Previously Valuecruncher has looked at Coca-Cola ($KO).  With Nielson rating carbonated beverages a recession vulnerable category we thought it was time to have a look at PepsiCo ($PEP).  How does the current share price look?

Valuecruncher valuation model of $PEP with interactive assumptions

Valuecruncher produces a valuation of US$48.01 for $PEP. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 10.5% below the current share price of US$53.64.

Assumptions

• Revenue: Reuters aggregates 10 analysts covering $PEP and these analysts have mean estimates of 2008 and 2009 revenues of US$43.5 billion and US$46.7 billion respectively. For our analysis we have used US$43.0 billion in 2008, US$46.0 billion in 2009 and US$47.5 billion in 2010.
• Profitability: We have used an EBITDA margin of 20.0% in 2008 rising to 21.0% in 2010. Reuters has $PEP‘s EBITD margin at 20.8% last year and 22.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.5 billion per annum moving forward.
• Discount Rate: 9.0%.  Valuecruncher used a discount rate of 8% in our $KO valuation.  We believe a discount rate in the 8-9% range is reasonable.
• Terminal Growth Rate: 3.0%.

Our analysis incorporates the cash and debt the $PEP balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has run the numbers on The Coca Cola Company (Coca-Cola) and arrived at a mid-point valuation of $46.16 per share with a sensitivity range of $41.86 to $50.65. At the time of the valuation Coca-Cola was trading at $52.67 per share, slightly higher than the upper end of the Valuecruncher valuation range. A comparable company valuation approach values Coca-Cola at $50.70 per share based on a comparable company Enterprise / EBIT multiple of 18.7.

Key Assumptions

• Short-term revenue and EBIT growth of approximately 10%
• Long-term growth of 3.3%
• Cost of capital 8.3%

Are we not accounting for all of Coca-Cola’s growth opportunities?

Is the cost of capital of 8.3% too high for Coca-Cola?

Valuecruncher Valuation Report - The Coca-Cola Company