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Comparing Pepsi Inc To Its Competitors Finance Essay

INTRODUCTION:-

This report has been prepared regarding the investment in the shares of our chosen company which is Pepsi Inc. In this report we will look at Pepsi Inc in details and compare it with the other competitors in the industry with the help of swot analysis and a valuation of Pepsi Inc shares will be carried out using Gordon Growth Model and other model of our choice in the end we will look at the bonds issued by Pepsi Inc and will look into their definition and also look at their price using the methods available.

Pepsi Inc:-

Pepsi Inc is the largest manufacturer of Pepsi cola a drink which needs no introduction and which is famous in many countries. Besides Pepsi the company offers other brands to its customers which include:-

Quaker.

Tropicana

Gatorade.

Frito Lay.

The company has established its brands in almost every country in the world and still growing.

The Competitors:-

Since Pepsi has diversify its business operations from soft drink industry to many other industry it has to face competition from different companies the main competitors of Pepsi are:-

Coca Cola:-

Coke is major competition for Pepsi in American market and it control more market share than Pepsi and like Pepsi Coke has also diversify to different industries where Pepsi is so the competition is in other industries now too.

Dr Pepper:-

Dr Peppers in relative new in the industry but competing with Pepsi in European markets targeting more teenage audience who enjoys the unique taste of Dr Peppers although Pepsi did manage to get back some its market share from Dr Peppers with introduction to its new software drink mountain dew which was design for teenagers.

Nestle:-

Nestle is giving competition to Pepsi in the mineral water industry and also in the food industry with Pepsi different drinks and food items are in direct competition with Pepsi.

Pepsi and Competitors Strengths and Weakness Analysis:-

Strengths:-

Pepsi

Coca Cola

Dr Pepper

Nestle

Has strong background and customer base

just like Pepsi Coke has been famous among its users

Holds a strong market position

Globally Recognized food manufacturer.

Good sales and profitable figures

Have strong brand loyalty which enables the company to grow more in the future

Strong revenue growth and economic of scale

Strong internal growth and emphasis on innovation internally

Sponsor of major sports events and major sports team in the world

Coke has established itself in the organic food market where it has no competition.

Has established a solid portfolio of brand and become a major competition for other companies in the group.

Largest consumer products organization that operates globally.

Pepsi has broader range of products for its customers

With the launch of its organic drinks the brand loyal customers of coke who like to drink healthy drinks will choose coke products

Lack of capital constraints (availability of large free cash flow)

It also sells professional brands to different customers such as colleges, hotels, restaurants etc

Weaknesses:-

Pepsi

Coke

Dr Pepper

Nestle

Pepsi is still far from Coca Cola when it comes to the brand images and financial performances.

Coke is new to the organic market and will required time to adjust itself into the organic market

People are getting health conscious which is a weakness for Dr Pepper as Pepsi has grown into that industry already

The industry has grown to 8.9% after 2008 but Nestle is still finding it difficult to grow into the organic industry.

Facing strong competition from Nestle in mineral water industry

Pepsi has sponsor many sporting events and captured the market of sports fans where coke has not done anything regarding that.

Ongoing recession and people still loyal to Coke and Pepsi

Storage and warehousing problems

Share Valuation Using Gordon Growth Model:-

The Gordon growth model also known as dividend growth model calculate the value of shares by looking into the growth in the dividend and the expected future growth of the company. It estimate that the growth of the company will be constant over the years.

Gordon Growth Model Formula:-

Po = Do (1+g) / Ke – g

Where

Po = Market value of shares

Do = Current dividend paid by the company

g = Growth in dividends

Ke = Expected return by shareholders

Valuation of Pepsi Inc Shares for 1st August 2010.

First we need to find out the growth rate of Pepsi’s dividend if we take the latest dividend of the quarter it is 0.48 and compare is with the dividend of 2005 which was 0.26 so the growth rate can be calculated as

(1+g)^20 = ┌

g = 20^ -1

g = 0.031 or 3.1% is the rate of growth in the shares of Pepsi dividend

Now we calculate the Ke of Pepsi shares

Ke = Do(1+g)/ Po +g

= 0.48(1.031) / 64.91 + 0.031

= 3.86 %

So now we can calculate the share price of Pepsi on 1st August 2010 using the equation

Po = 0.48(1.031) / 0.0386 – 0.031)

0.495 / 0.0076

65.13 will be the share price of Pepsi Inc on 1st August 2010.

Valuation of Pepsi Inc Shares for 1st August 2007.

Same like above we need to find out the growth rate of Pepsi’s dividend if we take the latest dividend of the quarter it is 0.375 and compare is with the dividend of 2002 which was 0.15 so the growth rate can be calculated as

(1+g)^20 = ┌

g = 20^ -1

g = 0.047 % is the rate of growth in the shares of Pepsi dividend

Now we calculate the Ke of Pepsi shares

Ke = Do(1+g)/ Po +g

= 0.375(1.047) / 65.02 + 0.047

= 0.053 %

So now we can calculate the share price of Pepsi on 1st August 2007 using the equation

Po = 0.375(1.047) / 0.053 – 0.047)

0.393 / 0.006

65.5 will be the share price of Pepsi Inc on 1st August.2007

Valuation of Pepsi Inc Shares for 1st August 2000.

The growth rate of Pepsi’s dividend if we take the latest dividend of the quarter it is 0.14 and compare is with the dividend of 1995 which was 0.10 so the growth rate can be calculated as

(1+g)^20 = ┌

g = 20^ -1

g = 0.017% is the rate of growth in the shares of Pepsi dividend

Now we calculate the Ke of Pepsi shares

Ke = Do(1+g)/ Po +g

= 0.14(1.017) / 45.81 + 0.017

= 0.02 %

So now we can calculate the share price of Pepsi on 1st August 2000 using the equation

Po = 0.14(1.031) / 0.02 – 0.017)

0.142 / 0.003

47.33 will be the share price of Pepsi Inc on 1st August 2000

.

Comparison Of Share Prices and Differences:-

1st August

Actual

Model

2010

65.58

65.13

2007

66.47

65.5

2000

45.06

47.33

The difference in price can be justify with the face that Gordon growth model work on the basis of constant growth in shares dividend where as in real life that is not the case beside that the shares float on stock market according to their volumes and if we compare the range between shares opening and closing prices we can see that the shares of Pepsi Inc did in fact operated under the range of the price predict by the model.

Other Method Of Valuation:-

Besides the Gordon growth model there are other methods of calculating the share price of a company one of them is discounted cash flow method

Discounted Cash flow Method:-

In this method of valuation a company is valued based upon it’s prevent value of future cash flows using estimates about the company growth and how it will perform in the future.

Discounted Cash Flows Vs Gordon Growth Model:-

DCF

GGM

1

DCF works on predicting future cash flows using historical data from past income statement and balance sheet

GGM works on analysing the growth in dividends only

2

It takes into account the risk factor

Risks not consider in the growth

3

Growth is calculated based on company performance and industry analysis

This model assumed that the growth rate will be constant

4

Give a realistic valuation based on company enterprise value

Only considers dividends given by the company in the past

DCF Strengths:-

It produces closed realistic valuations.

Calculations are based on the free cash flows.

Gives a reality check regarding the stock price of a company by working backwards and finding out is the current price of the stock is justify.

DCF Weaknesses:-

Only as good as the inputs in the model if the information entered into the model is not accurate than the result produce will not be reliable.

Required higher level of expertise when predicting future cash flows and required that all information should be available.

Works on the assumption growth rate and working capital if any of those calculated item fall below even 1% it will affect the prediction by a bog margin.

More suitable for long term investing purposes it based on the calculation for the future which a company may take time to achieved.

Valuation Of Pepsi Shares With DCF:-

All the calculations used and all the assumptions regarding the share prices of Pepsi and the data are attached in the appendixes in the end of this report.

For the year 2007 and 2000 share prices valuations the assumption are the same as in for 2010 regarding industry and Pepsi beta and other data as finding data this old was difficult.

Pepsi’s Share Price On 1st August 2010:-

The share price predicted for this period is $64.12 (Appendix 1)

Pepsi’s Share Price On 1st August 2007:-

The share price predicted for this period is $54.5 (Appendix 2)

Pepsi’s Share Price On 1st August 2000:-

The share price predicted for this period is $42.11 (Appendix 3)

Comparison Of Share Prices And Reasons:-

The share prices calculated by Gordon Growth Model and Discounted Cash Flow model are different on the basis that the growth model calculate price base on the grounds that the Gordon Growth Model estimate the growth at a constant rate in the dividends while the price based on the discounted cash flow model has been calculated based on the estimate enterprise value of the company and its past performances.

The model of discounted cash flows works with the estimate enterprise of the company which in our case is Pepsi Inc and value the company based on its equity and debt value at the moment and compare it with the industry or mainly with the top competitors, it also take into account the risks associated with the company and what should be the expected return on the investment.

The rate of return used in Gordon Growth Model is based on average dividends the company has given in the past and expected them to be constant over the future time while in the discounted cash flow model the rate of return has been calculated incorporating the risk associate with the company and analysis the competitors.

The difference in share price could also be the result of that the estimates use for the calculation of 2007 and 2009 share prices were the same as the estimates of 2010 as the historical data regarding risks and beta about the company can be obtain after some calculation but the risks and beta of the other companies in the industry was time consuming that is why for the calculation of 2007 and 2000 share price the same estimates of analysis and the same assumption about the industry was taken which result in difference in prices.

Bonds:-

Bonds are debt securities which provide returns on fixed rate.

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