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

The Coca-Cola Company (KO) is trading at the bottom of their 52-week range (US$49.44-65.59). Typically KO has been one of the world’s most admired stocks. Warren Buffett’s Berkshire Hathaway is the second largest holder of KO stock with a US$10.4 billion investment in the company. Analysts are however beginning to move away from the stock.

At Valuecruncher we decided to put some numbers around KO using our on-line valuation tool.

KO Valuation

KO grew revenues from US$21.7 billion in 2004 to US$28.9 billion in 2007 – a 9.9% compound annual growth rate. Our assumptions of revenues for the next three years are US$33.15 billion in 2008 growing to US$36.65 billion in 2010 – an 8.3% compound annual growth rate. We have projected EBITDA margins to be 29% in 2008 then flat at 30% to 2010. We have used a terminal growth rate of 3.25%. We calculated this terminal growth rate based on year three (2009-10) growth of 4.1% dropping to a 3.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$1.75 billion. We have used a WACC (discount rate) of 8.0%.

Valuecruncher valuation model of KO with interactive assumptions

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

Our analysis gives a valuation of US$54.73 per share which is 5% above the current share price of US$52.07.

One of Warren Buffett’s famous quotes is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. At US$52.07 a share – in our view KO fits that criteria. Play with our assumptions – what does your analysis say?

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