Overvalued Snacks Company: Pepsi


Leveraged balance sheet may also deter investors at first glance

Pepsi, $158 billion food and beverage company, reported is set to report its annual earnings in a matter of few days.

Meanwhile, the New York-based snacks company reported 1.7% rise in revenue and 13% increase in profits in its previous 36 weeks as of September 2017.

“Overall, our businesses performed well in the third quarter in what continues to be a challenging environment.

“Each of our operating sectors delivered results in line with or ahead of our expectations, with the exception of North America Beverages (NAB) where revenues declined following two consecutive years of very strong third-quarter growth. Despite the challenges in our NAB business, the PepsiCo portfolio overall generated revenue, operating profit and earnings per share growth. Although we have moderated our full-year organic revenue growth outlook, we are now on track to exceed the full-year earnings per share target we set at the beginning of the year.”

Chairman and CEO Indra Nooyi

In September, Pepsi’s debt rose by $2.2 billion to $39 billion (2.91x debt-equity) and book value of $13.5 billion. The company also generated $4.6 billion in free cash flow in the period.

In the past three fiscal years, Pepsi allocated $15 billion in financing activities and generated $22.8 billion in free cash flow.

Analysts have an average price target of $124.73/share vs. $111.79 at the time of writing. Conservative calculations gave a figure of $69/share. Falling nearly 9% from its all-time high, eager investors may have to wait a little more before purchasing Pepsi shares.

Disclosure: no shares in Pepsi.

Pepsi Cola Philippines is Undervalued


Pepsi’s numerous vice presidents and directors should consider handing out more dividends

Stock: Pepsi-Cola Products Philippines Inc. (PCOMP: PIP) 

Pepsi Cola Products Philippines, a ₱11.08 billion (Philippine peso) Muntinlupa-based beverage company, currently trades near its one-year low at ₱3 per share. Pepsi trades at 14.3x P/E (vs. 16.41x sector) and 1.2x P/B (vs. 3.44x sector). Pepsi also had a 2.3% dividend yield.

Founded in 1989, the 28-year-old Pepsi sells several products including Pepsi Max, 7 Up, Gatorade, Lipton, Cheetos, Lays, and etc. Only 0.05% of the company’s sales were generated from abroad.

Major Pepsi shareholders include a 38.9% ownership by a Korean conglomerate, Lotte Chilsung Beverage, and another 25% is owned by Dutch-based Quaker Global Investments.

In its recent six months of operations, Pepsi reported -1.7% decline year over year in its revenue (vs. 3-year average growth of 10.52%) to ₱17.9 billion, and -16.3% profit drop (3y ave. -1.89%) to ₱468.1 million.

Pepsi reasoned out that it experienced the slowdown in its business brought by ‘overlap of last year elections’ and ‘unrest in Mindanao.’ The beverage company also stated it spent more on manufacturing footprint thus leading to lower profits for shareholders in the period.

In particular, Pepsi’s carbonated soft drinks business (73% of revenue) experienced -2.5% revenue decline and maintained segment margin profitability of 23.3% compared to its year-earlier operations. The carbonated soft drinks business, which includes brands Pepsi-Cola, 7Up, Mountain Dew, Mirinda, and Mug, has consistently been the revenue generator of more than 65% for Pepsi in recent years.

Pepsi’s non-carbonated beverages, which include Gatorade, Tropicana/Twister, Lipton, Sting energy drink, Propel fitness water, Milkis and Let’s be coffee, delivered weak -4% revenue growth while also having maintained 23% segment profitability.

More interestingly, a consistent loss-generating business—Pepsi’s snacks segment (Cheetos and Lays)—delivered significant 79% jump in revenue but still delivered a loss of ₱7 million in the period vs. ₱18 million losses a year earlier.

Meanwhile, Pepsi had ₱551 million in cash and ₱4.2 billion in debt (+₱54 million vs. one year earlier) with debt-equity ratio of 0.45x (vs. 0.47x last year). Overall equity rose ₱518 million to ₱9.38 billion in June.

In the past three years, Pepsi allocated ₱8.7 billion in capital expenditures, raised ₱931 million in debt/other financing activities (net repayments), and provided ₱488 million in dividends representing 19.6% of its accumulative ₱2.49 billion in free cash flow.

COL Financial, a leading brokerage in the Philippines, recently (10/3/2017) recommended for investors to ‘SELL INTO STRENGTH’ without providing any target price. Applying three-year revenue growth and PS multiple averages and a 15% margin indicated a per share figure of ₱3.86 a share vs. ₱3 at the time of writing, indicating a possible 28% upside.

Pepsi does exhibit steady business growth in recent years except for its recent six months of operations. The company’s decision to mention ‘unrest in Mindanao’ affecting its business makes some investors question management’s competence in transparency as NO exact figures were provided—geographically—in how much Pepsi exactly makes in the island.

Meanwhile, the presence of Pepsi’s major shareholders would hopingly keep the company from diluting its existing shareholders from issuing more shares as it never did in recent years, while its strong balance sheet and plentiful cash flow should raise shareholders demand of more dividend payouts.

Pepsi has kept its allocation to dividends flat in recent years.

Brought by good upside to a conservatively calculated per share figure of ₱3.86, somewhat reliable management (to mention 11 vice presidents and seven directors), and potential dividend payouts in the future, Pepsi is a buy.

Disclosure: I have shares in Pepsi Cola Products Philippines.

*If you are one of the Pepsi Philippines board members/directors/vice presidents, I urge you to consider raising the idea of allocating more cash flow to dividends in your next board meeting as this would better serve not only the minority shareholders but also lift confidence in your major shareholders, Lotte and Quaker. This blog and its contents also have been forwarded to the aforementioned major shareholders as of its publication date (10/12/2017).

Letters including this blog were printed and sent to your office addressed to the Korean CEO Yongsang You; Quaker European Investments @Zonnebaan 35, 3542 EB Utrecht, Netherlands; and Lee Jae-hyuk of Lotte Chilsung Beverage @269, Olympic-ro, Songpa-gu, Seoul, Korea.