Brad Schwer

PepsiCo (PEP)

Sector: Consumer StaplesIndustry: Soft Drinks

Recommendation: BuyEstimated Value: $71.06-$79.04

Current Stock Price: $66.29

Company InformationFiscal year ends 12/31Non-alcoholic Carbonated and non-carbonated beveragesVarious foods and snacksHeadquarters in Purchase, NYBeverage concentrates, fountain syrups, and finished

goods

Familiar ProductsPepsi/Diet PepsiMountain DewAquafina (bottled water)7UPSoBe LifewaterTropicana Lays, Doritos, RufflesQuaker oatmeal/Rice-A-Roni

Direct Competitors

Business Units1. PepsiCo Americas Foods*2. PepsiCo Americas Beverages*3. PepsiCo International

* Includes Latin American business

PepsiCo 2009

37

26

11

8

7

11

Operating Profits by Segment

Frito-Lay North AmericaPepsiCo Beverages Amer-icaUnited Kingdom and EuropeMiddle East, Africa, and AsiaQuaker Foods North AmericaLatina America Foods

Source: Edward Jones

Sales and EPS GrowthDEC DEC DEC DEC DEC

2009 2008 2007 2006 2005

Revenue (in billions)

43.23 43.25 39.47 35.14 32.56

% Change -0.04% 9.57% 12.34% 7.91% N/A

GAAP EPS (as reported)

3.77 3.21 3.41 3.34 2.39

% Change 17.45% -5.87% 2.10% 39.75% N/A

Baseline EPS 3.71 3.67 3.38 3.00 2.66

% Change 1.09% 8.58% 12.67% 12.78% N/A

•Compounded sales growth rate: 7.3%•Compounded Baseline EPS growth rate: 8.7%

Value Line ProjectionsFiscal Year Mar 31 Jun 30 Sep 30 Dec 31 Full YearEPS 2010 0.80 1.12 1.18 1.05 4.15

Fiscal Year Mar 31 Jun 30 Sep 30 Dec 31 Full Year

EPS 2010 0.75 1.11 1.23 1.08 4.18

12% Yr to Yr Gain

12% Yr to Yr Gain

Baseline Projections

Value Line ProjectionsFiscal Year Mar 31 Jun 30 Sep 30 Dec 31 Full Year

Sales 2010 ($ billions)

9.60 12.25 13.68 15.0 50.5

Fiscal Year Mar 31 Jun 30 Sep 30 Dec 31 Full Year

Sales 2010 ($ billions)

9.57 13.88 14.67 17.04 55.16

Baseline Projections

28% Yr to Yr Gain

17% Yr to Yr Gain

SWOT AnalysisStrengths Weaknesses

•Brand name•Cash position•Diverse products•Pepsi Refresh Project

•Domestic focus•Unhealthy products

SWOT AnalysisOpportunities Threats

•Expanding global presence•Energy drinks•Non-carbonated beverages•Healthier food (Baked)•Aggressive CEO (Indra Nooyi)

•Potential soft drink tax•Health trend•Increased competition

P/E ValuationCompany Ticker EPS

Growth (5 yr)

Rev Growth (5 yr)

Beta Forward P/E Dividend ROE

PepsiCo PEP 11% 9% .68 16.0 2.7% 41%

Coca-Cola KO 8% 9% .71 16.0 3.2% 30%

Dr. Pepper Snapple

DPS 10% 4% .89 14.5 1.8% 17%

Kraft Foods KFT 8% 6% .60 15.0 3.7% 15%

Average Forward P/E for S&P 500: 14.5

P/E Valuation5-year average P/E: 18Forward P/E: 16Averaged P/E multiple: 17xEstimated projection: 17*$4.18

$71.06 per share

DCF Data Input Projection Period

2009 2010 2011 2012 2013 2014 Revenue $43,232.0 $56,889.4 $61,753.1 $66,693.4 $71,361.9 $76,357.2% Growth 0.0% 31.6% 8.5% 8.0% 7.0% 7.0%

EBITDA $9,679.0 $11,377.9 $12,350.6 $14,005.6 $14,986.0 $16,035.0% Margin 22.4% 20.0% 20.0% 21.0% 21.0% 21.0%% Growth 14.2% 17.6% 8.5% 13.4% 7.0% 7.0%Dep & Am $1,500.0 $1,973.9 $2,142.6 $2,314.0 $2,476.0 $2,649.3

EBIT $8,179.0 $9,404.0 $10,208.0 $11,691.6 $12,510.0 $13,385.7% Margin 18.9% 16.5% 16.5% 17.5% 17.5% 17.5%

Taxes $1,498.0 $1,971.2 $2,139.8 $2,310.9 $2,472.7 $2,645.8EBIAT $6,681.0 $7,432.8 $8,068.2 $9,380.6 $10,037.3 $10,739.9

Unlevered Free Cash

Flow $5,814.0 $6,562.2 $7,123.2 $8,360.0 $8,945.2 $9,571.4

Equity risk premium 8%P/EBITDA 10x

ValuationDCF intrinsic value: $79.24P/E valuation: $71.06Valuation range

$71.06-$79.24Current Stock Price

$66.29 (Undervalued)

Recommendation: BuyEstimated Value: $71.06-$79.24

Current Price: $66.29

Pros Cons•Growth in emerging markets•Solid payout ratio•Increasing dividends•Acquisitions•Stock buybacks

$15 billion through 2013

•Domestic focus•Unhealthy products•Regulations

Questions from the Board of Directors?

PepsiCo vs. Coca-Cola

Foreign Currency Exposure

Generated 74% of net operating revenue from outside U.S.

Uses 72 functional currenciesCurrency impact on net revenue

2009: -11%Uses derivatives to hedge

Forward contracts Purchase currency options

Generated 48% of net operating revenue from outside U.S.

Currency impact on net revenue 2009: -5%

Uses derivatives to hedge Forward contracts Commodity contracts

PepsiCo Coca-Cola

AcquisitionPepsiAmericas

Acquired remaining 57% stakeThe Pepsi Bottling Group

Acquired remaining 67.4% stakeTotal cost of acquisition

$7.8 billionHalf cash/Half PEP common stock

Adds $4 billion in debt to PEP balance sheetIncrease in EPS of $0.15 when fully realized in 2012Create synergies of $300 million by 2012

Cost efficiency and better revenue opportunities