Analysts: Zachary Haller, Andrew Paley Brown and Sean Miller

PEP

Washburn University Applied Portfolio Management

Pepsico, Inc.

HOLD

Consumer Staples

Sector:

Report Date: Market Cap (mm) Return on Capital EPS (ttm) Current Price 12‐mo. Target Price

$147,958 26.6% $3.71 $100.72 $105.00

Annual Dividend Dividend Yield Price/Earnings (ttm) Economic Value‐Added (ttm) Free Cash Flow Margin

$2.76 2.7% 27.2 $5,979 9.9%

Business Description PepsiCo, Inc. operates as a food and beverage company worldwide. Its Frito‐Lay  North America segment offers Lay’s and Ruffles potato chips; Doritos, Tostitos,  and Santitas tortilla chips; and Cheetos cheese‐flavored snacks, branded dips,  and Fritos corn chips. The company’s Quaker Foods North America segment  provides Quaker oatmeal, grits, rice cakes, natural granola, and oat squares;  and Aunt Jemima mixes and syrups, Quaker Chewy granola bars, Cap’n Crunch  cereal, Life cereal, and Rice‐A‐Roni side dishes. Its North America Beverages  segment offers beverage concentrates, fountain syrups, and finished goods  under the Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain  Dew, Tropicana Pure Premium, Sierra Mist, and Mug brands; and ready‐to‐ Investment Thesis PEP has increased net income even with decreases in total revenue, and  this is due to being able to maintain the growth rates of their profit  margins. With an ROIC to WACC spread of over 23%, PEP still creates value,  even in a sluggish economy. Also, PEP does reduce the portfolio's beta, and  has an expected 5‐year return of 3.7% on the dividend discount valuation  model. We’ve seen increased penetration into emerging markets. The  potential growths of these markets are among a highlight for PEP. The  currency exchange rate fluctuation, and the strengthening of the U.S.  Dollar still remains a concern. The strength of the company’s portfolio and  brand names reduces a portion of that risk. In comparison to industry  competitors, PEP is smaller yet maintains performance and relative  valuation. With PEP’s low beta, expected future returns on dividends, and  steady growth in intrinsic value, our recommendation is to hold. ANNUALIZED 3‐YEAR CAGR Total Revenue EBIT NOPAT Earnings Per Share Dividends Per Share

‐1.3% 1.6% 1.2% ‐2.2% 9.1%

Margins and Yields

2011

Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield

Free Cash Flow Total Invested Capital Total Assets Economic Value‐Added Market Value‐Added

2012

15.6% N/A 6.2% 3.1%

14.6% 9.2% 5.8% 3.1%

2013 14.9% 8.8% 5.3% 2.7%

2014 15.1% 15.9% 4.4% 2.6%

1.1% ‐0.2% ‐2.3% 1.6% 17.6%

2‐Yr Beta (S&P 500 Index) Annualized Alpha Institutional Ownership Short Interest (% of Shares) Days to Cover Short

PEP

Compared With: The Coca‐Cola Company Dr Pepper Snapple Group, Inc. and the S&P 500 Index

KO

DPS

20% 15% 10% 5% 0% ‐5% ‐10%

PEP

^SPX

8% 6% 4% 2% 0% ‐2% ‐4% ‐6% ‐8% ‐10% ‐12%

ROA

ROE

ROIC

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2011

2012

EBIT

2013

2014

2015

Net Operating Profit After Tax

$12,000 $10,000 $8,000 $6,000

Per Share Metrics

2011

2012

4.09 2.03 4.82 N/A

Earnings Dividends NOPAT Free Cash Flow

3.97 2.13 4.59 3.86

  Economic Value‐Added

2013 4.37 2.24 4.89 3.81

2014 4.32 2.53 5.00 7.01

3.71 2.76 5.05 4.24

$160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2011

2012

2013

$4,000 $2,000 $0 2011

  Market Valued‐Added

$6,300 $6,200 $6,100 $6,000 $5,900 $5,800 $5,700 $5,600 $5,500 $5,400

Datasource: Capital IQ

2015

2014

2015

2012

Price/Earnings

2013

2014

2015

Price/Free Cash Flow

30 25 20 15 10 5 0 2012

2013

4/18/2016

Pepsico, Inc.

25%

2015 15.9% 9.9% 3.7% 2.7%

0.64 3.9% 6.5% 0.7% 2.1

2014

2015

Pepsico, Inc.

Sector

PEP

The Coca‐Cola Company

Consumer Staples

Sector

KO

Income Statement Highlights

Consumer Staples

Income Statement Highlights

2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

Total Revenue Cost of Goods Sold Gross Profit SG&A Expense R&D Expense Dep. & Amort. Other Oper. Exp. Operating Income Interest Expense Other Non‐Oper. Exp. EBT ex‐Unusuals Total Unusual Exp. Earnings Before Tax Income Tax Expense Net Income

66,504 31,547 34,957 24,449 0 133 0 10,375 (856) 0 9,576 (742) 8,834 2,372 6,443

65,492 31,291 34,201 24,530 0 119 0 9,552 (899) 0 8,744 (440) 8,304 2,090 6,178

66,415 31,243 35,172 25,184 0 110 0 9,878 (911) 0 9,064 (173) 8,891 2,104 6,740

66,683 30,884 35,799 25,641 0 92 0 10,066 (909) 0 9,242 (485) 8,757 2,199 6,513

63,056 28,384 34,672 24,565 0 75 0 10,032 (970) 0 9,121 (1,679) 7,442 1,941 5,452

Total Revenue Cost of Goods Sold Gross Profit SG&A Expense R&D Expense Dep. & Amort. Other Oper. Exp. Operating Income Interest Expense Other Non‐Oper. Exp. EBT ex‐Unusuals Total Unusual Exp. Earnings Before Tax Income Tax Expense Net Income

46,542 18,204 28,338 17,422 0 0 4 10,912 (417) 631 11,609 (151) 11,458 2,812 8,584

48,017 19,053 28,964 17,738 0 0 10 11,216 (397) 810 12,144 (335) 11,809 2,723 9,019

46,854 18,421 28,433 17,310 0 0 18 11,105 (463) 608 11,854 (377) 11,477 2,851 8,584

45,998 17,889 28,109 17,218 0 0 24 10,867 (483) 581 11,610 (2,285) 9,325 2,201 7,098

44,294 17,482 26,812 16,427 0 0 145 10,240 (856) 690 10,770 (1,165) 9,605 2,239 7,351

Earnings per Share Dividends per Share Effective Tax Rate Total Common Shares Year‐end Stock Price

$4.09 $2.03 26.85% 1,576 $66.35 996

$3.97 $2.13 25.17% 1,557 $68.02 997

$4.37 $2.24 23.66% 1,541 $82.71 998

$4.32 $2.53 25.11% 1,509 $97.05 999

$3.71 $2.76 26.08% 1,469 $100.54 1000

Earnings per Share Dividends per Share Effective Tax Rate Total Common Shares Year‐end Stock Price

$1.88 $0.94 24.54% 4,568 $34.99 996

$2.00 $1.02 23.06% 4,504 $36.25 997

$1.94 $1.12 24.84% 4,434 $41.31 998

$1.62 $1.22 23.60% 4,387 $42.22 999

$1.69 $1.32 23.31% 4,352 $42.96 1000

2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

4,067 358 4,425 6,912 3,827 1,269 17,441 19,698 72,882

6,297 322 6,619 7,041 3,581 316 18,720 19,136 74,638

9,375 303 9,678 6,954 3,409 968 22,203 18,575 77,478

6,134 2,592 8,726 6,651 3,143 871 20,663 17,244 70,509

9,096 2,913 12,009 6,437 2,720 813 23,031 16,317 69,667

12,803 1,232 14,035 4,920 3,092 2,614 25,497 14,939 79,974

8,442 8,109 16,558 4,759 3,264 1,989 30,328 14,476 86,174

10,414 9,854 20,268 4,873 3,277 2,400 31,304 14,967 90,055

8,958 12,717 21,689 4,466 3,100 1,902 32,986 14,633 92,023

7,309 12,591 19,920 3,941 2,902 1,884 33,395 12,571 90,093

4,083 3,876 3,656 18,154 20,568 51,983 (116) 4,487 40,316 (17,870) 20,704 20,899 72,882

4,451 3,892 1,914 17,089 23,544 52,239 (123) 4,204 43,158 (19,458) 22,417 22,399 74,638

4,874 4,034 3,082 17,839 24,333 53,089 (130) 4,120 46,420 (21,004) 24,409 24,389 77,478

5,127 3,968 980 18,092 23,821 52,961 (140) 4,140 49,092 (24,985) 17,578 17,548 70,509

5,546 4,078 962 17,578 29,213 57,637 (145) 4,100 50,472 (29,185) 12,068 12,030 69,667

2,172 6,488 12,871 24,283 13,656 48,053 0 12,092 53,621 (31,304) 31,635 31,921 79,974

1,969 6,376 16,297 27,821 14,742 53,006 0 13,139 58,045 (35,009) 32,790 33,168 86,174

1,933 7,305 16,901 27,811 19,157 56,615 0 14,036 61,660 (39,091) 33,173 33,440 90,055

2,089 6,793 19,130 32,374 19,100 61,462 0 14,914 63,408 (42,225) 30,320 30,561 92,023

2,795 6,739 13,129 26,930 28,639 64,329 0 15,776 65,018 (45,066) 25,554 25,764 90,093

Balance Sheet Highlights

Assets Cash and Equivalents Short‐Term Investments Total Cash & ST Invest. Total Receivables Inventory Prepaid Expenses Total Current Assets Net PPE Total Assets Liabilities and Equity Accounts Payable Accrued Expenses Short‐Term Debt Total Current Liab. Long‐Term Debt Total Liabilities Preferred Equity Common Stock & APIC Retained Earnings Treasury Stock Total Common Equity Total Equity Total Liab. and Equity

1. Margins and Profitability

Balance Sheet Highlights

Assets Cash and Equivalents Short‐Term Investments Total Cash & ST Invest. Total Receivables Inventory Prepaid Expenses Total Current Assets Net PPE Total Assets Liabilities and Equity Accounts Payable Accrued Expenses Short‐Term Debt Total Current Liab. Long‐Term Debt Total Liabilities Preferred Equity Common Stock & APIC Retained Earnings Treasury Stock Total Common Equity Total Equity Total Liab. and Equity

PEP, Page 2 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Profit Margins Gross Profit Margin Operating Profit Margin Net Profit Margin Free Cash Flow Margin Gross Profit Margin

Pepsico, Inc. 2011

2012

2013

2014

2015

52.6% 15.6% 9.7% N/A

52.2% 14.6% 9.4% 9.2%

53.0% 14.9% 10.1% 8.8%

53.7% 15.1% 9.8% 15.9%

55.0% 15.9% 8.6% 9.9%

KO Profit Margins Gross Profit Margin Operating Profit Margin Net Profit Margin Free Cash Flow Margin

Gross Profit Margin

Operating Profit Margin

PEP

50% 40% 30% 20% 10% 0% 2011

2012

2013

Operating Profit Margin

2014

PEP

20.0%

20.0%

15.0%

15.0%

2012

2013

Net Profit Margin

KO

25.0%

2014

PEP

2015

5.0% 0.0% 2011

2012

2013

2014

2015

2014

2015

61.1% 23.6% 15.4% 16.2%

60.5% 23.1% 16.6% 29.5%

Operating Profit Margin

2012

2013

Free Cash Flow Margin

2014

PEP

2015

KO

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

10.0%

0.0%

2013

60.7% 23.7% 18.3% 10.5%

2011

KO

10.0% 5.0%

2012

60.3% 23.4% 18.8% 13.0%

70% 60% 50% 40% 30% 20% 10% 0% 2011

2015

2011

60.9% 23.4% 18.4% N/A

Gross Profit Margin

KO

62% 60% 58% 56% 54% 52% 50% 48% 46%

60%

The Coca‐Cola Company

2011

2012

2013

2014

2015

2012

2013

2014

2015

Analyst Comments: Gross Profit Margin: The gross profit margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with  producing the goods and services sold by a company. PEPs Gross profit margin increases steadily from 52.6 in 2011 to 55.0% in 2015, KO has seen a consolidation in their gross profit margin  from 60.9% in 2011 to 60.5% in 2015.  The important thing to note is that with PEP, we have seen a decrease in cost of goods sold by nearly $3 billion while seeing a decrease in total revenue  which has helped increase their gross margin.  Even when PEP saw a decline in revenue, they were still able to increase the gross profit margin. EBIT Margin (Operating profit margin):  EBIT/Operating margin is a measurement of a company's operating profitability. This margin can provide an investor with a cleaner view of a company's core profitability. PEP sees a slight  increase in operating profit margin from 15.6%% to 15.9%, which is a pretty moderate. KOs operating margin also sees a consolidation from 23.4% to 23.1% during the same period. We can  conclude that during this 5 year period PEP and KO have seen moderate to no growth in EBIT/Operating Profit Margin Net Profit Margin: Net profit margin, is the ratio of net profits   revenues, which shows how much of each revenue dollar earned is translated into bottom‐line profits. PEP’s net profit margin decreased from 9.7% in 2011 to 8.6% in 2015. KO has also seen a  decrease in net profit margin, but at a greater margin, from 18.4% in 2011 to 16.6% in 2015. We concluded from this that PEP and KO have seen a decrease in their net profit margins, but KO  still has double the net profit margin then PEP. Free Cash Flow Margin: Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to  maintain or expand its asset base. We want to make sure that accounting profits are backed up by tangible free cash flows. UNP has seen a slight increase of its free cash flow margin, from  9.2% in 2012 to 9.9% in 2015. KO has seen more of an increase in FCF, 13.0% in 2012 to 29.5% in 2015. Profit margin synthesis: Even though we saw decreases in total revenue in 2015, we saw  increases in total gross, operating, and net profit margins

1. Margins and Profitability

PEP, Page 3 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Profitability Ratios Net Profit Margin × Total Asset Turnover = Return on Assets × Equity Multiplier = Return on Equity

Pepsico, Inc.

Return on Assets

2011

2012

2013

2014

2015

9.7% 0.9 8.8% 3.5 30.8%

9.4% 0.9 8.3% 3.3 27.6%

10.1% 0.9 8.7% 3.2 27.6%

9.8% 0.9 9.2% 4.0 37.1%

8.6% 0.9 7.8% 5.8 45.3%

KO Profitability Ratios Net Profit Margin × Total Asset Turnover = Return on Assets × Equity Multiplier = Return on Equity

Total Asset Turnover

Return on Equity

PEP

The Coca‐Cola Company

30%

40%

0.8

25%

30%

0.6

20%

0.4

10%

0.2

0%

0.0 2013

Equity Multiplier

2014

PEP

KO

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

2014

2015

15.4% 0.5 7.7% 3.0 23.2%

16.6% 0.5 8.2% 3.5 28.5%

Return on Equity

20% 15% 10% 5% 0% 2011

2015

2013

18.3% 0.5 9.5% 2.7 25.7%

Return on Assets

1.0

2012

2012

18.8% 0.6 10.5% 2.6 27.2%

KO

50%

2011

2011

18.4% 0.6 10.7% 2.5 26.9%

2012

2013

Return on Assets

2014

PEP

2011

2015

2013

Return on Equity

KO

12.0%

50.0%

10.0%

40.0%

8.0%

2012

2014

PEP

2015

KO

30.0%

6.0% 20.0%

4.0%

10.0%

2.0% 0.0% 2011

2012

2013

2014

2015

0.0% 2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

Analyst Comments: Total asset turnover: The Asset Turnover ratio can often be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.  PEP’s total asset turner has remained relatively constant from 2011 to 2015, at .9. KO has remained around .6 to .5 for the past 5 years. Total revenue and total assets are increasing at a  similar rate, which is why asset turnover has remained constant. With a constant total asset turnover rate, any increase in net profit margin directly increases return on assets. Return on  assets: ROA shows how efficient management is at using its assets to generate earnings. The decrease in 2015 on ROA is due to the decrease net profit margin from 2014 to 2015. KO’s ROA  has decreased over the past 5 years from 10.7% in 2011 to 8.2% in 2015, due to a decreasing total asset turnover, and with a decrease in net profit margin. KO has an advantage on return on  assets due to a higher net profit margin than PEP even with an inferior total asset turnover. Return on equity / equity multiplier: Return on equity (ROE) is the amount of net income  returned as a percentage of shareholder’s equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders  have invested. KO’s return on equity has increased in 2011, from 26.9% to 28.5% in 2015. PEP on the other hand has been able to increase their return on equity from 30.8% in 2011 to 45.3%  in 2015; this is a direct result of an increase in equity multiplier. We can conclude that PEP is pushing out more profit with shareholder’s money. 

1. Margins and Profitability

PEP, Page 4 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Multiples and Yields Price/Earnings Price/Book Price/Free Cash Flow Earnings Yield Dividend Yield

Pepsico, Inc. 2011

2012

16.2 1.4 N/A 6.2% 3.1%

Price/Earnings

17.1 1.4 17.6 5.8% 3.1%

2013

18.9 1.6 21.7 5.3% 2.7%

Price/Free Cash Flow

2014

2015

22.5 2.1 13.8 4.4% 2.6%

27.1 2.1 23.7 3.7% 2.7%

KO Multiples and Yields Price/Earnings Price/Book Price/Free Cash Flow Earnings Yield Dividend Yield

Price to Earnings

30.0

30.0

25.0

25.0

20.0

20.0

15.0

15.0

10.0

10.0

5.0

5.0

PEP

2012

2013

Earnings Yield

2014

Dividend Yield

2013

2014

2012

2013

Price to Book

2014

Earnings Yield

PEP

KO

2.5

PEP

1.5 1.0 0.5 0.0 2012

2013

2014

2015

2012

2013

Earnings Yield

KO

2015

26.1 2.0 24.9 3.8% 2.9%

25.4 2.1 14.3 3.9% 3.1%

Price/Free Cash Flow

2014

2015

Dividend Yield

5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2013

2014

Dividend Yield

PEP

2015

2012

2013

2014

Price to Free Cash Flow

KO

2015

PEP

KO

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

3.2% 3.1% 3.0% 2.9% 2.8% 2.7% 2.6% 2.5% 2.4% 2.3%

2.0

2014

21.3 2.0 37.3 4.7% 2.7%

6.0%

2012

2015

2013

18.1 1.9 26.1 5.5% 2.8% Price/Earnings

2015

7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

2012

18.6 2.0 N/A 5.4% 2.7%

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2012

2015

2011

KO

0.0

0.0

The Coca‐Cola Company

2012

2013

2014

2015

2012

2013

2014

2015

Analyst Comments: Price/Earnings: The P/ E ratio, or P/ E multiple, expresses a stock's price as a multiple of its earnings over the past 12 trailing months. As we can see in this chart, PEP’s  P/E ratio has increased from 16.2 in 2011, to a 5‐year high of 27.1 in 2015. It is important to note that PEP’s P/E ratio is above the reasonable range of 12‐18, this add concern that PEP is  being overvalued.  KO’s P/E ratio has also increased over this 5‐year period, from 18.6 in 2011, to 25.4 in 2015. PEP’s P/E ratio increased because the market is willing to pay more today than  they were in 2011 based on their projected future earnings. Earnings Yield: Earnings yield expresses net income (ttm) as a percentage of the price investors are currently paying to buy a  fractional claim on that net income. PEP’s earnings yield has steadily decreased from 2011 through 2015, from 6.2% to 3.7%. KO’s earnings yield has also decreased over the last 5 years, from  5.4% in 2011 to 3.9% in 2015. PEP’s earning yield decreased therefore indicating the market is pricing their stock more expensive relative to their earnings. Dividend Yield: Dividend yield  indicates how much a company pays out in dividends each year relative to its share price. PEP’s dividend yield on a 5‐year basis has decreased ever so slightly from 3.1% to 2.7%. KO’s dividend  yield has increased since 2011, from 2.7% to 3.1% in 2015. The decrease in dividend yield shows investors that PEP is potentially less confident in the future of the company.

2. Relative Valuation and Debt

PEP, Page 5 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Liquidity and Debt Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Total Debt to Assets Long‐Term Debt to Equity Times Interest Earned

Pepsico, Inc. 2011

0.96 0.75 37.94 17.38 33.2% 99.3% 12.12

Current Ratio

2012

1.10 0.89 39.24 18.29 34.1% 105.0% 10.63

2013

1.24 1.05 38.22 19.48 35.4% 99.7% 10.84

Quick Ratio

2014

2015

1.14 0.97 36.41 21.22 35.2% 135.5% 11.07

1.31 1.16 37.26 23.18 43.3% 242.1% 10.34

KO Liquidity and Debt Current Ratio Quick Ratio Days Sales Outstanding Inventory Turnover Total Debt to Assets Long‐Term Debt to Equity Times Interest Earned

Current Ratio

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

PEP

2012

2013

Days Sales Outstanding

2014

2012

2013

Total Debt to Assets

Inventory Turnover

2014

PEP

20% 10% 0%

Total Debt to Assets

2013

2014

2011

2015

2012

2013

Long-Term Debt to Equity

Long-Term Debt to Equity

2014

PEP

2015

2011

120.0%

250%

250%

100.0%

200%

200%

80.0%

150%

150%

60.0%

100%

100%

40.0%

50%

50%

20.0%

0%

0% 2013

2014

2015

2012

2012

Total Debt to Assets

KO

300%

2012

2015

1.24 1.13 32.48 15.26 46.4% 112.1% 11.96

Quick Ratio

2013

Days Sales Outstanding

300%

2011

1.02 0.92 35.44 14.84 41.5% 63.0% 22.50

2014

2015

Inventory Turnover

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

30%

2012

2014

1.13 1.01 37.96 14.30 40.0% 57.7% 23.98

2011

KO

40%

2011

2013

1.09 0.97 36.18 14.71 36.0% 45.0% 28.25 Current Ratio

2015

50%

45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

2012

1.05 0.92 38.58 15.05 33.2% 43.2% 26.17

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2011

2015

2011

KO

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2011

The Coca‐Cola Company

2013

2014

2015

Long-Term Debt to Equity

0.0% 2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

Analyst Comments: Current Ratio: The current ratio is simply current assets over current liabilities; a quick check to make sure liquid short‐term assets can cover the company’s short‐term  liabilities. PEP’s current ratio has increased from 2011 to 2015, from .96 in 2011 to 1.31 in 2015. KO’s current ratio has also increased over this 5‐year period, from 1.05 in 2011 to 1.24 in  2015. We found that PEP has a better likelihood of maintaining its short‐term liabilities in 2015 then they could in 2011. We can conclude PEP has adequate liquidity. Total Debt to Assets:  Total debt to assets defines the total amount of debt relative to assets. PEP’s debt to assets increased from 2011 to 2015, from 33.2% to 43.3%. KO’s total debt to assets has also increased  over this 5‐year period, from 33.2% to 46.4%.  Based on this 5‐year period, PEP has been increasing their debt relative to their assets. Long‐Term Debt to Equity: Long‐term debt to equity is  used to measure a company’s financial leverage; the ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in the shareholders  equity. PEP’s long‐term debt to equity ratio has increased significantly from 2011 to 2015, from 99.3% to 242.1%. KO has also seen an increase in debt to equity over this 5‐year period, from  43.2% to 112.1%. As previously stated we concluded that PEP was financing capital expenditures with more debt, therefore this explains why long‐term debt to equity has also been  increasing.

2. Relative Valuation and Debt

PEP, Page 6 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Total Invested Capital Total Cash and ST Investments + Receivables + Inventory − Accounts Payable − Accrued Expenses = Net Oper. Working Capital + Net Property, Plant & Equip. = Total Invested Capital ÷ Total Weighted Shares = Total Invested Capital/Share

Pepsico, Inc.

Net Property, Plant & Equip.

2011

2012

2013

2014

2015

4,425 6,912 3,827 4,083 3,876 7,205 19,698 26,903 1,576 $17.07

6,619 7,041 3,581 4,451 3,892 8,898 19,136 28,034 1,557 $18.01

9,678 6,954 3,409 4,874 4,034 11,133 18,575 29,708 1,541 $19.28

8,726 6,651 3,143 5,127 3,968 9,425 17,244 26,669 1,509 $17.67

12,009 6,437 2,720 5,546 4,078 11,542 16,317 27,859 1,469 $18.96

KO Total Invested Capital Total Cash and ST Investments + Receivables + Inventory − Accounts Payable − Accrued Expenses = Net Oper. Working Capital + Net Property, Plant & Equip. = Total Invested Capital ÷ Total Weighted Shares = Total Invested Capital/Share

Total Invested Capital per Share

Total Invested Capital

PEP

$15.00 $10.00 $5.00 $0.00 2012

2013

PEP NOPAT and Free Cash Flow   Operating Income (EBIT) × (1−Effective Tax Rate) = Net Oper. Profit After Tax − ∆ Total Invested Capital = Free Cash Flow   NOPAT per Share   Free Cash Flow per Share

2014

2011

2015

2012

2013

Pepsico, Inc. 2011

2012

2013

2014

2015

10,375 26.9% 7,589 N/A N/A $4.82 N/A

9,552 25.2% 7,148 1,131 6,017 $4.59 $3.86

9,878 23.7% 7,540 1,674 5,866 $4.89 $3.81

10,066 25.1% 7,538 (3,039) 10,577 $5.00 $7.01

10,032 26.1% 7,415 1,190 6,225 $5.05 $4.24

Net Operating Profit After Tax

Free Cash Flow

2014

$6.00

$10,000

$5.00

$8,000

$4.00

$6,000

$3.00

$4,000

$2.00

$2,000

$1.00

PEP

2012

2013

2014

2015

2014

2015

21,689 4,466 3,100 2,089 6,793 20,373 14,633 35,006 4,387 $7.98

19,920 3,941 2,902 2,795 6,739 17,229 12,571 29,800 4,352 $6.85

Net Property, Plant & Equip.

2011

Total Invested Capital

2012

2013

2014

2015

The Coca‐Cola Company 2011

2012

2013

2014

2015

10,912 24.5% 8,234 N/A N/A $1.80 N/A

11,216 23.1% 8,630 2,386 6,244 $1.92 $1.39

11,105 24.8% 8,346 3,435 4,911 $1.88 $1.11

10,867 23.6% 8,302 859 7,443 $1.89 $1.70

10,240 23.3% 7,853 (5,206) 13,059 $1.80 $3.00

Net Operating Profit After Tax

KO

Free Cash Flow

$14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

$0.00

$0

2013

20,268 4,873 3,277 1,933 7,305 19,180 14,967 34,147 4,434 $7.70

2015

KO NOPAT and Free Cash Flow   Operating Income (EBIT) × (1−Effective Tax Rate) = Net Oper. Profit After Tax − ∆ Total Invested Capital = Free Cash Flow   NOPAT per Share   Free Cash Flow per Share

NOPAT per Share

$12,000

2012

16,558 4,759 3,264 1,969 6,376 16,236 14,476 30,712 4,504 $6.82

$40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

$20.00

2011

2011

14,035 4,920 3,092 2,172 6,488 13,387 14,939 28,326 4,568 $6.20

KO

$25.00

$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

The Coca‐Cola Company

2012

2013

2014

2015

2012

2013

2014

2015

Analyst Comments: Net Property, Plant & Equipment: Net Property Plant and Equipment is the value of all buildings, land, furniture, and other physical capital that a business has purchased to  run its business. PEP has decreased their PPE each year, decreasing from $19.698 billion in 2011 to $16.317 billion in 2015. Net PPE makes up a large portion of PEP's total invested capital (They  are a capital intensive firm), but as we can see PEP does utilize net operating working capital. We can see that the rate of depreciation exceeds the net gain of new assets or improvements to  current assets.  Net Operating Profit After Tax and Free Cash Flow: NOPAT is simply after tax EBIT. NOPAT is used by analysts and investors as a precise and accurate measurement of  profitability to compare a company's financial results across its history and against competitors. PEP's NOPAT has constant from 2011 to 2015, slightly decreasing from $7.589 billion to $7.415  billion. Along with the slow decrease in NOPAT, PEP has seen an increase in free cash flow from $6.017 billion in 2012 to $6.225 billion in 2015. Note that both NOPAT and Free cash flow has  seen a slight decline in 2015 from their previous 2014 high. Just to reiterate Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to  maintain or expand its asset base. Due to the 2015 decline we had an inconclusive outlook but felt as though the past data indicated positive operating income efficiencies (note operating  efficiency margin slightly increasing in the 5 year period). 

3. Value Creation and DCF Model

PEP, Page 7 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP Cost of Capital Equity Capitalization + Total Debt + Preferred Stock = Value of All Securities Effective Tax Rate Risk‐Free Rate Beta (5‐Yr) Market Risk Premium CAPM Cost of Equity

Pepsico, Inc. 2015 Weight % Cost Weighted % $147,693 83.1% 5.451% 4.530% $30,175 17.0% 5.000% 0.628% ($145) ‐0.1% 0.000% 0.000% $177,723 100.0% 26.08% Alternative RF Rate: 1.924% 1.924% 0.504 Alternative Beta: 0.50381 7.0% 5.451% Weighted Average Cost of Capital: 5.157% 5.157% 5.157% 5.157% 5.157% 5.157% Pepsico, Inc. 2011 2012 2013 2014 2015 28.2% 25.5% 25.4% 28.3% 26.6% 6,202 5,702 6,008 6,163 5,979 83,864 83,490 103,047 128,870 135,625 $3.94 $3.66 $3.90 $4.08 $4.07 $53.21 $53.62 $66.87 $85.40 $92.32

PEP ROIC, EVA and MVA   Return on Invested Capital   Economic Value‐Added   Market Valued‐Added   EVA per Share   MVA per Share Economic Value-Added

Market Valued-Added 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

6,300 6,200 6,100 6,000 5,900 5,800 5,700 5,600 5,500 5,400 2011

2012

2013

Return on Invested Capital

2014

KO ROIC, EVA and MVA   Return on Invested Capital   Economic Value‐Added   Market Valued‐Added   EVA per Share   MVA per Share

EVA per Share

PEP

2012

2013

Return on Invested Capital

2014

30% 20% 10% 0% 2011

2012

2013

2014

2015

4.379% 0.700% 0.000%

1.924% 0.49043

5.079%

2013 24.4% 6,612 149,996 $1.49 $33.83

Economic Value-Added

PEP

2015

2014 23.7% 6,524 154,899 $1.49 $35.31

2015 26.4% 6,339 161,408 $1.46 $37.09

Market Valued-Added 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

2011

2012

2013

2014

Return on Invested Capital

KO

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

40%

The Coca‐Cola Company 2011 2012 29.1% 28.1% 6,795 7,070 128,176 130,480 $1.49 $1.57 $28.06 $28.97

Weighted %

7,200 7,000 6,800 6,600 6,400 6,200 6,000 5,800 2011

Return on Equity

The Coca‐Cola Company 2015 Weight % Cost $186,962 81.7% 5.357% $41,768 18.3% 5.000% $0 0.0% 0.000% $228,730 100.0% 23.31% Alternative RF Rate: 1.924% 0.490 Alternative Beta: 7.0% 5.357% Weighted Average Cost of Capital:

KO

$4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

2015

50%

KO Cost of Capital Equity Capitalization + Total Debt + Preferred Stock = Value of All Securities Effective Tax Rate Risk‐Free Rate Beta (5‐Yr) Market Risk Premium CAPM Cost of Equity

2015

Return on Equity

35% 30% 25% 20% 15% 10% 5% 0% 2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

Analyst Comments: WACC (Weighted Average Cost of Capital)*: The WACC measures each  investor's expected return in proportion to their contribution to financing the firm's assets. We did  not alter PEP 's or KO's beta as it should represent the risk the company endured during previous years. The same could be said for the the risk free rate as well. All else equal, an investor now  receives less value per capital investment made by PEP when compared to KO. Return on Invested Capital: ROIC is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ROIC decreased in the 5 year period  from 28.2% in 2011 to 26.6% in 2015 for UTX. Note that PEP's WACC is at 5.157%, which is a positive indication for the investment since it is still well below ROIC. When we compare it to KO you  will notice that they too had a declining ROIC.  Both companies are equally creating value for their company, however in regards to this model PEP has always created less economic value than  KO. Economic Value‐Added ‐ Market Value‐added: EVA is a year‐by‐year measure of how much economic profit the firm has created. While PEP has been able to increase their economic profit  consistently over this 5‐year period, we do see a KO increasing their EVA at a greater rate.  From our model we can conclude that PEP grows in value more slowly than KO, but neither is truly  outperforming the other, it is important to note that both are positively growing economic value.  MVA is measured as the market value of all the firm's securities minus the book value of all the  firm's securities and therefore is a basic measure of value creation. As was the case with many of the value creation metrics, PEP posted significantly lower MVA/shares than KO. In conclusion  the market has fairly valued PEP stock from 2011‐2015 while undervaluing KO.

3. Value Creation and DCF Model

PEP, Page 8 of 22

Copyright Robert A. Weigand, Ph.D., 2016

Long‐Term Growth Rate: PEP Intrinsic Value Model   PV of Future FCFs + Value of Non‐Oper. Assets = Total Intrinsic Firm Value − Total Debt = Intrinsic Value of Equity ÷ Total Weighted Shares = Per Share Intrinsic Value vs. Year‐End Stock Price  Over (Under) Valuation/Share  % Over (Under) Valued Year-End Stock Price

Pepsico, Inc. 2011 123,934 4,425 128,359 24,224 104,135 1,576 $66.08 $66.35 $0.27 0.4%

2012 124,309 6,619 130,928 25,458 105,470 1,557 $67.74 $68.02 $0.28 0.4%

2013 124,853 9,678 134,531 27,415 107,116 1,541 $69.51 $82.71 $13.20 19.0%

Per Share Intrinsic Value

$120

2014 120,715 8,726 129,441 24,801 104,640 1,509 $69.34 $97.05 $27.71 40.0%

Long‐Term Growth Rate: KO Intrinsic Value Model   PV of Future FCFs + Value of Non‐Oper. Assets = Total Intrinsic Firm Value − Total Debt = Intrinsic Value of Equity ÷ Total Weighted Shares = Per Share Intrinsic Value vs. Year‐End Stock Price  Over (Under) Valuation/Share  % Over (Under) Valued

2015 120,715 12,009 132,724 30,175 102,549 1,469 $69.81 $100.54 $30.73 44.0%

MVA per Share

PEP

$20

$20

$0

$0 2011

2012

2013

$ Over (Under) Valued

2014

2015

$30 $10 $0 2012

2013

2014

Return on Invested Capital

50%

30%

40%

25%

30%

$20

2011

% Over (Under) Valued

$35 $30 $25 $20 $15 $10 $5 $0

WACC

2011

2012

2013

2014

2015

10% 5%

0%

0%

2012

2013

$ Over (Under) Valued

2014

2015

% Over (Under) Valued

$0 ($2) ($4) ($6) ($8) ($10) ($12) ($14) ($16)

20%

10%

2011

2015

15% 20%

Per Share Intrinsic Value

$40

$40

$40

2015 257,118 19,900 277,018 41,768 235,250 4,352 $54.06 $42.96 ($11.10) ‐20.5%

$50

$60

$60

2014 257,118 21,675 278,793 38,230 240,563 4,387 $54.84 $42.22 ($12.62) ‐23.0%

$60

$80

$80

2013 251,774 20,268 272,042 36,058 235,984 4,434 $53.22 $41.31 ($11.91) ‐22.4%

Year-End Stock Price

KO

$100

$100

The Coca‐Cola Company 2011 2012 238,413 244,278 14,035 16,551 252,448 260,829 26,527 31,039 225,921 229,790 4,568 4,504 $49.46 $51.02 $34.99 $36.25 ($14.47) ($14.77) ‐29.3% ‐28.9%

2011

2012

2013

2014

2015

0% ‐5% ‐10% ‐15% ‐20% ‐25% ‐30% ‐35% 2011

2012

2013

2014

2015

Analyst Comments: Intrinsic Value: When both firms are given a long term growth rate of 1% you can see they both created intrinsic value for the past 5 years. It is important to note that KO  has been under valued every year, whereas PEP has been fairly valued. Bankruptcy Score: Both companies are in a solid financial position, and according to the Altman probability of bankruptcy  show no recent indications of financial trouble.

3. Value Creation and DCF Model

PEP, Page 9 of 22

Copyright Robert A. Weigand, Ph.D., 2016

PEP

Pepsico, Inc.

Piotroski Financial Fitness Scorecard Positive Net Income Positive Free Cash Flow Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) % Change Shares Outstanding  % change assets) Total Liabilities to Operating Cash Flow (EBIT)  % change TA) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) % Change Shares Outstanding (Diluted)  % change assets) Total Liabilities to Operating Cash Flow (EBIT)  2.9, Grey Zone = 1.23