Financial Research Project

PepsiCo., Inc. and Coca Cola have been two dominating figures in the beverage market over the years. Each has consecutively maintained firm returns for investors for both companies. The main difference between the two organizations is how PepsiCo., Inc. has chosen to diversify its product lines. However, as time has shown both companies have stood the test of time within different markets over the past ten years. As you look at the Price Book Ratio of PepsiCo., Inc. and Coca-Cola, both firms have been trading at their actual market worth. PepsiCo., Inc. has traded on average at $13.10 while Coca-Cola has traded at $10 (Figure. 1).

Fig. 1. Data for the Price to Book Ratio of PepsiCo., Inc. & Coca-Cola between 2018 - 2020 was

Even though you can clearly look at what the firms are selling for, it’s tough to assume that just because PepsiCo., Inc. is selling at a higher rate than other businesses itself its doing better. You would also have to look at the bottom line of each companies’ revenue and assets alike, and then compare them to what its trading for to determine which one is more profitable. If you reviewed the numbers before March 2020 you would notice common stock numbers performing well within the market. Comparing them to after March you will see a massive drop due to the economic effects of COVID-19. At the end of March to April you will see the common stock attempt to level off from its decrease as the economy recovers.

The earnings distributed during these periods are normally paid through stocks. When the company profits are up, the higher the EPS. Consequently, when the profits are decreasing the EPS is also directly affected and it goes down. You can see a difference in 2017 PepsiCo., Inc. EPS standing at $3.38 and Coca-Cola $0.29, which is a 168% difference. 2018 is where PepsiCo., Inc. increased profits approximately 160%, and then fell 41% in 2019 (Figure. 2).

Fig. 2. Data for the EPS of PepsiCo., Inc. & Coca-Cola between 2017 - 2019 was retrieved from

Nasdaq PEP (2020), and Nasdaq KO (2020).

Even with the EPS and profits fluctuating in 2017 to 2019, dividends paid per share steadily increased between those times for both PepsiCo., Inc. and Coca-Cola (Figure. 3). Typically, these types of moves by companies tend to insinuate the growth of the organization and to put confidence in its investors. The dividends paid by PepsiCo., Inc. show a 12% increase from 2017 to 2018 and 5% increase from 2018 to 2019. However, Coca-Cola shows a 5% increase from 2017 to 2018 and 3% increase in 2018 to 2019.

Fig. 3. Data for the Dividends per share for PepsiCo., Inc. & Coca-Cola between 2017 - 2029 was

retrieved from Morningstar PEP (2020), and Morningstar KO (2020).

a) Compare the P/E ratio of PepsiCo with the industry average or 5-year average. Is the stock overvalued, undervalued, or properly valued? Why?  In accordance with your findings, is it reasonable to buy the stock? Please explain your answers.

PepsiCo., Inc. on average has maintained a second place standing when you compare their P/E Ratio’s over a five year period to its direct competitor Coca-Cola, then the Sector, and finally the Industry. PepsiCo., Inc. P/E average over these periods stands at 24.692 ratio, while Coca-Cola maintains a 52.542 ratio, the Sector sustains a 31.114 ratio, and the Industry topped off the market with 22.852 ratio (Figure. 4). PepsiCo., Inc. itself has managed to keep a steady pace within this five year period. The only huge disparity was in 2016 to 2017 where major differences were noticed and PepsiCo., Inc. P/E average rose from 24.09 to 32.81 which was only a 36% increase, whereas Coca-Cola’s average rose from 27.48 to 150.54 which was a 448% increase, and the Sector rose from 25.81 to 56.89 which was a 120% increase. These increases could mean a few things. One, the price of the products could be increasing but the earnings are not. Secondly, the earnings from the products sold are dropping quicker than the price of the product. Third, the price continues to increase and the profits continue to decrease.

Fig. 4. Data for the PE-Ratio’s for PEP, KO, Beverages, and Consumer Goods 2015 - 2019 was

retrieved from Nasdaq (2020).

During different periods in any market you will find that changes are necessary to meet the demands of the consumer. In 2017, the market for soda by the consumer shifted to a need for more healthier products where the main factors of increases during this period. However, if you move forward to FY 2019 you would see PepsiCo., Inc. maintaining a 27.83 ratio which is the lowest out of three compared ratios. This could be because of PepsiCo., Inc. answer to its consumer by diversification of its beverages, food and snack line. With PepsiCo., Inc. having a low P/E ratio, investors tend to assume that the stock is undervalued. However, some would also believe that the stock isn’t necessarily eye-catching to the investors in general. If there was an option to purchase or to not purchase PepsiCo., Inc stock, it would not only be necessary to look at the history of P/E ratios but also review its competitive advantage, momentum in its market, how dividends are paid out, and the valuation of the stock. With acknowledgement of these factors, PepsiCo., Inc. would be an idea organization to invest in during the 2019 period.

Fig. 5. Data for the Historical Stock Prices of PepsiCo., Inc. & Coca-Cola for 2019 was retrieved from

Yahoo Finance PEP (2020), and Yahoo Finance KO (2020).

a) Write about (1/2) half a page of analysis the historic stock prices trend for the last year.

PepsiCo., Inc. and its massive portfolio of products have continued to outperform its direct competitors. Its performance and its historical stock prices have maintained steady growth from January 1, 2019 through the end of 2019 indicating a 21.30% growth. Its direct competition Coca Cola has also seen growth, but just not as steady as PepsiCo., Inc. However, Coca Cola still showed a minor rise in 2019 of 15%. The increased competition and the need for companies to maintain a competitive advantage in their designated market has been growing each month. Just being able to sell a soda is not what the market is calling for no adays. Being able to adapt to the needs of a new age of consumer is what’s making and breaking organizations. PepsiCo., Inc. maintains 7 licensed/Joint Partnership Trademarks, 7 Breakfast Bars, 4 Coffee Drinks, 5 Energy Drinks, 15 Cereals, 5 Other (Miscellaneous Products), 4 Rice Snacks, 3 Side Dishes, 49 Snacks, 50 Soft Drinks, 15 Sports Nutrition Drinks, and 4 Bottled Water brands (PepsiCo, 2020). Whereas Coca Cola brags an impressive 500 sparkling brands with nearly 3,900 beverage choices (World of Coca-Cola, 2020). Each has their own unique way of making a distinctive mark in their specific market all over the world.

1. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate the required return on stock. Note that you will need the risk-free rate, beta, and the market return.

https://csimarket.com/stocks/single_growth_rates.php?code=PEP&cfw

· Free Cash Flow0 (M) = 9,649

· Free Cash Flow Growth Rate (i) = 0.02

· Discount Rate (r) = 0.105

· Growth Rate (g) = 0.03

· Shares Outstanding (M) = 1,394.4

(9,6491 / 1.11 + 9,841.982 / 1.22 + 10,038.823 / 1.35 + 10,239.64 / 1.49 + 10,444.395 / 1.65 + 10,653.286 / 1.82 + 10,866.347 / 2.01 + 11,083.678 / 2.22 + 11,305.349 / 2.46 + 11,531.4510 / 2.71

+ 11,531.4510 x (1+0.03) / (0.105 - 0.03)) ÷ 1,394.4

(8,732.13 + 8,060.42 + 7,440.39 + 6,868.05 + 6,339.74 + 5,852.07 + 5,401.91 + 4,986.38 + 4,602.81 + 4,248.75 + 58,349.49) ÷ 1,394.4

Share price = $86.69

4. Compare the result of your calculations with the current stock price. Is the stock overvalued, undervalued, or properly valued? Why?  In accordance with your findings, is it reasonable to buy the stock? Why? Explain your answer.

Based off the 10 years of historical data of PespiCo., Inc. at this time you should not invest in this particular stock due to its present price point of $136.61 being higher than the stock's intrinsic value of $86.69.

References

Macrotrends. (2020). Historical Stock Prices for PEP. Retrieved on 1 April 2020, from https://finance.yahoo.com/quote/PEP/history?period1=1546300800&period2=157775040 0&interval=1mo&filter=history&frequency=1mo

Macrotrends. (2020). Price Book KO. Retrieved on 1 April 2020, from https://www.macrotrends.net/stocks/charts/KO/coca-cola/price-book

Morningstar. (2020). Dividends & Splits KO. Retrieved on 1 April 2020, from https://www.morningstar.com/stocks/xnys/ko/dividends

Morningstar. (2020). Dividends & Splits PEP. Retrieved on 1 April 2020, from https://www.morningstar.com/stocks/xnas/pep/dividends

Nasdaq. (2020). EPS KO. Retrieved on 1 April 2020, from https://www.nasdaq.com/market- activity/stocks/ko/revenue-eps

Nasdaq. (2020). PE-Ratio’s for PEP, KO, Beverages, and Consumer Goods. Retrieved on 1 April 2020, from https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo- Inc/Valuation/Ratios

Yahoo Finance. (2020). Historical Stock Prices for KO. Retrieved on 1 April 2020, from https://finance.yahoo.com/quote/KO/history?period1=1546300800&period2=157775040 0&interval=1mo&filter=history&frequency=1mo

PepsiCo., Inc. (2020). Pepsi Product Information. Retrieved on 1 April 2020, from https://www.pepsico.com/brands/product-information

World of Coca Cola. (2020). About Us Coca-Cola Beverages and Products. Retrieved on 1 April 2020, from https://www.worldofcoca-cola.com/about-us/coca-cola-beverages-products/

PepsiCo., Inc and Coca-Cola Price to Book Ratio

PepsiCo. Inc.

43942 43830 43738 43646 43555 43465 43373 43281 43190 12.25 12.79 13.46 13.07 12.04 10.66 15.08 14.83 13.75 Coca-Cola

43942 43830 43738 43646 43555 43465 43373 43281 43190 9.2100000000000009 11.23 11.28 10.73 10.1 10.6 9.59 9.02 8.2799999999999994

Date

Price

PepsiCo., Inc. vs Coca-Cola EPS

PepsiCo. Inc EPS

2019 2018 2017 5.2 8.7799999999999994 3.38 Coca-Cola EPS

2019 2018 2017 2.0699999999999998 1.5 0.28999999999999998

(FISCAL YEAR'S)

(Price)

PepsiCo., Inc. and Coca-Cola Dividends per share

PepsiCo., Inc

2017 2018 2019 3.17 3.59 3.79 Coke-Cola

2017 2018 2019 1.48 1.56 1.6

Year

Price

PepsiCo., Inc. vs Industry P/E Ratio 5-year average

PepsiCo., Inc

43827 43463 43099 42735 42364 27.83 13.01 32.81 24.09 25.72 Competitor (Coca-Cola)

43827 43463 43099 42735 42364 28.21 30.47 150.54 27.48 26.01 Sector (Beverage)

43827 43463 43099 42735 42364 28.04 18.940000000000001 56.89 25.81 25.89 Industry (Consumer Goods)

43827 43463 43099 42735 42364 30.43 22.5 21.55 19.239999999999998 20.54

PepsiCo., Inc. and Coca-Cola Historical Stock Prices (2019)

Coca-Cola Historical Stock Prices

43466 43497 43525 43556 43586 43617 43647 43678 43709 43739 43770 43800 48.130001 45.34 46.860000999999997 49.060001 49.130001 50.919998 52.630001 55.040000999999997 54.439999 54.43 53.400002000000001 55.349997999999999 PepsiCo., Inc. Historcial Stock Prices

43466 43497 43525 43556 43586 43617 43647 43678 43709 43739 43770 43800 112.66999800000001 115.639999 122.550003 128.050003 128 131.13000500000001 127.80999799999999 136.729996 137.10000600000001 137.16999799999999 135.83000200000001 136.66999799999999

Year

Stock Prices