According to both PepsiCo Inc. (2008) and Cola-Cola Co. (2008) annual reports, each position the other as the primary competitor in the soft drink industry. Performing a cross sectional financial analysis for both of the competitors to determine their current position and predict future performance one needs to put the analysis in the context of the shareholders investment fortification. To measure sustainability and growth trends of the investment, the business will need to be evaluated for its operation, profitability, future growth prospects and citizenship. Other stakeholders are involved, such as the employees, creditors, partners, environment activists and government and financial regulators. However, if the shareholders are getting their return on investment it is most likely that other stakeholders will be in content. The stakeholders are consistently found throughout the world, because PepsiCo Inc. line of businesses and products exist in merely all the continents. Also, Coca-Cola Co. enjoys the same geographical benefits. The quality and the variety of PepsiCo Inc. products and its ability to attract different cultures of the world, while proactively practicing environmentally friendly business practices will produce positive financial investment future for shareholders.
History of PepsiCo Inc
Regarded as one of the worlds' preferred soft drinks, Pepsi-Cola struggled at its inception to make it in taste tests several times. Despite its earlier struggle, at the present time PepsiCo Inc. is considered as one of the world fortune 500 companies ranked at number 52 by Fortune Magazine (2009) with sales achieved more than $40 billion. The company employs around 200,000 worldwide.
The creator of the popular drink, Caleb D. Bradham, a college dropout, opened a drug store located in his home town of New Bern, NC at the end of the 20th Century. In the store back room Pepsi-Cola, the drink, was born. The drink name, Pep Cola, was bought for $100 from a business that went bankrupt. The name got changed from Brad's Cola to Pepsi-cola, and shortly after Caleb's neighbor helped him create the first product logo.
Bradham obtained patent on the name Pepsi-Cola in the beginning of the 20th Century and issued around 100 shares of stock for the new business, and was geared up to deliver Pepsi to the globe. Just in the first year, thousands of gallons of syrup were sold. Bradham wanted to make use of advertising, so he invested around $2000 of his initial profits in promotions for the new drink. In the beginning of the 20th Century the startup company moved to a temporary facility before residing in its permanent facility, in New Bern. During that time, bottling lines were introduced to grow and industrialize the business, and bottling plants were added to meet the growing demand on the product.
According to PepsiCo (http://www.pepsico.com/Company/Our-History.html#/block_1965, 2008), present-day PepsiCo Inc. was shaped by merging Pepsi-Cola and Frito-Lay. The two companies were led by D.M. Kendall, President and CEO and H.W. Lay, Chairman and CEO respectively.
Organization Structure
At the top of the organization's hierarchy, 12 members Board of Directors is present coming from various businesses and institutions. Next level down in the hierarchy, the company has an Executive Committee of 30 senior experienced leaders reporting to the Board of Directors. The Executive committee consists of three groups, the Corporate, PepsiCo Americas Foods and PepsiCo International. Further down at the organization hierarchy a second level of executives is instituted followed by a 4th level of managers whom all other employees report to.
Company Products
PepsiCo brings to the market a wide range of food and soft drinks products. The common characteristic of the products is that it is made to attract diverse cultural tastes and satisfy different life activities and occasions. It ranges from sports drinks, snacks, soft drinks, cereals, etc. The products are produced through five business lines, Pepsi-Cola, Frito-Lay, Quaker, Tropicana and Gatorade.
Geographic Areas of Operation
PepsiCo is structured into three main business entities which operate in different geographical regions throughout the world and each specializes in producing specific range of products. The first entity is PepsiCo Americas Foods, which operates in North and Latin America, this entity also includes Sabritas and Gamesa businesses in Mexico. The second entity is PepsiCo Americas Beverages, which produces PepsiCo beverages in North and Latin America. The third business entity is PepsiCo International which operates in the UK, Europe, Asia, the Middle East and Africa. The three business entities are comprised of six reportable segments.
Distribution network
PepsiCo Inc. (2008) product distribution to market is accomplished by multiple channels. PepsiCo uses direct store delivery channel through its bottlers and distributors directly to retailers. This is most suitable for products that are restocked frequently and it answers stores coming up promotions. Another distribution channel is delivery of products directly from plant to customer warehouse. This channel is ideal for products that are less breakable, and have lower turnover. Another important distribution channel is using food service and vending sales force distributers for snacks, foods and beverages to distribute to places such as schools, stadiums, restaurants and alike.
Guiding Principles
PepsiCo guiding principles covers different aspects equivalent to its position as a global organization. Its principles deal with the benefit of the customers, consumer health and the sustainability of the environment that we live in. Use due diligence to bring a product which can make a difference and the company can be proud of. Ensure transparency and honesty when making announcements to the market and the consumer. Other principles are to succeed by variety, continue adding new products, respect competitors and win together.
Accounting Polices
PepsiCo Inc. (2008) accounting policies are focused on the following areas of accounting
Revenue Recognition
Cash or on credit basis are acceptable terms of payment. In the U.S., payment is due within 30 days of delivery while overseas it is generally between 30 to 90 days. Revenue recognition is upon shipment or delivery with product quality guaranteed. PepsiCo policy is to replace damaged and expired products. Discounts and incentives are taken care of as a revenue reduction.
Brand and Goodwill Valuations
Product development costs are expensed as they incurred. This is also valid for brands acquisitions. The acquisition price is first allocated to assets and liabilities, and amount considered outside fair value is recorded as goodwill.
Income Tax Expense and Accruals
The company annual tax rate is governed by income, legislative rates and tax breaks available where PepsiCo operates. An anticipated annual tax rate is applied to the quarterly results. Tax adjustments are considered from prior year declaration. Typically deferred tax assets correspond to items usually used as deductions or credit in future year's returns. Tax liabilities deferred usually represent tax expense acknowledged in financial statements for which payment has been deferred, or expense for which we have already taken a deduction in our tax return but have not yet acknowledged as expense in financial statements.
Pension and Retiree Medical Plans
Pension plans are applicable for permanent employees in the U.S. and employees in particular international countries. Years of service or a mixture of years of service and earnings is what determines employee benefits. In U.S. and Canada retirees are illegible for medical and life insurance as soon as they meet age and years of service requirements.
Corporate Citizenship
PepsiCo is listed in the CRO's Magazine (2008) 100 Best Corporate Citizens, ranked at 22, while Coca-Cola is ranked at 95. The ranking is based on contribution to climate change, its employee relations policies to enhance their living standards and it is reputation as an equal opportunity employer. Also, on its environmental policies and practices and how they are impacting the environment. The ranking also evaluates financial performance based on three years return on investment. Finally, how it is performing in the human rights arena, as well as charity.
Based on the history of PepsiCo (http://www.pepsico.com/Company/Our-History.html#/block_1965Inc, 2009) the following accomplishments have been stated as a result of the company's citizenship practices
"Supports breast cancer research, education, screening and treatment with donation and special edition pink ribbon bottles of Propel
PepsiCo is awarded the 'New Freedom Initiative' Award by the U.S. Department of Labor for efforts to improvement employment opportunities for people with disabilities
PepsiCo wins the 'Workplace Excellence' Award at Out & Equal Workplace National Summit
PepsiCo India commissions first remote wind turbine to generate renewable, clean energy
Wall Street Journal article recognizes PepsiCo for Leadership in Employment of People with Different Abilities"
Financial Analysis
When investing or evaluating an investment, examining a financial statement data is a fundamental practice for investors. The amount of financial data a company can produce at one time can be in a company's financial statements can be nerve-racking to countless investors. Conversely, using ratio analysis will allow investors to streamline their analysis and know how to deal with numbers to their advantage. On the other hand, when selecting which ratio to apply an investor needs to take into consideration relevancy to the company or industry, type of analysis required, and to whom it is addressed. To determine PepsiCo performance and evaluate it against its main competitor Coca-Cola, a cross sectional ratio comparison can be performed between them for financial year 2008. The following (Table1) outlines the different ratios used and the results of both companies.
Table1. Different ratios selected to determine company performance and to perform cross sectional comparison.
Ratio
Formula
PepsiCo
Coca-Cola
Current ratio
Current Assets/Current Liabilities
(Horngren et al. 2008)
1.23
.94
Inventory Turnover
Cost of Goods Sold/Average Inventory
Jon Schreibfeder (1997) information about the importance of inventory turnover.
8.5
5.2
Shareholder Equity
Total Shareholders Equity/Total Assets
34%
50%
Return on Equity
Net Income /Average Shareholder's Equity
(Horngren et al. 2008)
34%
28%
Gross Profit Percentage
Goss Profit or Gross margin/Sales
(Horngren et al. 2008)
52%
64%
Average Collection Period
(Average Accounts Receivable * 365)/Sales on Account
(Horngren et al. 2008)
38
37
Total Debt to Equity
Total Liabilities/Stockholder's Equity
(Horngren et al. 2008)
1.95
1.6
Total Assets to Sales
Total Assets/Net Sales
D&B (http://www.dnb.com/us/support/eram/pdf/eRAM_USER_V31_AppendixC-FinancialRatios.pdf.pdf, 2004)
.83
.79
Return on Sales
Net Income/Net Sales
D&B (http://www.dnb.com/us/support/eram/pdf/eRAM_USER_V31_AppendixC-FinancialRatios.pdf.pdf, 2004)
11.9%
18.2%
Dividend Payout
Dividends Per Common Share/Earnings Per Share
(Horngren et al. 2008)
45%
68%
Examining the analysis results, a shareholder can interpret each one of the ratios outcome and relate it to the return on investment. An investor can use the current ratio, categorized as a liquidity ratio, to measure ability to pay short-term obligations such as payables making use of its current assets. An investor looking at PepsiCo consolidate balance sheet, the current ratio can be calculated as per the following
Current Ratio = 10,806/8787 = 1.23
The outcome is higher than one which gives an indication that PepsiCo is capable to fulfill its obligations. Equally, if the result is below one, then an investor will be aware of that the company is not in a good financial health. On the contrary, it does not inevitably mean that the company is insolvent. PepsiCo beats Coca-Cola in the current ratio. Another value an investor can decipher from the current ratio is that it is a measure of efficiency in the company's operations.
Another calculation that can be used to measure the company efficiency in operations and its strength in sales is its inventory turnover. This will provide information for the investor on how many times a company's inventory is sold and restored over a period. When calculated using the data provided by the income statement and the balance sheet, first the Average Inventory = (2522+2290)/2 = 2406 is calculated and this will lead to the inventory turnover as follows
Inventory Turnover = 20,351/2406 = 8.5
When compared with Coca-Cola, which has an inventory turnover of 5.2, it predicts that PepsiCo has stronger sales indication. An investor can make out that a lower inventory turnover signifies that his investment may be suffering from a zero rate of return.
Shareholder equity ratio provides information and awareness to shareholders on how much they would actually get if a company-wide liquidation is imminent. These are claimable assets by the shareholders. The ratio is arrived at using numbers in the balance sheet as per the following
Shareholders' Equity Ratio = (12,203 / 35,994) * 100 = 34%
To check how successful the company is in investing shareholders' equity, the shareholder can depend on the return on equity ratio to determine the return on equity. The shareholder equity include includes retained earnings, common stock, and paid-in-capital common stock. This ratio can be calculated by first determining the Average Shareholders Equity = (12,203 + 17,628)/2 = 14,916, then calculating the return on equity as follows
Return on Equity = (5142 / 14,916) * 100 = 34%
PepsiCo shareholders are enjoying an edge over Coca-Cola shareholders on their return on equity.
For an investor to figure out how proficient is PepsiCo when it comes to utilizing its labor, raw materials and production related cost to generate profit, the gross profit percentage can be leveraged. The investor begins by determining the gross profit, which is revenue after cost of sales is deducted. In PepsiCo case the gross profit from the income statement is (43,251-20351 = 22,900).
Gross Profit Percentage = (22,900/43251) * 100 = 52%
Coca-Cola shows slightly higher efficiency in using its resources to generate revenue. This informs how the company cost of sale characteristic is affecting its profit.
When business extends credit to its customers, it becomes susceptible to delaying its earned cash. The average collection period is used to determine how much time it takes a company to turn its receivables into cash. First the average receivables is calculated by looking at accounts receivable on the balance sheet, ((4683 + 4389)/2 = 4536). Then the average collection period is calculated as follows
Average Collection Period = (4536 *365) / 43,251 = 38 days
From the calculation of the average collection period for both PepsiCo and Coca-Cola it is apparent that they have similar collection period, which gives the impression that both companies have things in common considering that they fall under the same industry and they operate in similar locations.
To measure a company's financial strength, an investor can make use of the total debt to equity ratio. An investor wanting to put his money with a company that has a high debt to equity ratio is taking a risk; moreover, it is even riskier if the interest rates are high. For the investor as well as the creditor it is significant to recognize that if the result is more than 1, then the bulk of assets are financed through debt. Equally, if it is smaller than 1, assets are primarily financed through equity. Total debts to equity ratio outcome is as follows
Total Debt to Equity Ratio = 23,888 / 12,203 = 1.95
Both of PepsiCo and Coca-Cola has their ratio above one with PepsiCo slightly higher.
Total assets to sales ratio, appraises company's efficiency in running its assets with respect to its revenue. This means how much a company needs in assets to generate revenue. If this ratio is high it means we have a smaller investment compared to our revenue, which tells that the company is profitable. The ratio is calculated according to the following
Total Assets to Sales Ratio = 35,944 / 43,251 = .83
Both of the companies are having very close results.
Return on sales provides a measure on cost control capabilities of the company. Basically, how effective the company at converting its revenue into profit. The ratio can be derived as per the following
Return on Sales Ratio = 5142 / 43,251 = 11.9
Coca-Cola Co. is enjoying better return on sales ratio compared to PepsiCo.
Dividends payout ratio provides an insights on how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. The outstanding shares are figured out by deducting repurchased common shares from the issued shares. For PepsiCo the number of outstanding shares is (1782 - 229 = 1553). To calculate dividends per common share is dividends/outstanding shares = 2541 / 1553 = 1.64. The earnings per share is net income / outstanding shares = 5142 / 1553 = 3.3. This data will lead to calculating the dividend payout ratio as follows
Dividend Payout Ratio = 1.64 / 3.3 = 45%
Coca-Cola is giving more dividends compared to its earning per share than PepsiCo.
Conclusion
PepsiCo has more room for expansion considering its product line popularity in the market throughout the world. There is a tremendous possibility for it to expand its business in the international market, by further offering a variety of product lines with a creative touch of diverse international and cultural tastes, like their success Latin America. Furthermore, its business model flexibility in developing or acquisition of products and employing contract manufacturers, widens the company's prospect for future expansion. The company strategy of sustainable growth can be maintained by preserving its standards of quality. As long as the company maintains the stakeholder's equity value and maintain solid results this will keep and attract investment. The financial analysis of PepsiCo shows that the company is on the right track fulfilling shareholder and other stakeholder's expectations.
