal Open Market Committee decided to end its asset purchase program that was initiated due to the financial crisis and helped to keep the interest rates low. While they announced that target Fed Funds rate will remain at the same level, they also mentioned that it may be going up sooner than they had anticipated assuming inflation and unemployment keep improving. Economists predict the rates to start increasing in the second half of 2015. Fiscal Policy In the third quarter of 2014 federal government consumption expenditures and gross investment increased 10% compared with a 0.9% decrease in the second. The biggest growth driver was a 16% increase in national defense expenditures which was caused by a U.S. campaign against ISIS and increased tensions with Moscow. International and Political Implications The global growth has been causing worries among many investors in 2014, the slowdown in Europe, China, and Japan in particular. The European Central Bank announced that it will stimulate the economy with the asset purchasing program similar to the U.S. The Bank of Japan also announced an increased roll-out of its own quantitative easing program. The International Monetary Fund (IMF) states that global growth will be improving worldwide, due to expected accelerating recovery in advanced economies. The IMF estimates that global growth in GDP will be around 3.7% in 2014 and rise further to 3.9% in 2015. Effects on PepsiCo PepsiCo will be effected in several ways with all of the possible upcoming changes to the global economy. Improved GDP and lower unemployment is a good thing for Pepsi as it will allow Americans to have more money for spending which will possibly be spent on unnecessary PepsiCo products. Once again Pepsi is helped by the increase in food exports, as well as a low interest rate. When interest rates rise however, this will increase the financing costs of PepsiCo as well as most other companies.

0

5

10

15

Jan-

07Se

p-07

May

-08

Jan-

09Se

p-09

May

-10

Jan-

11Se

p-11

May

-12

Jan-

13Se

p-13

May

-14

Figure 9: U.S. Unemployment Rate %

6

Industry Overview and Competitive Positioning PepsiCo operates in two distinct industrial segments: liquid refreshment beverages and snacks. The refreshment beverage industry refers to the industry that produces non-alcoholic drinks such as soft drinks, sport and energy drinks, juices, bottled water, and ready-to-drink tea and coffee. The snacks industry includes the production of sweet, savory, and dairy snacks such as potato chips, corn chips, nuts etc.

Beverage Industry Changing Consumer Tastes: Health Conscious Buyer As a whole the beverage industry has seen a change in consumer tastes towards healthier drinks that are not primarily composed of corn syrup and sugar. Thus, in 2012-2013, the domestic sales of carbonated  soft  drinks  (CSD’s)  have  declined  3.2%  while the bottled water sales have increased 4.7% (Figure 10).

Declining Domestic, Solid Global Growth in CSD Globally,  CSD’s  have  made  revenues  exceeding  209  billion  dollars  which  equates  to  a 1.8% compound annual growth rate (CAGR) in revenues from 2009 to 2013. This rate is expected to increase in the next five years up to a CAGR of 2.1%. Domestically, CSD’s  are  not doing quite as well, declining 3.2% in 2013. Since this segment  is  the  single  largest  segment  of  the  liquid  refreshment  beverage  industry  it’s not surprising that, overall, the industry declined 0.1%. Declining Stage of Industry Life-Cycle We assigned the declining stage of the industry life-cycle to the beverage industry because of the declining domestic growth and changing consumer tastes. Beverage Industry Five Forces Analysis Bargaining Power of Buyers: Medium The typical customer is not very responsive to the changes in price of refreshment beverages due to a relatively low price of the good. Another reason for that is the brand loyalty towards certain products in the industry. On the other hand, if the prices go up substantially customers can easily stop consuming those beverages and switch to water or to a different brand, which is why we assigned a medium rating. Bargaining Power of Suppliers: Low Suppliers for the beverage industry include bottling and distribution companies as well as companies that provide ingredients for beverages. All those companies have only a handful of customers with Pepsi, Coke, and Dr. Pepper being the largest. This entails a very limited bargaining power from their side. Besides bottling, distribution, and ingredient companies, all remaining suppliers operate in very competitive markets. Threat of New Entrants: Low

Figure 10: U.S. Liquid Refreshment Beverage Market

Segments 2012/13 Ready-to-Drink Coffee 6.2% Energy Drinks 5.5% Bottled Water 4.7% Sports Drinks 0.6% Ready-to-Drink Tea 0.4% Fruit Beverages -1.9% Carbonated Soft Drinks -3.2% Value-Added Water -6.6% Total LRB -0.1%

7 There are very few barriers to entry in the beverage industry and, thus, a potential for a lot of competition, the real threat from new entrants is very low. That is because of the few large companies dominating the beverage industry who buy out new companies when they grow to a decent size. Also, customer loyalty to those few companies contributes to the low threat of new entrants in the beverage industry whereas new companies will have difficulties making consumers switch to their brands forcing them to invest more money in marketing. Threat of Substitutes: Medium There are plenty of substitutes in each of the beverage industry segments, from CSD’s to sport drinks, etc. This implies a very high threat of substitutes in the industry. However, this threat is diminished by the customer loyalty existing in the industry. Rivalry in the Industry: High With little to no growth in the industry, existing companies’ major method for growth  is  gaining  competitors’  market  share.  This  results  in  very  intense  marketing  campaigns among the biggest players and aggressive pricing towards the lower end. The two biggest companies in the industry, Pepsi and Coke, are also the two biggest rivals competing against each other across product lines and geographic markets. Beverage Industry Financial Analysis

Financial Ratios PEP KO DPS Average Current Ratio 1.2x 1.1x 1.2x 1.2x Total Asset Turnover .9x .5x .7x .7x Debt/Capital Ratio 58.5% 55.4% 52.0% 55.3% Return on Assets 8.2% 7.5% 9.5% 8.4% P/E Ratio 21.3x 24.2x 19.8x 21.8x

x The Current Ratio shows the ability to meet short-term obligations. PepsiCo’s  ratio of 1.2x is fairly consistent with the industry.

x Total Asset Turnover shows how efficiently companies manage their assets. We can see that PepsiCo is ahead of the peer group in this regard with a ratio of 0.9x, higher than the average of 0.7x.

x The average Debt/Capital ratio of 55.3% shows that beverage companies slightly prefer debt financing over equity. PepsiCo’s ratio is higher than the industry average.

x Pepsi’s  ROA  of  8.2%  is  fairly  consistent  with  the  industry  average of 8.4%. x Average P/E ratio of 21.8x is slightly higher than the S&P 500 average of

20.05 meaning that investors expect better growth prospects of the beverage companies and/or less risky cash flows.

Snacks Industry Preference for Healthier Products, Parallel to Beverages The snack food industry is very similar to the beverage industry in the sense that consumers worldwide are becoming more health conscious. Most of the companies have acknowledged that they are being called to take some form of action in developing healthier food options for the public and most have done so. Frito-Lay

8 for example, has had good fortune producing their  “baked”  chips  with  lower  amounts of salt. Decelerating Domestic and Global Growth The snack industry has experienced a strong growth during the past five years at a CAGR of 3.8%. Overall, the industry’s  domestic revenue is expected to increase at an average annual rate of 2.6% to $39.4 billion in the next five years, including a leap of 2.4% in 2015 alone. Globally, the snacks industry has grown 5.1% CAGR between 2009 and 2013. The growth is expected to decelerate slightly to 4.8% CAGR until 2018. Maturity Stage of the Industry Life-Cycle Positive moderate growth rates globally and domestically were the primary reason we assigned maturity stage to the snacks industry. With most snack companies succeeding at fulfilling the concern for healthy options, there is plenty more room to grow. Snacks Industry Five Forces Analysis Bargaining Power of Buyers: Medium The customer has a medium level of bargaining power for the same reasons as the beverage industry. These reasons are a relatively low price of the good and customer/brand loyalty on one hand, and easy switching between products on the other. Bargaining Power of Suppliers: High The bargaining power of suppliers is high due to their diversified customer base. High demand nature of raw materials (nuts, corn, wheat, grains etc.), also plays a part in the high power of the suppliers. Threat of New Entrants: Medium In regards to the threat of new entrants, the snacks industry is at a medium level due to the dominance of Frito-Lay Inc. and its acquisition power curbing any entrants’  attempt to become a big company. At the same time, consumers are always looking to try new healthy foods so having a small company with relatively low startup costs is always possible. Threat of Substitutes: High The threat of substitute products is high because of many alternative brands for each type of snack food as well as limited brand loyalty in the industry. If customers are not loyal to a brand then they can choose private label companies to save money on snacks for nearly the same product. Rivalry in the Industry: Medium The rivalry among competing firms is medium. Although  we  don’t  see  Pepsi  vs.  Coke level of competition in snacks, the abundance of brands makes the industry quite competitive as well.

9 Snacks Industry Financial Analysis

Financial Ratios PEP KRFT K Average Current Ratio 1.2x 1.1x .8x 1.03x Total Asset Turnover .9x .8x .9x 0.87x Debt/Capital Ratio 58.50% 64.20% 69.10% 63.93% Return on Assets 8.20% 11.20% 12.90% 10.77% P/E Ratio 21.28 14.80 13.33 16.47

x PepsiCo’s  Current  Ratio is above the average of 1.03x which means that the company is better positioned in the event of crisis.

x The average Total Asset Turnover ratio of 0.87x is fairly consistent across the companies.

x The average Debt/Capital ratio of 63.93% shows that snack companies are more aggressive in using debt financing than beverage companies. PepsiCo ratio is lower than the industry average making it relatively less risky.

x Pepsi’s  ROA  of  8.2%  is  lower  than  the  industry  average of 10.77% which is probably the result of less leverage.

x Average P/E ratio of 16.47x is lower than the S&P 500 average of 20.05 meaning that investors expect worse growth prospects of the snacks companies and/or more risky cash flows.

10 Figure 11: Historical performance of PEP, KO, and DPSG since October 2009

Valuation We have used two methods to come up with our target price: Discounted Dividend Model (DDM) and P/E ratio relative valuation. DDM Valuation This model is appropriate to use when valuing PepsiCo because the company has been paying dividends for a very long period of time (Figure 12) and is expected to do so in the future. The DDM model is particularly sensitive to the following factors:

x Dividend Growth Rate (g): The forecast of growth rate was based on the estimates of the ROE and the retention ratios. Over the last twenty years Pepsi’s  ROE  has  been  relatively  stable  deviating  slightly  from  the  30%  mark. Its retention ratio has been declining from more than 70% in 1990 down to around 50% in 2013 (Figure 13). We expect its ROE to decline in the coming years due to the mature and declining industries Pepsi operates in. The retention ratio is expected to keep declining as well.

Figure 13: Historical g 1990 2004 2013 ROE 24.5% 33.2% 29.0% Retention 72.3% 65.3% 48.7% g 17.7% 21.7% 14.1%

$ -

$1.0

$2.0

$3.0

1990 1995 2000 2005 2010 2013

Figure 12: PEP Dividend Paid

-50.00%

-20.00%

10.00%

40.00%

70.00%

100.00%

130.00%

Pepsico, Inc. (NYSE:PEP) - Share PricingThe Coca-Cola Company (NYSE:KO) - Share PricingDr Pepper Snapple Group, Inc. (NYSE:DPS) - Share Pricing

11

2015 - 2020E 2021 - 2030E 2030+E ROE 25% 15% Retention 40% 30% g 10.00% 4.50% 2%

x Terminal Growth Rate: We decided to use a 2% terminal growth rate

because  of  PepsiCo’s  consistently  good  performance  in  the  past, as well as potential in emerging markets.

x Risk Free Rate (Rf): For the risk free rate we used an approximate 10-year treasury rate of 2.5% for the next two years (2015 - 2016). For the years 2017+ we decided to use a slightly higher 3.5% rate to account for the expected rise in interest rates.

x Market Risk Premium (Rm-Rf): The market risk premium of 5% given in

the outline seemed appropriate in our case.

x Computations: Using the capital asset pricing model and the values in Figure 14 we attained a required rate of return of 5.3% in 2015-2016, and 6.3% from 2017 on. Our final fair price value for our DDM model was an average of our bullish and bearish scenarios resulting in a value of USD113.60.

P/E Ratio Relative Valuation For the relative valuation we decided to use the P/E ratio forecast based on the comparisons with peers. Since Pepsi operates in two different industries, snacks and beverages, we decided to use both beverage and snack companies for our relative valuation.

Company Name EV/EBITDA EV/Total Revenues

P/BV P/E Forward P/E

Dividend Yield

The Coca-Cola Company

15.5x 4.6x 5.8x 24.7x 21.55x 2.7%

Dr. Pepper Snapple

11.1x 2.7x 5.9x 20.2x 19.11x 2.3%

Kellogg Company 8.2x 2.1x 6.9x 13.6x 16.22x 3.0% Kraft Foods 9.8x 2.4x 6.3x 15.1x 18.13x 3.7% Median 10.5x 2.6x 6.1x 17.7x 18.62x 2.9% PepsiCo, Inc. 13.1x 2.5x 6.4x 21.9x 20.7x 2.6%

Source: CapitalIQ

By looking at the P/E and forward P/E ratios we can see two patterns emerge. Firstly, companies in the beverage industry have higher P/E ratios than do those in the snack industry. Secondly, we can see that the forward ratios decrease for both Coke and Dr. Pepper engaging in beverage business but increase for Kellogg and Kraft, snack companies. Since Pepsi engages in both beverage and snack businesses we had to come up with an estimate that fairly reflected P/E movements in opposite directions (Figure 14). Our final fair price for relative valuation came out to be USD106.20.

Figure 14: Components of k(r)

Risk free rate 2015-2016 2.50% Risk Free Rate 2017+ 3.50% Beta (Bloomberg) 0.56 Market Risk Premium 5%

Figure 14: P/E Estimates 2014 2015E P/E 22.14 22.14 23.00

12 An average of the DDM price, USD113.60, and the relative P/E price, USD106.20, gave us the final value of USD109.90. (Full calculations in Appendix 1 & 2)

Financial Analysis Ratios 2011 2012 2013 2014 Profitability EBITDA margin 19.50% 18.20% 18.60% 19.10% Operating Profit Margin 15.60% 14.36% 14.90% 15.47% Net Profit Margin 9.69% 9.43% 10.15% 10.39% Return on Assets 9.20% 8% 8.10% 8.20% Return on Equity 30.50% 28.70% 29.00% 30.60%

Liquidity Current Ratio 0.96x 1.10x 1.24x 1.16x Quick Ratio 0.62x 0.80x 0.93x 0.93x Cash Ratio 0.49x 0.50x 0.54x 0.43x

Efficiency Total Asset Turnover 0.94x 0.89x 0.87x 0.85x Fixed Asset Turnover 3.43x 3.37x 3.52x 3.71x Cash Conversion Cycle 27.64 26.23 19.23 -62

Financial Leverage Debt to Equity 128% 127% 122% 141% LT Debt to Equity 98% 105% 100% 101% LT Debt to Assets 43% 46% 45% 42% Interest Coverage 12.12x 12.12x 12.12x 12.12x

Shareholder Ratio Earnings per Share $ 3.79 $ 3.43 $ 3.65 $ 3.90 Dividends Per Share $ 2.03 $ 2.13 $ 2.24 $ 2.45

Liquidity Throughout  the  last  few  years,  PepsiCo’s  liquidity  ratios  have  improved.  This  is  shown primarily through the current and quick ratios both increasing by a drastic margin. Efficiency PepsiCo’s  efficiency  has  had  mixed  results  since  2011.  On  one  hand,  their total asset turnover has decreased a small amount implying that they are not managing their assets quite as efficiently as they once were. On the other, PepsiCo has proven that they are capable of generating revenue on the fixed assets that they have in place. Profitability Overall, the profitability of PepsiCo has remained fairly constant with a small decline in return on assets. The return on equity has stayed at around 30% throughout many years which is very impressive for a company of such a large size.

13 Debt PepsiCo’s  use  of  long-term debt has stayed relatively constant as seen by the long-term debt to equity and to assets ratios.  It’s  important  to  note  that  the  total  debt  to  equity has fluctuated more edging up to 141% in 2014 from 122% in 2013. This implies that the company has taken out short-term financing which in theory should worsen  PepsiCo’s  liquidity  but wasn’t  the  case in reality as the liquidity improved, discussed earlier. DuPont

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier Net Income 6944 PM Sales 66853 0.10387 Sales 66853 TAT ROE Total Assets 80466 0.830823 0.2994782

Total Assets 80466 EM Total Equity 23187 3.470307

Our DuPont analysis gives us an ROE of 30% which is extremely similar to PepsiCo’s  actual  ROE  of  30.8%. Common Size: Since 2009, many things for PepsiCo has remained the same. The only areas with a significant change are operating and net income. The decline in operating income can be attributed to the declining beverage industry which also affects the net income. The net income to the company has declined as well showing that PepsiCo focuses on making shareholders ducky. (Appendix 6)

SWOT Analysis Strengths

x Innovative Marketing - PepsiCo is  the  first  company  to  use  “music  marketing”  in  1984  when  it  teamed up with Michael Jackson.  It’s  also the sponsor for the Super Bowl half-time show.

x Extensive Distribution Network - serving more than 10 million stores in 200 markets.

x Diverse Product Line - PepsiCo does not simply rely on one product to bring in revenue but instead has 22 different billion-dollar brands across two industries. This is especially important considering the declining soda sales. Studies suggest that 30% of consumers who buy Pepsi drinks also buy Pepsi snacks.

With this combination of top-notch marketing, diversification and innovation, PepsiCo shows that it is a company that has a strong  grip  in  all  industries  it’s involved in and that will not change anytime soon.

14 Weaknesses

x Profitability - PepsiCo’s  profit  margin  has  recently  been  lower  than  that  of  its main competitors. This means that if the company wants to increase its profitability it needs either to increase prices which can result in lost customers or to decrease its costs which can potentially hurt the product quality.

x Unhealthy Product Portfolio – As of today the product portfolio of PepsiCo is mostly unhealthy.  It’s  important  that  the  company  keeps  up  with  the trend of changing consumer tastes.

Opportunities

x Emerging and Developing Markets - PepsiCo realizes that some of their biggest opportunities lie in emerging and developing markets. Specifically Pepsi is investing in China and India. Currently 51% of PepsiCo sales are generated domestically.

x New Products for Health Conscious Consumer - As consumer desire for healthier snacks and beverages is increasing so do opportunities for PepsiCo to enter these new industry segments through new ventures. Besides that, with  PepsiCo’s  substantial  amount of capital power there are always more opportunities for them to increase market share through mergers and acquisitions.

Threats

x Competitors - Although PepsiCo is one of the dominant companies in its industries, it does have a few competitors, Coca Cola, Dr. Pepper, Kraft, and Kellogg are always a threat to Pepsi's market share.

x Regulation - U.S government is considering passing legislation that would force PepsiCo to disclose ingredients for some of its products that, as research suggests, may cause cancer.

x Changing Consumer Taste - Another threat is that consumer tastes are changing, they are becoming more health conscious therefore reducing their purchases of snacks and carbonated beverages.

Corporate Governance and Social Responsibility Corporate Governance PepsiCo has strict corporate standards that govern their operations. The rules, expectations and duties are outlined in the Corporate Governance Guidelines which are readily  available  on  PepsiCo’s  official  website.  The  company has three committee charters: Audit, Compensation, and Nominating & Corporate Governance Committees. All statements and policies are available online which shows  the  company’s  commitment  to  transparency.   Corporate Social Responsibility All of  PepsiCo’s  corporate  social  responsibilities  (CSR’s) activities are outlined in the latest Sustainability Report. Some of the highlights include:

x Recently the company received 100% rating on the corporate equality index released by the LGBT human rights group campaign.

15

x Since 1962 Pepsi is running a charitable program called PepsiCo Foundation which primarily focuses on nutrition, activity, safe water and water usages. They have given grants to programs such as the YMCA and United Way among others. The Foundation has helped 3 million people gain access to safe water as of 2013 and plans on doubling that by 2015.

x PepsiCo realizes that environmental sustainability is becoming more and more parallel to sustainable success. Therefore plans are being put in place for developing systems to improve conservation. In the 2013 sustainability report, the company outlines its plans to eliminate waste from production facilities, implement innovative recyclable packaging, and protect and conserve water supplies.

Investment Risks and Upside Potential Downside Risks Along with the ordinary risks that a company goes through (tax increases, unfavorable economic conditions, failure to compete effectively, etc.), PepsiCo has a unique set of investment risks. Operational Risk│ Inability to Grow in Emerging and Developing Markets There are a number of reasons that PepsiCo would not be able to expand to emerging markets that include unstable political conditions, civil unrest, and other developmental hazards. However, even if PepsiCo expands into other countries there is no guarantee that products will be enjoyed or purchased overseas due to cultural differences. Operational  Risk│Change in Consumer Tastes As mentioned throughout, consumer tastes in the last few years have changed drastically  which  already  makes  a  stir  in  PepsiCo’s  operations.  In  order  to stay in business and make a profit they have had to adjust their products. PepsiCo says that their success depends on the, “ability  to  anticipate  and  respond  to  shifts  in  consumer  trends,”  which  does  include health concerns. Market  Risk│Fluctuations in Exchange Rates Being a global giant in beverage and snacking, PepsiCo is very tangled with exchange rates throughout Europe and Latin America. With financial statements being presented in U.S. dollars, wavering exchange rates could have a negative or positive effect on the  company’s  financials.  

Project Reflection Learning We all felt like we learned a great deal working on this project. The things we learned ranged from analyzing companies from their ratios, to valuing a company using mathematics. It absolutely helped us in applying the financial concepts learned in class to a real world report. Lastly, we learned to understand the importance of communication as a group.

16 Difficulties Our group had a few difficulties throughout the semester on this project. It was hard to determine and agree upon an acceptable length of the paper, Bek won that quarrel. It was hard organizing our absurd first draft as well. It was difficult to know where to start and how to proceed with the free cash flow valuation. That is a part of the reason we decided to do the Discounted Dividend Model. Simplicities The outline gave a clear direction on what should be included in the paper. We feel as though we lucked out on group members, nobody missed any meeting and we all gave 100%. Information Resources See references page Changes A recommended length requirement (minimum or maximum) would be helpful. Perhaps requiring sections to be finished throughout the semester to prevent groups from procrastinating even though our group had very limited problems with that. Lastly, possibly have the project due two weeks earlier  so  that  it  isn’t  coinciding  with the trading project, or vice versa.

17

Appendix 1: Discounted Dividend Model Scenario (1)

2015 - 2020E

2021 - 2030E 2030+E

ROE 25% 15% Retention 40% 30% g 10.00% 4.50% 2% r1 (2015-2016) 5.30% r2 (2017+) 6.30% Dividend  ‘14 2.53

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Dividends 2.79 3.06 3.37 3.71 4.08 4.49 4.69 4.90 5.12 5.35 5.59 5.84 6.11 6.38 6.67 6.97 7.11 g 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 2.00% n 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 r 5.30% 5.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% PV of Dividends 2.65 2.76 2.81 2.90 3.01 3.11 3.06 3.01 2.95 2.90 2.86 2.81 2.76 2.71 2.67 2.62 Sum of PVs 45.58 Terminal Value 165.27 PV of Terminal Value 62.18 Price (1) 107.8

18

Scenario (2)

2015 - 2020E

2021 - 2030E 2030+E

ROE 27.50% 17.50% Retention 40.00% 30.00% g 11.00% 5.25% 2.00% r1 (2015-2016) 5.30% r2 (2017+) 6.30% Dividend  ‘14 2.53 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Dividends 2.81 3.12 3.46 3.84 4.27 4.74 4.99 5.25 5.52 5.81 6.12 6.44 6.78 7.13 7.51 7.90 8.06 g 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 2.00% n 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 r 5.30% 5.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% PV of Dividends 2.67 2.81 2.88 3.01 3.14 3.28 3.25 3.22 3.19 3.16 3.12 3.09 3.06 3.03 3.00 2.97 Sum of PVs 48.90 Terminal Value 187.43 PV of Terminal Value 70.52 Price (2) 119.4 Weights Price (1) 50% Price (2) 50% DDM Fair Price 12/2014 113.6

19

Appendix 2: Relative Valuation r = 5.30% 2014 2015E P/E 22.14 22.14 23.00 EPS 4.54 4.91 5.00 Price 100.52 108.7074 115

PV @ 5.3% 103.24 109.21

Weights Price (1) 50% Price (2) 50% RV Fair Price 12/2014 106.2

Weights DDM Fair Price 50% RV Fair Price 50%

Weighted Fair Price 12/2014 109.9

20 Appendix 3: Income Statement Income Statement

For the Fiscal Period Ending Reclassified 12 months Dec-26-2009

12 months Dec-25-2010

12 months Dec-31-2011

12 months Dec-29-2012

12 months Dec-28-2013

LTM 12 months Sep-06-2014

Currency USD USD USD USD USD USD In Millions of the reported currency, except per share items. Revenue 43,232.0 57,838.0 66,504.0 65,492.0 66,415.0 66,853.0 Other Revenue - - - - - - Total Revenue 43,232.0 57,838.0 66,504.0 65,492.0 66,415.0 66,853.0 Cost Of Goods Sold 20,099.0 26,177.0 31,547.0 31,291.0 31,243.0 31,085.0 Gross Profit 23,133.0 31,661.0 34,957.0 34,201.0 35,172.0 35,768.0 Selling General & Admin Exp. 14,940.0 22,045.0 24,449.0 24,680.0 25,184.0 25,326.0 R & D Exp. - - - - - - Depreciation & Amort. - - - - - - Amort. of Goodwill and Intangibles 63.0 117.0 133.0 119.0 110.0 100.0 Other Operating Expense/(Income) - - - - - - Other Operating Exp., Total 15,003.0 22,162.0 24,582.0 24,799.0 25,294.0 25,426.0 Operating Income 8,130.0 9,499.0 10,375.0 9,402.0 9,878.0 10,342.0 Interest Expense (397.0) (903.0) (856.0) (899.0) (911.0) (894.0) Interest and Invest. Income 67.0 68.0 57.0 91.0 97.0 86.0 Net Interest Exp. (330.0) (835.0) (799.0) (808.0) (814.0) (808.0) Income/(Loss) from Affiliates 365.0 735.0 - - - - Other Non-Operating Inc. (Exp.) - - - - - - EBT Excl. Unusual Items 8,165.0 9,399.0 9,576.0 8,594.0 9,064.0 9,534.0 Restructuring Charges (36.0) - (383.0) (279.0) (163.0) (384.0) Merger & Related Restruct. Charges (50.0) (1,167.0) (359.0) (11.0) (10.0) (10.0) Impairment of Goodwill - - - - - - Other Unusual Items - - - - - - EBT Incl. Unusual Items 8,079.0 8,232.0 8,834.0 8,304.0 8,891.0 9,140.0 Income Tax Expense 2,100.0 1,894.0 2,372.0 2,090.0 2,104.0 2,154.0 Earnings from Cont. Ops. 5,979.0 6,338.0 6,462.0 6,214.0 6,787.0 6,986.0 Earnings of Discontinued Ops. - - - - - - Extraord. Item & Account. Change - - - - - - Net Income to Company 5,979.0 6,338.0 6,462.0 6,214.0 6,787.0 6,986.0 Minority Int. in Earnings (33.0) (18.0) (19.0) (36.0) (47.0) (42.0) Net Income 5,946.0 6,320.0 6,443.0 6,178.0 6,740.0 6,944.0 Pref. Dividends and Other Adj. 6.0 6.0 7.0 7.0 8.0 9.0 NI to Common Incl Extra Items 5,940.0 6,314.0 6,436.0 6,171.0 6,732.0 6,935.0 NI to Common Excl. Extra Items 5,940.0 6,314.0 6,436.0 6,171.0 6,732.0 6,935.0

21

Per Share Items Basic EPS $3.81 $3.97 $4.08 $3.96 $4.37 $4.57 Basic EPS Excl. Extra Items 3.81 3.97 4.08 3.96 4.37 4.57 Weighted Avg. Basic Shares Out. 1,558.0 1,590.0 1,576.0 1,557.0 1,541.0 1,518.5 Diluted EPS $3.77 $3.92 $4.03 $3.92 $4.32 $4.52 Diluted EPS Excl. Extra Items 3.77 3.92 4.03 3.92 4.32 4.52 Weighted Avg. Diluted Shares Out. 1,577.0 1,614.0 1,597.0 1,575.0 1,560.0 1,536.0 Normalized Basic EPS $3.25 $3.68 $3.79 $3.43 $3.65 $3.9 Normalized Diluted EPS 3.22 3.63 3.74 3.39 3.6 3.85 Dividends per Share $1.78 $1.89 $2.03 $2.13 $2.24 $2.45 Payout Ratio % 45.9% 47.1% 49.0% 53.5% 50.9% 52.1%

22 Appendix 4: Balance Sheet Balance Sheet Balance Sheet as of: Dec-26-2009 Dec-25-2010 Dec-31-2011 Dec-29-2012 Dec-28-2013 Sep-06-2014

Currency USD USD USD USD USD USD ASSETS Cash And Equivalents 3,943.0 5,943.0 4,067.0 6,297.0 9,375.0 7,282.0 Short Term Investments 192.0 426.0 358.0 322.0 303.0 5,624.0 Total Cash & ST Investments 4,135.0 6,369.0 4,425.0 6,619.0 9,678.0 12,906.0 Accounts Receivable 3,936.0 5,370.0 5,879.0 6,058.0 6,033.0 8,376.0 Other Receivables 688.0 953.0 1,033.0 983.0 921.0 - Total Receivables 4,624.0 6,323.0 6,912.0 7,041.0 6,954.0 8,376.0 Inventory 2,618.0 3,372.0 3,827.0 3,581.0 3,409.0 3,784.0 Prepaid Exp. 660.0 793.0 1,269.0 316.0 968.0 1,524.0 Deferred Tax Assets, Curr. 391.0 554.0 845.0 740.0 716.0 - Other Current Assets 143.0 158.0 163.0 423.0 478.0 - Total Current Assets 12,571.0 17,569.0 17,441.0 18,720.0 22,203.0 26,590.0 Gross Property, Plant & Equipment 24,912.0 33,041.0 35,140.0 36,162.0 36,961.0 37,373.0 Accumulated Depreciation (12,241.0) (13,983.0) (15,442.0) (17,026.0) (18,386.0) (19,444.0) Net Property, Plant & Equipment

12,671.0 19,058.0 19,698.0 19,136.0 18,575.0 17,929.0

Long-term Investments 4,573.0 2,021.0 1,566.0 2,351.0 2,623.0 1,946.0 Goodwill 6,534.0 14,661.0 16,800.0 16,971.0 16,613.0 16,225.0 Other Intangibles 2,623.0 13,808.0 16,445.0 16,525.0 16,039.0 15,500.0 Loans Receivable Long-Term 118.0 165.0 159.0 136.0 105.0 - Deferred Charges, LT 182.0 203.0 186.0 195.0 214.0 - Other Long-Term Assets 576.0 668.0 587.0 604.0 1,106.0 2,276.0 Total Assets 39,848.0 68,153.0 72,882.0 74,638.0 77,478.0 80,466.0 LIABILITIES Accounts Payable 2,881.0 3,865.0 4,083.0 4,451.0 4,874.0 13,591.0 Accrued Exp. 2,947.0 3,620.0 3,876.0 3,892.0 4,034.0 - Short-term Borrowings 362.0 3,272.0 3,656.0 1,914.0 3,082.0 9,253.0 Curr. Port. of LT Debt 102.0 1,626.0 2,549.0 2,901.0 2,224.0 - Curr. Income Taxes Payable 165.0 71.0 192.0 371.0 - - Other Current Liabilities 2,299.0 3,438.0 3,798.0 3,560.0 3,625.0 - Total Current Liabilities 8,756.0 15,892.0 18,154.0 17,089.0 17,839.0 22,844.0 Long-Term Debt 7,400.0 19,999.0 20,568.0 23,544.0 24,333.0 23,489.0 Pension & Other Post-Retire. Benefits

- - - 3,467.0 1,986.0 -

Def. Tax Liability, Non-Curr. 659.0 4,057.0 4,995.0 5,063.0 5,986.0 5,870.0 Other Non-Current Liabilities 5,591.0 6,729.0 8,266.0 3,076.0 2,945.0 5,076.0 Total Liabilities 22,406.0 46,677.0 51,983.0 52,239.0 53,089.0 57,279.0 Pref. Stock, Convertible 41.0 41.0 41.0 41.0 41.0 41.0 Pref. Stock, Other (145.0) (150.0) (157.0) (164.0) (171.0) (178.0) Total Pref. Equity (104.0) (109.0) (116.0) (123.0) (130.0) (137.0) Common Stock 30.0 31.0 26.0 26.0 25.0 25.0 Additional Paid In Capital 250.0 4,527.0 4,461.0 4,178.0 4,095.0 4,028.0 Retained Earnings 33,805.0 37,090.0 40,316.0 43,158.0 46,420.0 48,764.0

23

Treasury Stock (13,383.0) (16,745.0) (17,870.0) (19,458.0) (21,004.0) (23,463.0) Comprehensive Inc. and Other (3,794.0) (3,630.0) (6,229.0) (5,487.0) (5,127.0) (6,146.0) Total Common Equity 16,908.0 21,273.0 20,704.0 22,417.0 24,409.0 23,208.0 Minority Interest 638.0 312.0 311.0 105.0 110.0 116.0 Total Equity 17,442.0 21,476.0 20,899.0 22,399.0 24,389.0 23,187.0 Total Liabilities And Equity 39,848.0 68,153.0 72,882.0 74,638.0 77,478.0 80,466.0

24 Appendix 5: Statement of Cash Flows Cash Flow

For the Fiscal Period Ending 12 months Dec-26-2009

12 months Dec-25-2010

12 months Dec-31-2011

12 months Dec-29-2012

12 months Dec-28-2013

LTM 12 months Sep-06-2014

Currency USD USD USD USD USD USD Net Income 5,946.0 6,320.0 6,443.0 6,178.0 6,740.0 6,944.0 Depreciation & Amort. 1,453.0 2,073.0 2,448.0 2,374.0 2,356.0 2,345.0 Amort. of Goodwill and Intangibles 63.0 117.0 133.0 119.0 110.0 100.0 Depreciation & Amort., Total 1,516.0 2,190.0 2,581.0 2,493.0 2,466.0 2,445.0 Other Amortization 119.0 137.0 156.0 196.0 197.0 197.0 Asset Writedown & Restructuring Costs (160.0) 114.0 352.0 3.0 4.0 182.0 (Income) Loss on Equity Invest. (235.0) (693.0) - - - - Stock-Based Compensation 227.0 299.0 326.0 278.0 303.0 291.0 Tax Benefit from Stock Options (42.0) (107.0) (70.0) (124.0) (117.0) (109.0) Other Operating Activities (558.0) (443.0) 688.0 (779.0) (514.0) (621.0) Change in Acc. Receivable 188.0 (268.0) (666.0) (250.0) (88.0) (408.0) Change In Inventories 17.0 276.0 (331.0) 144.0 4.0 (140.0) Change in Acc. Payable (133.0) 488.0 520.0 548.0 1,007.0 810.0 Change in Inc. Taxes 319.0 123.0 (340.0) (97.0) 86.0 390.0 Change in Other Net Operating Assets (408.0) 12.0 (715.0) (111.0) (400.0) (262.0) Cash from Ops. 6,796.0 8,448.0 8,944.0 8,479.0 9,688.0 9,719.0 Capital Expenditure (2,128.0) (3,253.0) (3,339.0) (2,714.0) (2,795.0) (2,838.0) Sale of Property, Plant, and Equipment 58.0 81.0 84.0 95.0 109.0 118.0 Cash Acquisitions - (3,296.0) (2,592.0) - - - Divestitures 99.0 12.0 780.0 (32.0) 133.0 145.0 Sale (Purchase) of Intangible assets - (900.0) - - - - Invest. in Marketable & Equity Securt. (445.0) (295.0) (535.0) (60.0) (48.0) (5,345.0) Net (Inc.) Dec. in Loans Originated/Sold

- - - - - -

Other Investing Activities 15.0 (17.0) (16.0) (294.0) (24.0) (5.0) Cash from Investing (2,401.0) (7,668.0) (5,618.0) (3,005.0) (2,625.0) (7,925.0) Short Term Debt Issued 26.0 2,578.0 862.0 549.0 1,657.0 - Long-Term Debt Issued 1,057.0 6,451.0 3,000.0 5,999.0 4,195.0 - Total Debt Issued 1,083.0 9,029.0 3,862.0 6,548.0 5,852.0 6,516.0 Short Term Debt Repaid (1,044.0) (96.0) (559.0) (2,010.0) (492.0) - Long-Term Debt Repaid (226.0) (559.0) (2,367.0) (2,449.0) (3,894.0) - Total Debt Repaid (1,270.0) (655.0) (2,926.0) (4,459.0) (4,386.0) (3,152.0) Issuance of Common Stock 413.0 1,038.0 945.0 1,122.0 1,123.0 693.0 Repurchase of Common Stock - (4,978.0) (2,489.0) (3,219.0) (3,001.0) (4,167.0) Repurchase of Preferred Stock (7.0) (5.0) (7.0) (7.0) (7.0) (9.0) Common and/or Pref. Dividends Paid (2,732.0) (2,978.0) (3,157.0) (3,305.0) (3,434.0) (3,621.0) Total Dividends Paid (2,732.0) (2,978.0) (3,157.0) (3,305.0) (3,434.0) (3,621.0) Other Financing Activities 16.0 (65.0) (1,363.0) 14.0 64.0 59.0 Cash from Financing (2,497.0) 1,386.0 (5,135.0) (3,306.0) (3,789.0) (3,681.0) Foreign Exchange Rate Adj. (19.0) (166.0) (67.0) 62.0 (196.0) (35.0) Net Change in Cash 1,879.0 2,000.0 (1,876.0) 2,230.0 3,078.0 (1,922.0)

25 Appendix 6: Common Size Income Statement Income Statement

For the Fiscal Period Ending

Reclassified 12 months

Dec-26-2009 12 months

Dec-25-2010 12 months

Dec-31-2011 12 months

Dec-29-2012 12 months

Dec-28-2013

LTM 12 months

Sep-06-2014 Currency USD USD USD USD USD USD Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Other Revenue - - - - - - Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost Of Goods Sold 46.5% 45.3% 47.4% 47.8% 47.0% 46.5% Gross Profit 53.5% 54.7% 52.6% 52.2% 53.0% 53.5%

Selling General & Admin Exp. 34.6% 38.1% 36.8% 37.7% 37.9% 37.9% R & D Exp. - - - - - - Depreciation & Amort. - - - - - - Amort. of Goodwill and Intangibles

0.1% 0.2% 0.2% 0.2% 0.2% 0.1%

Other Operating Expense/(Income) - - - - - -

Other Operating Exp., Total 34.7% 38.3% 37.0% 37.9% 38.1% 38.0%

Operating Income 18.8% 16.4% 15.6% 14.4% 14.9% 15.5%

Interest Expense (0.9%) (1.6%) (1.3%) (1.4%) (1.4%) (1.3%) Interest and Invest. Income 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% Net Interest Exp. (0.8%) (1.4%) (1.2%) (1.2%) (1.2%) (1.2%)

Income/(Loss) from Affiliates 0.8% 1.3% - - - - Other Non-Operating Inc. (Exp.) - - - - - - EBT Excl. Unusual Items 18.9% 16.3% 14.4% 13.1% 13.6% 14.3%

Restructuring Charges (0.1%) - (0.6%) (0.4%) (0.2%) (0.6%) Merger & Related Restruct. Charges

(0.1%) (2.0%) (0.5%) (0.0%) (0.0%) (0.0%)

Impairment of Goodwill - - - - - - Other Unusual Items - - - - - - EBT Incl. Unusual Items 18.7% 14.2% 13.3% 12.7% 13.4% 13.7%

Income Tax Expense 4.9% 3.3% 3.6% 3.2% 3.2% 3.2% Earnings from Cont. Ops. 13.8% 11.0% 9.7% 9.5% 10.2% 10.4%

Earnings of Discontinued Ops. - - - - - - Extraord. Item & Account. Change - - - - - - Net Income to Company 13.8% 11.0% 9.7% 9.5% 10.2% 10.4%

Minority Int. in Earnings (0.1%) (0.0%) (0.0%) (0.1%) (0.1%) (0.1%) Net Income 13.8% 10.9% 9.7% 9.4% 10.1% 10.4%

Pref. Dividends and Other Adj. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

NI to Common Incl Extra Items 13.7% 10.9% 9.7% 9.4% 10.1% 10.4% NI to Common Excl. Extra Items

13.7% 10.9% 9.7% 9.4% 10.1% 10.4%

26

Per Share Items Basic EPS $3.81 $3.97 $4.08 $3.96 $4.37 $4.57 Basic EPS Excl. Extra Items

3.81

3.97

4.08

3.96

4.37

4.57 Weighted Avg. Basic Shares Out.

1,558.0

1,590.0

1,576.0

1,557.0

1,541.0

1,518.5

Diluted EPS $3.77 $3.92 $4.03 $3.92 $4.32 $4.52 Diluted EPS Excl. Extra Items

3.77

3.92

4.03

3.92

4.32

4.52 Weighted Avg. Diluted Shares Out.

1,577.0

1,614.0

1,597.0

1,575.0

1,560.0

1,536.0

Normalized Basic EPS $3.25 $3.68 $3.79 $3.43 $3.65 $3.9 Normalized Diluted EPS

3.22

3.63

3.74

3.39

3.6

3.85

Dividends per Share $1.78 $1.89 $2.03 $2.13 $2.24 $2.45 Payout Ratio % 45.9% 47.1% 49.0% 53.5% 50.9% 52.1%

27

Reference List

1. "4. Porter's Five Forces - Soft Drink Industry SAR Analysis." 4. Porter's Five Forces - Soft Drink Industry SAR Analysis. N.p., n.d. Web. 02 Dec. 2014. <https://sites.google.com/site/softdrinkindustrysaranalysis/porter-s-five-forces>.

2. "America's Biggest Food Companies." Forbes. Forbes Magazine, n.d. Web. 03 Dec. 2014. <http://www.forbes.com/sites/investopedia/2010/11/02/americas-biggest-food-companies/>.

3. B. PEPSICO, INC. CORPORATE GOVERNANCE GUIDELINES As of November 20, 2014 (n.d.): n. pag. Web.

4. "Frito-Lay Dominates U.S. Salty Snacks, But Rising Cracker Sales Could Stall Growth." Forbes. Forbes Magazine, n.d. Web. 03 Dec. 2014. <http://www.forbes.com/sites/greatspeculations/2014/06/27/frito-lay-dominates-u-s-salty-snacks-but-rising-cracker-sales-could-stall-growth/>.

5. "Global Carbonated Soft Drinks." Global Carbonated Soft Drinks. N.p., n.d. Web. 03 Dec. 2014. <http://www.marketresearch.com/MarketLine-v3883/Global-Carbonated-Soft-Drinks-8403575/>.

6. "New Respect Is Bestowed on Fiscal Policy." The New York Times. The New York Times, 31 Oct. 2014. Web. 03 Dec. 2014. <http://www.nytimes.com/2014/10/31/business/international/new-respect-is-bestowed-on-fiscal-policy.html?_r=0>.

7. "Our History." PepsiCo Home. N.p., n.d. Web. 03 Dec. 2014. <http://www.pepsico.com/Company/Our-History/>.

8. "Pepsico -- Trefis." Trefis. N.p., n.d. Web. 03 Dec. 2014. <http://www.trefis.com/stock/pep/model/trefis?freeAccessToken=PROVIDER_93d2ee4db431d6acec7eeddfde9f8bff58f890f8>.

9. "PepsiCo." PepsiCo. N.p., n.d. Web. 03 Dec. 2014. <http://www.pepsico.com/annual11/financials/notes/note2.html>.

10. "Policies." Performance with Purpose. N.p., n.d. Web. 03 Dec. 2014. <http://www.pepsico.com/Purpose/Performance-with-Purpose/Policies>.

11. "Savory Snacks: Global Industry Almanac, MarketLine." -- LONDON, Nov. 13, 2014 /PRNewswire/ --. N.p., n.d. Web. 03 Dec. 2014. <http://www.prnewswire.com/news-releases/savory-snacks-global-industry-almanac-marketline-282601961.html>.

12. "Soft Drinks in the US." Soft Drinks in the US. N.p., n.d. Web. 02 Dec. 2014. <http://www.euromonitor.com/soft-drinks-in-the-us/report>.

13. "State of the Snack Food Industry - IRI." State of the Snack Food Industry - IRI. N.p., n.d. Web. 03 Dec. 2014. <http://www.iriworldwide.com/insights/reports/stateofthesnackfoodindustry.aspx>.

14. "United States Balance of Trade 1950-2014 | Data | Chart | Calendar." United States Balance of Trade. N.p., n.d. Web. 03 Dec. 2014. <http://www.tradingeconomics.com/united-states/balance-of-trade>.

15. "United States Fed Funds Rate 1971-2014 | Data | Chart | Calendar." United States Fed Funds Rate. N.p., n.d. Web. 02 Dec. 2014. <http://www.tradingeconomics.com/united-states/interest-rate>.

16. "United States GDP Growth Rate 1947-2014 | Data | Chart | Calendar." United States GDP Growth Rate. N.p., n.d. Web. 02 Dec. 2014. <http://www.tradingeconomics.com/united-states/gdp-growth>.

17. "US GDP Growth Forecast 2014-2015 and up to 2060, Data and Charts - Knoema.com." Knoema. N.p., n.d. Web. 02 Dec. 2014. <http://knoema.com/qhswwkc/us-gdp-growth-forecast-2014-2015-and-up-to-2060-data-and-charts>.

18. "What Is Fiscal Policy?" Investopedia. N.p., n.d. Web. 02 Dec. 2014. <http://www.investopedia.com/articles/04/051904.asp>.

19. "World GDP." The Economist. The Economist Newspaper, 21 Sept. 2013. Web. 03 Dec. 2014. <http://www.economist.com/news/economic-and-financial-indicators/21586611-world-gdp>.