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Investment Overview for PepsiCo (NYSE:PEP)
Below are key drivers for PepsiCo that present opportunities for upside or downside to the current Trefis price estimate:
Frito-Lay EBITDA Margins
- Frito-Lay North America EBITDA margins: Margins stood at 33.1% and 34.7% in 2010 and 2011 respectively. In 2013 margins fell to almost 33% due to higher marketing spend and restructuring process undertaken by the company. We expect long term margins to stay around the 33.3% levels. However, if the increased marketing costs and restructuring costs do not yield the desired results and the margins fall to 30%, we could see the Trefis price estimate revised downwards by 5%.
PepsiCo is the world's second largest carbonated soft drink manufacturer and the largest packaged foods product manufacturer. Additionally, it owns a number of other businesses - ranging from fruit juices and other non carbonated drinks to bottled water and breakfast cereal.
PepsiCo's most important division is its food products division, which consists of Frito-Lay and Quaker Oats.
PepsiCo's beverage division competes with Coca-Cola Co. in virtually all sub-segments of the beverage market. Both the companies have been operating from more than a century and compete fiercely across the globe - this fierce rivalry is termed as Cola Wars. Its flagship brand is Pepsi - the second largest selling CSD globally - which just trails behind Coca-Cola's flagship brand Coke. Apart from Pepsi, both the companies have competing brands - which closely resemble each other - in all market segments.
In early 2010, PepsiCo completed its merger with major bottlers, Pepsi Bottling Group and PepsiAmericas to strengthen its bottling and distribution operations and gain from expected synergies.
We believe that Frito-Lay, Quaker Foods and other food products constitutes the most important component of PepsiCo's value:
Frito-Lay has a virtual monopoly in some market segments
Frito-Lay enjoys a virtual monopoly in many sub-segments of the packaged foods market, especially in the US where it owns most of the top selling brands -
Doritos and Tostitos being a few examples. From potato chips and tortilla chips to wafers, Frito-Lay commands a dominating position in all market segments. Increasingly, it derives a significant portion of its revenues from new, untapped and unsaturated markets such as China and India, where traditionally, the general population has not been too exposed to the idea of instant snacks.
PepsiCo has been able to withstand negative publicity around the unhealthy nature of its food products
As with soft drinks, there has been an increased focus on the unhealthy nature of instant snacks. Allegedly, these foods products promote binge eating and unhealthy eating habits - especially, in young children. However, PepsiCo has been able to face this increased scrutiny reasonably well. Most of the attention is focused on the likes of McDonald's. For example, Frito-Lay has increased its marketing efforts to counter this campaign. It has also managed to introduce a new line of healthier snacks. Furthermore, Frito-Lay has decided to label its products as gluten-free in order to appeal to gluten sensitive consumers. In addition, PepsiCo, along with Germany's Theo Muller, has also launched yogurt and dairy products in the U.S. in the second half of 2012.
Increased focus on negative health impact of soft drinks is likely to curtail consumption
Over the last few years, there has been an increased focus on rising obesity levels in the general population due to unhealthy eating habits. This is especially true in developed economies like the US and Western Europe where a heavy consumption of fast foods and soft drinks has been blamed for rising obesity levels. This has been especially prevalent among children. As a result, a number of organizations and even local government institutions have increased efforts to curtail consumption of these unhealthy foods. For example, a number of schools and educational institutions have even banned the sale of soft drinks on their premises. The soft drink manufacturers have sought to hit back by aggressive marketing and by promoting alternative healthier drinks. We expect the balance in the beverages market to shift gradually towards fruit juice and non carbonated soft drink consumption.
Emerging economies are likely to drive growth
Unlike in the developed world, soft drink consumption in emerging economies is still low - the market is unsaturated, especially when seen from a per capita consumption point of view. Over the last few years, both PepsiCo and Coca-Cola have stepped up efforts to increase consumption in these economies - especially in countries such as China, India and Brazil. These countries have a large young population and rising disposable income levels which implies that the propensity to spend on lifestyle choices is high. This is true not only of the soft drink and snacks market but also for the fruit juices and bottled water markets.
Possible decline in Mexico volumes due to high obesity and diabetes rates
Mexico has the world's worst obesity rate of 32.8%. In addition, the country also has a high diabetes rate of 9%, as compared to 7.7% for the U.S. The President of Mexico has called for a "change in culture", urging people to live a healthier lifestyle and consume less CSDs. This might hamper PepsiCo's volumes in the coming future. In addition, the Mexican government has imposed an added tax of one peso (~7.4 cents) on a liter of fizzy drinks, in a bid to fight health problems. Beverage companies will pass this tax on to consumers in order to meet margins. Price hike might deter demand for CSDs in Mexico.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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