April 9, 2012

Consumer Staples (Soft Drinks)

Henry Fund Research

PepsiCo (PEP)
Patrick Roche
patrick-roche@uiowa.edu

Investment Recommendation
Current Price Target Price Range

Buy
$65.78 $73-78

INVESTMENT THESIS
(+) PepsiCo is increasing marketing and advertising spending by five to six million dollars to help stabilize the market share losses of its core soft drink brand Pepsi, that has occurred 7 over the past year. This initiative, coupled with an increased focus and newfound sense of urgency, should help the companys core brand regain momentum in the market. (+) Embedded in PepsiCos culture is a strong commitment to innovation. The company continues to increase research and development spending, which is up from $414 million in 2009 to 3 $525 million in 2011. This innovation will help Pepsi stay ahead of its competitors and fend off future challenges.
$58.50-71.89 $103.32 1.57 68.2% 0.75 3.2% 16.31 4.93 1.54 9.2% 30.5% 6.15%

Source: http://bigcharts.marketwatch.com/

Key Stock Statistics2

52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE (ttm) Projected 5-Year Growth

(+) Improved sales growth internationally should continue to help offset slower growth domestically. Many emerging market economies are growing rapidly and contributing to an increase in local living standards. (+) Over the next five years companies at the upper and lower end of the industry will preform the best, while companies in the middle are likely to lose market share to private label brands and healthier beverages. PepsiCo is well positioned as an industry leader because of its premium brand and loyal customer base. (-) PepsiCo will likely experience declining margins in the near term. Commodity prices have been steadily rising over the last three years and have now reached a level that will more seriously affect profitability. (-) Although per capita soft drink consumption was down in 2011, PepsiCos core soft drink brand, Pepsi, saw a greater decline in sales volume than 4 its chief competitor Coke. (-) Pepsis core products, soft drinks and salty snacks, will continue to face increasing challenges from domestic health initiatives and a healthier consumer base internationally.

EPS ($)
Year EPS

2
2009 3.81 2010 3.97 2011 4.08 2012E 4.11 2013E 4.36 2014E 4.77

All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

Valuation Models ($)

Discounted Cash Flow Economic Profit Relative P/E Dividend Discount Model 79.63 79.63 73.26 77.72

Important disclosures appear on the last page of this report.

Henry Fund Research

EXECUTIVE SUMMARY
During the 2009 recession, many consumer staples stocks saw some of their largest declines in many years. Over the last two years many of these stocks have regained most of these declines and currently trade at levels near all-time highs. The impressive move higher was helped by price increases, cost cutting, and an improvement in business fundamentals. Sales for PepsiCo, as well as many other companies in the industry, remained stable throughout the 2009 5 recession and have since recovered quickly. However, stocks in the industry were driven lower by shrinking economic activity and investor psychology. Despite a decline in domestic per capita soft drink consumption, as many consumers look for healthier alternatives, Pepsi has experienced earnings per share growth of 5 11.32% in 2010 and 6.54% in 2011. A crash in commodity prices during the most recent recession helped company profitability coming out of the recession. However, many of the ingredients used in PepsiCos products have once again had powerful moves higher in price, which has and will continue to put a ceiling on profit margins and earnings per share growth. Given our projected target price from our model of $76.87, we have a buy recommendation on PepsiCo. We feel that Pepsi has one of the best risk reward ratios in an industry that is facing many challenges. We believe the company will take the steps needed to regain traction with their number one soft drink brand Pepsi. The company will continue to lead the industry in product innovation allowing it to overcome declining domestic per capita soft drink consumption. Moreover, PepsiCo and Coca-Cola are best positioned to deal with rising input prices because of their pricing power and economies of scale. Coca-Cola will continue to offer tremendous competition, but we feel Pepsi has more upside due to the recent success of Coca-Cola. The Henry Fund currently has a 9.74% position in the consumer staples sector. We feel this is an appropriate weighting given the economic outlook and the valuations for different market sectors. We feel many companies in the consumer staples sector have limited upside and downside prospects making PepsiCo a good fit for our portfolio.
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territories. The company prides itself on becoming an 3 environmentally friendly business leader. The companys four business units consist of PepsiCo American Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East, and 3 Africa. Some of PepsiCos most popular brands include; Lays, Doritos, Cheetos, Tostitos, Ruffles, Fritos, SunChips, Santitas, Quaker oatmeal, Aunt Jemima, Quaker granola bars, Capn Crunch, Life, Rice-A-Roni, Pasta Roni, Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, 7UP, Diet Mountain Dew, 3 Tropicana, Sierra Mist, and Mirinda. The main ingredients used in Pepsis products are apples, oranges, pineapple juice, corn, corn sweeteners, 3 flavorings, flour, sugar, and sucralose. Sales of PepsiCo products are divided across six different business segments including: Frito-Lay North America, Quaker Foods North America, Latin America Foods, PepsiCo Americas Beverages, Europe, and 3 Asia, Middle East & Africa.

Frito-Lay North America The Frito-Lay North America division had a strong year in 2011. Sales volume increased by three percent and 3 net revenue increased by six percent. The divisions strength can be attributed to pricing increases and 3 growth in individual brands. The most successful brands during the year were Doritos, Cheetos, and Ruffles, which all contributed growth in the mid-single3 digit range. These results are encouraging, and we like the fact that some of the companies core brands are headed in the right direction. While results were mostly positive for this division, we are concerned about the continued decline in sales volume for the SunChips 3 brand. SunChips has had double-digit declines in sales 3 volumes in each of the last two years. We think that some of our other brands our cannibalizing sales from SunChips, but increased attention to this brand should help partly reverse the negative trend in sales volumes. Quaker Foods North America Quaker Foods North America had the worst year of any 3 of the companys operating divisions. The division was primarily hurt by fierce competition and a decline in 3 sales of breakfast products. Volume declined five percent during 2011, led by a double-digit decline in 3 granola bars and ready-to-eat cereals. The companys Aunt Jemima brand also saw a mid-single-digit decline 3 in sales volume. The decline in sales of breakfast foods will be difficult to overcome because of the continued fast-paced lifestyles many people live today and the longer hours many Americans are now required

COMPANY DESCRIPTION
PepsiCo was founded in 1898 and currently employs 2 297,000 full time employees. The company is led by 2 CEO Indra Nooyi. Headquartered in Purchase, New York, PepsiCo produces soft drink syrups and snack foods internationally in over 200 countries and

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to spend at work. If society continues to cut out PepsiCo Sales Revenue Breakdown breakfast from the daily routine, the company should be able to capitalize on an increasing trend in snacking. In this division, granola bars seem like a perfect substitute that will deliver a flexible and convenient alternative. Latin America Foods Helped by increasing sales volumes in Brazil, sales in 3 this division increased by five percent in 2011. An increase in prices led to a thirteen percent rise in net 3 revenue. We are encouraged by these results and feel that Brazil represents one of the greatest opportunities for future sales growth. We expect sales growth to accelerate in the future. PepsiCo Americas Beverages The PepsiCo Americas Beverages division continued to bounce back slowly in 2011. Sales volume increased 3 two percent and net revenue increased ten percent. On the positive side, the companys Gatorade brand had an impressive year. Volumes for Gatorade sports drinks were up double-digits in 2011 compared to 3 2010. However, like many companies in the soft drink industry, PepsiCo was hurt by the decline in per capita domestic soft drink consumption. Carbonated soft drink volumes were down two percent in 2011. Europe Recent acquisitions and expansions into new markets assisted the European division in overcoming some of 3 the economic weaknesses in these markets. In 2011, snack volume grew thirty-five percent and beverage 3 volume grew twenty-one percent. Political and economic restructuring will likely limit future growth in this segment, but PepsiCo has been one of the most successful beverage companies to expand into Europe. Asia, Middle East & Africa Growth from the Asia, Middle East & Africa division should lead the company going forward. Sales volumes for snacks grew fifteen percent and beverage volumes 3 grew five percent year over year. One of the most important developments for this division was the 3 twenty-five percent growth in operating profit in 2011. As PepsiCo expands into emerging markets, they must not only be successful in growing sales, but also be able to charge the appropriate prices in order for these ventures to meet profitability expectations.
Source: www.sec.gov
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Over the course of the last three years we have seen a significant transition in the revenues from PepsiCos different business divisions. Two divisions, Europe and PepsiCo Americas Beverages, have experienced superior growth over all the other divisions over this 3,6 time period. Revenue for the European business segment has increased by 111% and has increased from 14.88% of revenues to 20.39% of company 3,6 revenues. Revenue for the PepsiCo Americas Beverages division has increased 105% and has increased from 25.29% of revenues to 33.71% of 3,6 company revenues. The biggest factor in the growth of these two segments is the entry into new markets. We believe these two divisions will continue growing in the future, but at a slower rate. The division most likely to see revenue growth similar to that of the European and PepsiCo Americas Beverages over the last three years is the Asia, Middle East & Africa division. We are projecting revenue growth of 7.5 percent for the Asia, Middle East & Africa business segment and expect sales revenues from this division to rise to 11.6 percent of total company revenues.

Source: www.sec.gov

Henry Fund Research

RECENT DEVELOPMENTS
On February ninth, Pepsi reported fourth quarter earnings per share of $1.15, which beat analysts 7 expectations of $1.13 per share. Revenues for the quarter were 20.16 billion versus analysts expectations 7 of 19.89 billion. Although investors remain concerned about the performance of the core Pepsi soft drink brand and the prospects for splitting the company into two parts, the company has met or exceeded earnings 5 expectations in each of the four quarters in 2011.

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sixty calories, which is roughly half the amount of 8 calories in the companys traditional Pepsi brand. Despite the success of diet soda, many consumers just can not stand the taste. Soft drink companies have been searching for ways to make diet soda tastier for years. PepsiCo previously attempted to win over this 8 segment of the market with Pepsi Edge in 2004. This product also attempted to win over this segment of the market by offering a beverage with nearly half the calories of traditionally carbonated soft drink, but was 8 eventually taken off the market because of weak sales. Skeptics will argue that making a great tasting healthy soft drink just isnt possible, but we feel the success of diet soda proves otherwise. We feel there are two factors likely to make this product launch more successful. First, the experience gained from the first product launch will be important to the success of Pepsi Next. The company can improve on the mistakes made from Pepsi Edge and it has a better idea of the tastes that consumers are looking for. Secondly, PepsiCo now truly understands the urgency needed to provide products to this segment of the market. After multiple years of declining per capita soft drink consumption domestically, the company must acknowledge that this trend appears permanent. The company must deliver new products to meet the changing tastes of consumers. We feel Pepsi Next will be a success, although sales will likely be small compared to some of the companys top selling brands. Recently PepsiCo and Coca-Cola have come under attack for the presence of the chemical 49 Methylimidazole in their soft drinks. The chemical was found to cause cancer in research studies done on rodents. After a petition from a U.S. watchdog group, the FDA stated that people would need to drink a thousand cans of soda a day for the chemical to have 9 the same affect it had on rodents in the study. However, because the chemical is now covered under Californias Safe Drinking Water and Toxic Enforcement Act of 1986, the companies would have to put a label on their products containing the chemical disclosing the 9 risks. Pepsi and Coke have since decided to eliminate the ingredient from their caramel coloring in order to avoid the California law. Both companies have claimed the change in recipes will have no effect on the taste of their products. We are hesitant to immediately buy into the companies claims, but because the ingredient is used for coloring and not flavor, we believe the companies will be able to find a similar substitute that will not have an affect on taste. The story has brought about a little minor negative publicity, but we do not feel it will have any affect on the companies permanent reputations. Similarly, because the taste will likely remain the same, we dont foresee this event having much of an impact on sales.

Source: http://bigcharts.marketwatch.com/

Investors spent much of the last year rotating in and out of both PepsiCo and Coca-Cola stock as they scrutinized the future prospects of these evenly matched industry leaders. During the first half of 2011, PepsiCo outperformed Coca-Cola relative to analysts expectations causing the stock to outperform CocaColas for much of the first half of the year. Since the beginning of 2012 we have seen an impressive 1 outperformance by Coca-Cola of almost ten percent. This performance has been largely driven by the outperformance of Coca-Colas core soft drink brands, Coke and Diet Coke. During this time investor sentiment has turned negative towards Pepsi. Investors have argued that PepsiCo has lost its way and the company needs to be split up into two different businesses. We disagree and feel that the current company will be able to use its brand strength and competitive position to grow more successfully in the future than it would as two separate companies. As the company puts more emphasis on its Pepsi brand, investor sentiment will likely shift back in PepsiCos favor. PepsiCos stock should soon start to play catch up to Coke, creating a better investment opportunity. PepsiCos newest addition to their product portfolio is Pepsi Next. Pepsi Next is scheduled to come to market 8 by the end of March. The drink will attempt to regain customers that have switched from carbonated soft drinks to healthier beverages. Pepsi Next will contain

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INDUSTRY TRENDS

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market share to peak at 17.5% in the next two to three years and then stabilize near these levels. We think these gains will come at the expense of the entire industry, including Pepsi and Coke. We feel the trend will reverse itself in about five years when personal savings levels are replenished and input prices eventually decline from falling commodity prices. The majority of this information is already priced in to PepsiCo and Coca-Colas stocks, and we feel the stocks may get a boost in the intermediate term as investors begin to look forward and reward these companies for their future business prospects.

Despite the success PepsiCo has had moving into emerging markets, they have received heavy criticism for their massive consumption of water required in the companys production process. In some of the newest international markets that soft drink companies operate in, clean water is an extremely scarce resource. As these companies grow operations and increase usage, locals are becoming increasingly frustrated with the strain being put on water supplies. In 2008 Coca-Cola reported that it required 2.43 liters of water to make a 10 one-liter beverage. A recent research report noted that one billion people around the world do not have access to clean drinking water and billions of others are consuming dirty water making them susceptible to 10 disease. Another factor contributing to the problem is the record high temperatures popping up all over the world. Abnormally long spans of warm weather and lack of rainfall are causing droughts in many areas with low water levels. As Pepsi and Coke continue to use large amounts of water for their production processes, local citizens are becoming increasingly vocal about their unhappiness. In some parts of the world we may have reached a point where political rules and regulations may soon be put into affect. In response to these events, PepsiCo has started an initiative in 2007 to reduce per unit water consumption by twenty percent 6 10 by the year 2015. By 2010 Pepsi had reduced per unit Source: www.sec.gov water consumption by fifteen percent and appears to be 10 well on their way to meeting their ultimate goal. Regardless of the success of the companys initiative, the production process still consumes a large amount of water supplies. PepsiCo is taking the necessary steps to help alleviate the problem, but as water supplies continue to decline, the situation may be out of their control. We think the company will soon have to spend more money to help replenish the water supply in some countries. This will likely lower margins slightly, but we think the company will quickly adjust and the increased costs will not have a material effect on profitability. Not only are the leaders in the soft drink industry battling declining per capita consumptions, but they are also facing stiff competition from private label brands. After years of excess consumer spending, domestic consumption appears to be showing signs of exhaustion. Strapped with high debt levels, American consumers can no longer afford to spend frivolously and purchase everything they desire. These changes have had a direct impact on the soft drink industry, as private label brands have grown in popularity and taken market share away from name brands. From 2008 to 2011 private label brands have grown their market 3&6 share from 14 to 16.5%. At the same time, PepsiCo and Coca-Colas market share has dropped by 2.6 and 3&6 2.1% respectively. We are projecting private label

Source: www.sec.gov

Similar to many other companies that rely heavily on commodities in their production process, companies in the soft drink industry have had to decide whether or not to try and pass along rising input prices to consumers. Both PepsiCo and Coca-Cola have determined that input prices have become too high to absorb and they must raise prices. In 2011 PepsiCo and Coca-Cola laid out plans to begin increasing prices 11 three to five percent by July. In PepsiCos 2011 annual report, the company noted that price increases

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had helped sales revenues in many of its operating 3 segments. The results of this strategic move have been a mixed bag as higher retail prices have helped maintain profitability, but some customers have been lost to cheaper brands. We believe that company executives and financial analysts do not believe the economy is strong enough to warrant these levels of prices. However, prices should remain high as long as commodities remain at elevated levels.

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

The top four companies in the soft drink industry rule the market, controlling approximately 93.7% of the 17 market share. Coke remained the industrys top selling brand in 2011 with a market share of 16.7% in 17 2011. Pepsi is the second leading brand, holding a 17 market share of 9.2%. Diet Coke, Mountain Dew, and Dr Pepper hold market shares of 9.1%, 6.5%, and 6% 17 respectively. In 2011, Pepsi and Coke each experienced declines in market share, while Dr 4 Peppers sales rose five percent. Moving forward we think PepsiCos increased focus and spending on its core Pepsi brand will lead to market share gains at the expense of Coke and other private label brands. We MARKETS AND COMPETITION project markets shares to average 16.5%, 9.5%, and 6.1% for Coke, Pepsi, and Dr Pepper over the next five Carbonated Soft Drink Market Share years. PepsiCos stock will likely trade at a higher P/E multiple as investors reward the company for the The carbonated soft drink industry is one of the most increase in market share. competitive industries in the entire economy. The domestic market is highly saturated and the industry is U.S Savory Snacks Market Share on the decline. World-wide sales volumes of carbonated soft drinks continue to grow very slowly due to population growth and the increased adoption of soft 16 drinks in foreign countries. In 2010 global consumption increased four percent to over 550 16 billion. Growth in India and China was 16% and 14% 16 respectively in 2010. Global per capita consumption 16 averaged around eighty units per year in 2010. We project global sales to grow between three to five percent in the future. PepsiCo will be one of the biggest beneficiaries of this global growth because of their international footprint. However, despite the positive news internationally, domestic per capita consumption of carbonated soft drinks has fallen from 50.6 gallons in 2006 to 46.9 gallons per year in 2011 in the United 17 States. We feel this downward trend will stabilize soon, but prospects for growth remain limited. We project domestic per capita consumption to average 3 Source: www.sec.gov 47.5 gallons over the next five years. U.S. savory snacks include potato, tortilla, corn, pita, bagel and veggie chips, pretzels, fruit crisps and cheese puffs, snack nuts, seeds, meat snacks, crackers (excluding graham), popcorn, dips, trail mixes, rice 3 cakes and soy crisps. PepsiCo is the leader in domestic savory snack market share. The company 3 controlled 38.3% of the market in 2011. Kraft is the 3 next largest single player with a market share of 9.4%. Other leading producers include Kelloggs, Conagra, 3 Campbell, and private label brands. Over the last year, PepsiCo, Kraft, and Kelloggs have all seen a slight decline in market share as consumers switched over to 3 private label and other cheaper name brands. Market share for PepsiCo and Kraft declined by 0.1% and 0.4% 3 respectively. We feel this trend will reverse soon as the U.S. economic recovery gains momentum following the 2009 recession. Increased hiring and a decline in the unemployment rate will be the catalyst for consumers

Source: www.ibisworld.com

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switching back to premium brands such as PepsiCo. We project PepsiCos market share in the savory snacks segment to increase to an average of 38.7% over the next five years.

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

result of higher input prices. Pepsis 30.5% return on equity is a few percentage points higher than its competitors return on equity because it operates with 2 more debt. We are confident these numbers will be similar after next years results. Although both PepsiCo and Coca-Cola have a payout ratio near fifty percent, Threat of Substitute Products 2 Pepsis dividend yield is 3.10% versus 2.80% for Coke. The biggest challenge facing the industry in the near We believe both companies will continue raising term is the abrupt shift towards healthier eating habits dividends annually and keep their payout ratios around in the U.S. Consumers spent much of the nineties and fifty percent. two thousands making terrible dietary choices. However, this trend appears finished, as consumers have begun purchasing alternatives such as bottled PEP KO DPS water, sports drinks, energy drinks, tea, coffee, and fruit and vegetable based beverages in greater numbers. In Market Cap (B) 104.82 167.79 8.61 2011, sales of bottled water increased 4.1% and sales 4 of energy drinks grew 14.4%. Both PepsiCo and CocaPrice/Sales (ttm) 1.57 3.60 1.44 Cola are aware of this trend and are implementing strategic initiatives to overcome this challenge. In 2011, Price/Book (mrq) 5.01 5.29 3.77 Coca-Cola purchased Odwalla Inc., the maker of fruit 18 juices, smoothies, and food bars. Similarly, in 2006 PepsiCo bought the Naked Juice Company, which Forward P/E 15.03 16.59 12.73 19 produces natural fruit juice beverages. Also, Pepsi will be releasing their new half calorie soda, Pepsi Next, at PEG Ratio (5 yr) 2.13 2.94 2.13 8 the end of March. PepsiCo is looking at many options to make its products healthier. The company is Return on Assets 9.20 8.91 7.06 searching for combinations of new and existing (ttm) ingredients to help increase the nutritional value of its Return on Equity 30.50 27.31 25.67 product portfolio. We feel that strategic initiatives and (ttm) increased research and development will help Pepsis product portfolio compete in the healthy food and Profit Margin 9.69 18.42 10.27 (ttm) beverage markets moving forward. The effect from the health initiative will be relatively small due to Operating Margin 15.60 23.41 17.35 stabilization in soft drink sales and the likelihood that (ttm) many of the new healthy beverages will be Pepsi Qtrly. Rev. 11.00 5.20 3.50 products. Growth (%) Key Metrics The three most dominant players in the soft drink industry are PepsiCo, Coca-Cola, and Dr Pepper. Coca-Cola is the largest company in the industry with a 2 market capitalization of $167.79 billion. PepsiCo and Dry Pepper have market capitalizations of $104.82 and 2 $8.61 billion respectively. Coca-Colas forward P/E is 16.59, which is a slight premium to Pepsis forward P/E 2 of 15.03. We feel Coca-Colas superior operating performance recently warrants the higher multiple, but we believe this creates an opportunity for PepsiCos stock. We think that investors will reward Pepsis improved operating performance over the next year with a forward P/E similar to Cokes around 16.5. CocaColas profit margin is nearly double PepsiCos at 2 18.42% versus 9.69%. PepsiCos margins are lower than Cokes because of its salty snacks portfolio, which generates lower margins than soft drinks. All three industry leaders will likely see margins fall this year as a
% Held by Institutions Payout Ratio (%) Dividend Yield (%) 68.20 50.00 3.10 64.30 51.00 2.80 91.50 44.00 3.40

Source: www.finance.yahoo.com/

ECONOMIC OUTLOOK
GDP Gross Domestic Product in the U.S. remains stubornly slow and inconsistent. Fourth quarter GDP growth came in at 3.0%, which was slightly stronger than 12 initially expected. This was a significant improvement

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over the 1.8% increase in the third quarter. On a year over year basis, GDP was up 1.6% in the fourth 12 quarter. Improved consumer and business confidence, warm weather, and a rebuilding of inventories all helped contribute to the increase in fourth quarter GDP. In the third quarter of 2011, consumer and business sentiment moved lower as fears over the European debt crisis domestic budget negotiations reached a climax. Following the resolution of these issues, consumers began increasing spending again and business began rebuilding inventories. Unusually mild temperatures throughout much of the country during the fourth quarter also provided a tailwind for the U.S. economy. The warm weather provided unusual opportunities for the construction industry to build homes and complete more projects than normal during this time of year. Also, many retailers saw improved foot traffic and sales due to the pleasant weather.
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Jobless Claims New unemployemnt claims have been one of only a few economic indicators to remain consistently positive over the last year. New jobless claims have fallen from five hundred thousand at the end of 2009 to just over three 13 hundred and fifty thousand in the first quarter of 2012. During the week of March 24, 2012, initial unemployment claims were 359,000, which was an 13 improvement from the 364,000 the week before. We expect new jobless claims to continue trending lower throughout the year. We think initial weekly claims will be near three hundred thousand by the end of the year. The decline in unemployment claims should lead to increased consumer confidence and personal spending. As fewer and fewer Americans file new claims, currently employed workers will begin to feel more secure in their jobs, and likely increase their spending levels. Similarly, the combination of increased hiring and lower unemployment claims will drive the unemployment rate lower. We think that PepsiCo will see an important uptick in carbonated soft drink demand from restuarants as discretionary spending increases along with the improvement in the labor market.

Source: www.bloomberg.com

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Moving forward the team expects GDP in the range of 2.5 to 3.0%. We acknowledge that the weak labor market and the bountiful fiscal and monetary economic stimulus make GDP more vulnerable to economic shocks that may lead to erratic future growth numbers. However, with the Federal Reserve likely to keep interest rates unchanged until late 2014 and the steadily improving job market, we think all signs point to GDP in the two to three percent range for the next few years. PepsiCos business is somewhat dependent on GDP, although to a lessor degree than many other industries. The company produces a baseline amount of sales each quarter because people require food to survive. However, they rely on economic growth for incremental sales from discretionary purchases. We project GDP between two and three percent will lead to steady sales growth near four percent. We believe PepsiCo would need GDP to be above 3.5% to see a sizeable acceleration in sales growth.

Source: www.bloomberg.com

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Price of Sugar Sugar is one of the most heavily used raw materials in Pepsis production process. Similar to many other commodities, the price of sugar has increased 20 significantly over the last couple of years. The price of 20 sugar averaged around 37.8 cents per pound in 2011. This is up substantially compared to prices over the last thirty years, which have remained near twenty cents per 20 pound. Two key factors have caused the recent run 20 up in sugar prices. First, a global sugar shortage was casued by severe drought in India and flooding in 20 Brazil. Secondly, the U.S. dollar declined due to negative real interest rates and rising budget deficits. We believe sugar prices will pull back to around thirty

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Henry B. Tippie School of Management

cents per pound in the next year or two as supplies environment for carbonated soft drink producers, and increase. However, increased global demand will likely limit the upside on future sales growth. put a floor under sugar prices at these levels. Rising inputs prices are threatening PepsiCos margins and profitability. The companys cost of goods sold have increased from 45.95% of sales to 47.51% of sales in 3 the last year. Unfortunately, the decline in sugar prices will be more than offset by the rise in other raw material prices. Price increases implemented in the last few years will help profitability, but we feel margins will likely fall in 2012.

Source: www.bloomberg.com

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CATALYSTS FOR GROWTH

Source: www.ibisworld.com
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Personal Income Similar to many other economic indicators, domestic personal incomes continue to rise at a discouragingly slow rate. Personal incomes rose 0.2% in January and 15 February. The 0.2% gain in February was below 15 analysts expectations of a 0.4% gain. The year over 15 year rise in personal incomes was 3.2% in February. Although these statistics are encouraging, there are a number of warning signs in the details. In May 2009, concurrent with the beginning of the economic recovery, the year over year change in real disposable incomes jumped off of its lows for approximately a year 15 and a half. Nevertheless, since November 2010, real disposable incomes have trended lower and fallen into 15 negative territory the last two months. We believe this trend lower will soon stabilize because of an improving labor market and stabilization in the U.S. dollar. We expect real disposable incomes to grow at a modest rate of 1.5% over the next year. Another troubling statistic was the 0.8% increase in consumer spending 15 during the month of February. Consumers have once again reverted back to their old spending habits, spending more than the earn. We feel that a sharp rise in consumer sentiment is the main factor behind the increase in spending. Consumer sentiment rose to 75.3 14 in February. This was the highest reading since March 14 of 2011. We think changes in consumer spending will quickly fall back in line with changes in personal incomes. This will provide a challenging operating

PepsiCos greatest opportunity for accelerated growth lies in the Latin America and Asia, Middle East and Africa business segments. The company gets around fifty percent of its revenue internationally and we project this number will be around fifty-two percent in five 3 years. The two percent increase will come mostly from growth in Asia, Africa, and the Middle East. One of Pepsis biggest challenges is to create loyal customers in these new markets just as they have done in the U.S. We think Pepsi will be the most successful beverage company to gain significant brand loyalty in emerging markets because of their diverse product portfolio and their diligent efforts to gain new customers. PepsiCo will be able to reach a greater number of customers more quickly by offering beverages and salty snacks in these new markets, leading to an acceleration in brand loyalty. Additionally, improving economies in emerging markets are leading to rising incomes for many people in these countries. Higher levels of discretionary income will contribute to a new era of casual dining, though likely nowhere near the scope of casual dining domestically. Casual dining will create another channel for Pepsi to reach new customers in these new markets, especially those who would otherwise not have been drawn to PepsiCo products. Research and development spending of $525, $488, and $414 million over the last three years has put PepsiCo in great position to successfully expand their 3 product portfolio. First, expanding into some emerging markets will be a tricky task. Companies will need to find the right balance between pushing products popular in the U.S. and catering to local tastes and

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traditions. PepsiCo has spent lots of time and money analyzing consumer preferences in many of these markets. Additionally, the company has made a concerted effort to test variations of products containing slightly different ingredients in order to be able to meet customer preferences. Secondly, research and development spending should help Pepsi make up ground on companies offering healthier food and beverage options. Pepsi is continuously testing new ingredients in an attempt to find healthy substitutes that will be able to replace unhealthy existing ingredients without sacrificing the taste. In March 2012, the company is scheduled to launch its sixty-calorie soft 8 drink, Pepsi Next. We think the new brand will be a success, and begin contributing new sales immediately. Finally, the race to offer increasingly health conscious consumers more choices is moving full steam ahead. PepsiCo will look to continue to build upon recent success growing the companys three healthiest 3 brands, Quaker, Tropicana, and Gatorade. Also, we feel the company will be an industry leader bringing healthier products to market through internal development or attractive acquisitions.

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Henry B. Tippie School of Management

We think many of the imbalances causing this decline will soon be addressed, and Pepsi will experience negative exchange rates as they recognize international profits.

Many Americans have begun to put extra emphasis on adhering to healthier eating habits. The majority of PepsiCos snacks and beverages are unhealthy. PepsiCo will continue to lose business to substitute products if it fails to build a robust portfolio of healthier choices. The soft drink industry faces threats from state and federal regulations. Multiple states have proposed taxes on soft drinks because of the health problems they contribute to. Facing large deficits and angry constituents, politicians across the country are looking everywhere for places to put the blame. Pepsi will be forced to deal with any new laws or regulations that are put in place.

VALUATION INVESTMENT POSITIVES

Coordinated bailout efforts and liquidity injections from the European Union and the International Monetary Fund have stabilized economic conditions in Europe. Sales in PepsiCos European division should improve this year. Traditional income generating investments such as bonds and money market funds are currently offering investors extremely low returns relative to historical ranges. Many of these short-term instruments are even producing negative real returns when factoring in inflation. Pepsis 3.1% dividend yield is considerably higher than the 1.87% 5 yield of the S&P 500. PepsiCos experience creating products that adapt to the tastes of different cultures will help the company grow internationally and maintain its position as an industry leader in new markets. Pepsis innovative spirit and diverse product portfolio will drive the innovation needed to meet customers needs in foreign countries.

We have a buy recommendation on PepsiCo. Our price target for PepsiCo over the next twelve months is $76.87. We produced this price target using our discounted cash flow, dividend discount, and relative valuation models. Our discounted cash flow model gave us a price of $79.63. Our dividend discount model gave us a price of $77.72. Our relative P/E valuation model gave us a price of $73.26. We used equal weightings of 33.33% to come up with our price target of $76.87. We felt it was appropriate to equally weight the three models because their outputs were in such close proximity. The growth rate used in our discounted cash flow model was two percent. The weighted average cost of capital was 6.44%. The key assumptions used in our growth models were sales growth rates and the cost of goods sold. We believe that rising input prices will put pressure on the companys cost of goods sold. We have forecasted cost of goods sold to rise slightly in 2 the coming years. Pepsi is currently trading at $65.78. Therefore, our model is forecasting 14.43% upside. The fund already has a sizeable position in PepsiCo. Therefore, no action is needed at this time. We expect to benefit from price appreciation and dividends over the next year.

INVESTMENT NEGATIVES

Our buy and sell disciplines revolve around economic and company specific factors. We would look to add to our position if the economy added 250,000 jobs for two Volatile exchange rates have the potential to hurt consecutive months and the unemployment rate profitability as the company translates overseas dropped below 7.6%. These events would lead to profits back into American dollars. The U.S. dollar higher personal income levels and a rise in consumer has had an immense decline over the last decade.

10

Henry Fund Research

spending. Also, if the price of Pepsis stock dropped below $62 without a material change in the companys fundamentals, we would look to purchase more shares. At these levels, valuations for the stock would become very attractive. We would look to reevaluate our position, and possibly sell the stock if PepsiCos price rose above $80. Additionally, if the companys soft drink market share were to fall below 8.9% we would likely sell the stock.

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

11

Henry Fund Research

REFERENCES
1). http://bigcharts.marketwatch.com/ 2). http://finance.yahoo.com/ 3).PepsiCo-10K,2011 http://www.sec.gov/Archives/edgar/data/77476/00011931251 2081822/d269581d10k.htm 4). CNBC. Berk, Christina. Drop in Soda Sales Accelerates as Healthier Options Grow. http://www.cnbc.com/id/46796332 5). http://www.cnbc.com/ 6).PepsiCo-10k,2008 http://www.sec.gov/Archives/edgar/data/77476/00011931250 9033126/d10k.htm 7). CNBC. PepsiCo to Cut 8,700 Jobs; Quarterly Earnings Rise. http://www.cnbc.com/id/46314789 8).USA Today. Choi, Candice. Pepsis mid-calorie soda aims to win back drinkers. http://www.usatoday.com/money/industries/food/story/201202-23/soda-wars-continue/53221210/1 9). USA Today. Choi, Candice. Coke, Pepsi make changes to avoid cancer warning. http://www.usatoday.com/money/industries/food/story/201203-08/coke-pepsi-cancer-warning/53416248/1 10). Triple Pundit. Donovan, William. Pepsi, Coke Report on Water Conservation. http://www.triplepundit.com/2010/09/pepsi-coke-set-waterconservation-goals/ 11). Seeking Alpha. Soft Drink Prices Rise, Following Other Food and Beverage Hikes. http://seekingalpha.com/article/276629-soft-drink-prices-risefollowing-other-food-and-beverage-hikes 12).Bloomberg.GDP http://www.bloomberg.com/markets/economic-calendar/ 13).Bloomberg.JoblessClaims http://www.bloomberg.com/markets/economic-calendar/ 14).Bloomberg.ConsumerSentiment http://www.bloomberg.com/markets/economic-calendar/ 15).Bloomberg.Personal Income and Outlays http://www.bloomberg.com/markets/economic-calendar/ 16). CEE Packaging. Globsl soft drinks consumption increases in 2010. http://www.ceepackaging.com/2011/08/09/global-soft-drinksconsumption-increases-in-2010/

THE UNIVERSITY OF IOWA

Henry B. Tippie School of Management

17). IBISWorld. Kaczanowska, Agata. Soda Production in the US. http://clients.ibisworld.com/industryus/productsandmarkets.as px?indid=285 18). Wikipedia. Odwalla http://en.wikipedia.org/wiki/Odwalla 19).Wikipedia. Naked http://en.wikipedia.org/wiki/Naked_Juice Juice.

20).IBISWorld. World price of sugar. http://clients.ibisworld.com/bed/default.aspx?bedid=176 21).http://mergentonline.com.proxy.lib.uiowa.edu/compsearch .asp 22). http://www.finra.org/

IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowas Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

12

PepsiCo, Inc. RevenueDecomposition FiscalYearsEndingDec.31 Sales(Millions) PercentofRevenue GrowthRates FritoLayNorthAmerica PercentofRevenue GrowthRates QuakerFoodsNorthAmerica PercentofRevenue GrowthRates LatinAmericaFoods PercentofRevenue GrowthRates PepsiCoAmericasBeverages PercentofRevenue GrowthRates Europe PercentofRevenue GrowthRates Asia,MiddleEast&Africa PercentofRevenue GrowthRates 2009 43,232 100% 0.04% 12421 28.73% 0.69% 2687 6.22% 41.27% 5703 13.19% 3.26% 10116 23.40% 7.51% 7028 16.26% 1.99% 5277 12.21% 3.09% 2010 57838 100% 33.79% 12573 21.74% 1.22% 2656 4.59% 1.15% 6315 10.92% 10.73% 20401 35.27% 101.67% 9602 16.60% 36.62% 6291 10.88% 19.22% 2011 66504 100% 14.98% 13322 20.03% 5.96% 2656 3.99% 0.00% 7156 10.76% 13.32% 22418 33.71% 9.89% 13560 20.39% 41.22% 7392 11.12% 17.50% 2012E 68532.16 100% 3.05% 13655.05 19.93% 2.50% 2695.84 3.93% 1.50% 7513.8 10.96% 5.00% 22754.27 33.20% 1.50% 13966.80 20.38% 3.00% 7946.40 11.60% 7.50% 2013E 71503.14 100% 4.34% 14146.63 19.78% 3.60% 2763.24 3.86% 2.50% 8039.77 11.24% 7.00% 23550.67 32.94% 3.50% 14420.72 20.17% 3.25% 8582.11 12.00% 8.00% 2014E 74623.80 100% 4.36% 14655.91 19.64% 3.60% 2832.32 3.80% 2.50% 8602.55 11.53% 7.00% 24374.94 32.66% 3.50% 14889.39 19.95% 3.25% 9268.68 12.42% 8.00% 2015E 77807.77 100% 4.27% 15183.52 19.51% 3.60% 2903.12 3.73% 2.50% 9118.70 11.72% 6.00% 25228.07 32.42% 3.50% 15410.52 19.81% 3.50% 9963.83 12.81% 7.50% 2016E 80841.96 100% 3.90% 15730.13 19.46% 3.60% 2975.70 3.68% 2.50% 9574.64 11.84% 5.00% 26111.05 32.30% 3.50% 15988.42 19.78% 3.75% 10462.02 12.94% 5.00% 2017E 82458.66 100% 2.00% 15926.76 19.31% 1.25% 3005.46 3.64% 1.00% 9957.62 12.08% 4.00% 26398.27 32.01% 1.10% 16289.00 19.75% 1.88% 10881.55 13.20% 4.01%

PepsiCo, Inc. IncomeStatement FiscalYearsEndingDec.31

Net revenue Cost of sales Selling, general & administrative expenses Amortization of intangible assets Total operating profit Bottling equity income Interest expense Interest income & other Income before income taxes Total current provision (benefit) for income taxes Total deferred provision (benefit) for income taxes Provision for income taxes Net income Net income (loss) attributable to noncontrolling interests Net income attributable to PepsiCo, Inc. Preferred shares - dividends Preferred shares - redemption premium Net income available for common shareholders Weighted average shares outstanding - basic Year end shares outstanding Net income (loss) per share - basic Dividends per common share

2009
43,232 20,099 15,026 63 8,044 365 397 67 8,079 1,835 265 2,100 5,979 -33 5,946 1.00 5.00 5,940 1,558 1,565 3.81 1.81

2010
57,838 26,575 22,814 117 8,332 735 903 68 8,232 1,797 97 1,894 6,338 -18 6,320 1.00 5.00 6,314 1,590 1,581 3.97 1.89

2011
66,504 31,593 25,145 133 9,633 0.00 856 57 8,834 1,617 755 2,372 6,462 -19 6,443 1.00 6.00 6,436 1,576 1,564 4.08

2012E 68532.16 32998.24 25596.76 137.06 9800.10

0.00

2013E 71503.14 34321.51 26384.66 143.01 10653.97

0.00

2014E 74623.80 35670.17 27685.43 149.25 11118.95

0.00

2015E 77807.77 37036.50 29100.11 155.62 11515.55

0.00

2016E 80841.96 38157.41 30234.89 161.68 12287.98

0.00

2017E 82458.66 38920.49 30922.00 164.92 12451.26

0.00

925.18 68.53 8943.45 1679.04 822.39 2501.42 6442.02

-19.00

1001.04 85.80 9738.73 2073.59 858.04 2931.63 6807.10

-21.00

1007.42 74.62 10186.15 2164.09 559.68 2723.77 7462.38

-21.00

1128.21 116.71 10504.05 2217.52 583.56 2801.08 7702.97

-18.00

1212.63 145.52 11220.86 2384.84 687.16 3071.99 8148.87

-17.00

1278.11 164.92 11338.07 2432.53 700.90 3133.43 8204.64

-15.00

6423.02 1.00
6.00

6786.10 1.00
6.00

7441.38 1.00
6.00

7684.97 1.00
7.00

8131.87 1.00
7.00

8189.64 1.00
7.00

6416.02 1572.5 1560 4.11 2.06

6779.10 1562 1555 4.36 2.18

7434.38 1557.5 1558 4.77 2.39

7676.97 1556.5 1562 4.91 2.46

8123.87 1560 1570 5.17 2.59

8181.64 1566 1563 5.23 2.62

2.04

PepsiCo, Inc. BalanceSheet FiscalYearsEndingDec.31

Cash & cash equivalents Short-term investments Accounts & notes receivable, net Inventories Prepaid expenses & other current assets Total current assets Property, plant & equipment, gross Less accumulated depreciation Property, plant & equipment, net Amortizable intangible assets, net Goodwill Nonamortizable intangible assets Non-current notes & accounts receivable Deferred marketplace spending Pension plans Other investments Other assets Total assets Current maturities of long-term debt Amounts reclassified to long-term debt Short-term debt Accounts payable Accrued marketplace spending Accrued compensation & benefits Dividends payable Other current liabilities Accounts payable & other current liabilities Income taxes payable Total current liabilities Long-term debt obligations Other liabilities Deferred income taxes Total liabilities Total stock Retained earnings Currency translation adjustment Unamortized pension & retiree medical, net of tax Accumulated other comprehensive income (loss) Repurchased common stock, at cost Total PepsiCo, Inc. common shareholders' equity Noncontrolling interests Total equity

2009
3,943 192 4,624 2,618 1,194 12,571 24,912 12,241 12,671 841 6,534 10098 118 182 64 4627 1423 39,848 102 0.00 826 2,881 1,656 1,291 706 1,593 8,127 165 8,756 7,400 5,591 659 22,406 466 33,805 -1,513 -2,328 -3,747 13,383 16,908 638 17,442

2010
5,943 426 6,323 3,372 1,505 17,569 33,041 13,983 19,058 2,025 14,661 38227 165 203 121 2021 2236 68,153 113 0.00 9683 3,865 1,841 1,779 766 2,672 10,923 71 15,892 19,999 6,729 4,057 46,677 4749 37,090 -1,259 -2,442 -3,559 16,745 21,273 312 21,476

2011
4,067 358 6,912 3,827 2,277 17,441 35,140 15,442 19,698 1,888 16,800 45914 159 186 65 1566 1543 72,882 2,549 0.00 9861 4,083 1,915 1,771 813 3,175 11,757 192 18,154 20,568 8,266 4,995 51,983 4690 40,316 -2,857 -3,419 -6,182 17,875 20,704 311 20,899

2012E 5404.0989 376.93 7195.88 3940.60 2439.74 19357.25 37735.87 16105.06 21630.81 1884.22
16,800

2013E 6607.79 378.97 7350.52 4182.93 2545.51 21065.72 40275.98 16803.24 23472.74 1880.46
16,800

2014E 7669.24 485.05 7686.25 4440.12 2604.37 22885.04 42713.86 17536.59 25177.27 1876.69
16,800

2015E 9091.21 505.75 8286.53 4559.54 2723.27 25166.29 45081.30 18284.83 26796.47 1872.94
16,800

2016E 10926.38 541.64 8569.25 4688.83 2845.64 27571.74 47460.38 18997.86 28462.52 1869.20
16,800

2017E 12608.15 560.72 8699.39 4724.88 2927.28 29520.42 49720.51 19377.79 30342.72 1865.46
16,800

45950.73 158.67 191.58 65.00 1628.50 1573.86 75640.62 2315.75 0.00 8458.00 4325.48 2098.93 2047.74 846.65 3255.28 12574.08 219.30 20404.73 21179.37 8909.18 5139.91 55633.20 4714.98 43889.38 2671.22 3042.91 4690.13 18503.68 19696.42 311.00 20007.42

45987.49 160.76 197.33 62.00 1544.00 1559.51 79130.01 2381.00 0.00 6783.23 4481.96 2163.54 2110.77 893.79 3417.63 13067.69 238.81 21576.94 22156.40 9295.41 5362.74 58391.49 4722.60 47946.95 2964.00 2982.05 5890.13 20405.85 20427.52 311.00 20738.52

46024.28 173.18 195.36 60.50 1567.16 1537.62 82697.10 3150.18 0.00 4236.13 4716.90 2270.21 2214.83 915.29 3595.35 13712.57 245.61 21344.49 23155.19 9956.73 5512.36 59968.77 4769.83 51933.93 2788.00 2922.41 7149.87 21426.14 22417.33 311.00 22728.33

46061.10 157.33 203.17 65.00 1658.00 1625.80 86806.11 2336.00 0.00 5995.90 4983.28 2386.21 2328.01 982.14 3695.87 14375.50 248.98 22956.39 24305.71 10279.64 5724.14 63265.88 4817.52 56257.83 3618.00 4663.08 7067.59 22497.45 23229.23 311.00 23540.23

46100.25 156.35 211.30 67.30 1682.87 1658.32 90979.85 829.00 0.00 8605.51 5160.06 2479.26 2418.79 1010.52 3724.94 14793.58 258.69 24486.78 25474.36 10613.55 5975.32 66550.01 5540.15 60426.40 2787.00 4569.82 10868.57 23622.32 24118.84 311.00 24429.84

46139.44 151.87 219.75 68.40 1763.89 1691.48 94963.43 250.00 0.00 10012.69 5242.80 2535.60 2473.76 1050.79 3851.05 15154.01 263.87 25680.57 26589.76 10823.89 6034.44 69128.66 6371.18 56327.73 1854.00 1755.56 8762.14 24803.44 25523.77 311.00 25834.77

PepsiCo, Inc. CashFlowStatement FiscalYearsEndingDec.31

Net income Depreciation & amortization Stock-based compensation expense Restructuring & impairment charges Pension & retiree medical plan contributions Pension & retiree medical plan expenses Bottling equity loss (income), net of dividends Deferred income taxes & other tax charges & credits Accounts & notes receivable Inventories Prepaid expenses & other current assets Accounts payable & other current liabilities Income taxes payable Other operating activities, net Net cash flows from operating activities Capital spending Other acquisitions, divestitures & investments Short-term investments Net cash flows from investing activities Proceeds from issuances of long-term debt Payments of long-term debt Debt repurchase Short-term borrowings Cash dividends paid Share repurchases - common Share repurchases - preferred Other financing activities, net Net cash flows from financing activities Effect of exchange rate changes on cash & cash equivalents Net increase (decrease) in cash & cash equivalents Cash & cash equivalents, beginning of year Cash & cash equivalents, end of year

2009
5,979 1,635 227 -159 -1,299 423 -235 284 188 17 -127 -133 319 -323 6,796 -2,128 -328 55 -2,401 1,057 -226 0.0 -1018 -2,732 0 -7 429 -2,497 -19 1,879 2,064 3,943

2010
6,338 2,327 299 657 -1,734 453 -916 500 -268 276 144 488 123 -239 8,448 3,253 -4186 -229 -7,668 6,451 -59 -500 2482 -2,978 -4,978 -5 973 1,386 -166 2,000 3,943 5,943

2011
6,462 2,737 326 304 -349 571 0.0 495 -666 -331 -27 520 -340 -758 8,944 -3,339 -2329 50 -5,618 3,000 -1,596 -771 303 -3,157 -2,489 -7 -418 -5,135 -67 -1,876

2012E 6442.02 663.06 332.52 237.00 350.00 595.00 0.00 487.00 283.88 113.60 162.74 817.08 27.30 398.00 8238.16 2595.87 1563.00 68.00 4090.87 3579.00 621.20 635.50 375.23 3233.72 2190 7 21 2754.19

2013E 6807.10 698.18 339.17 259.00 382.00 615.00 0.00 463.00 154.65 242.33 105.77 493.61 19.51 429.00 8341.81 2540.11 1348.00 39.00 3849.11 3279.00 671.80 615.80 401.40 3404.81 2300.00 6.00 81.00 3237.01

2014E 7462.38 733.35 345.95 351.00 461.00 649.00 0.00 458.00 335.73 257.18 58.86 644.88 6.80 348.00 9177.00 2437.88 1652.00 35.00 4124.88 2879.00 655.40 435.90 388.63 3716.00 2573.00 7.00 214.00 3905.67 85.00 1061.45 6607.79 7669.24

2015E 7702.97 748.23 352.87 316.00 395.00 588.00 0.00 454.00 600.28 119.42 118.90 662.93 3.37 305.00 9283.03 2367.44 1499.00 46.00 3820.44 2965.00 526.80 525.50 367.64 3824.97 2406.00 6.00 21.00 3977.63 63.00 1421.96 7669.24 9091.21

2016E 8148.87 713.03 359.93 283.00 326.00 521.00 0.00 463.00 282.72 129.30 122.36 418.08 9.71 265.00 9771.82 2379.08 1387.00 37.00 3729.08 3202.00 578.00 955.50 359.00 4036.06 2117.00 5.00 27.00 4157.56 50.00 1835.17 9091.21 10926.38

2017E 8204.64 379.92 367.13 255.00 155.00 488.20 0.00 423.00 130.14 36.05 81.65 360.43 5.17 253.00 9817.31 2260.13 1269.00 41.00 3488.13 2546.00 454.90 635.50 381.65 4098.67 2281.00 5.00 54.00 4601.42 46.00 1681.77 10926.38 12608.15

56.00 52.00 1337.0989 1203.69 5,943 4,067 5404.0989 4,067 5404.10 6607.79

PepsiCo, Inc. CommonSizeIncomeStatement FiscalYearsEndingDec.31

Net revenue Cost of sales Selling, general & administrative expenses Amortization of intangible assets Total operating profit Bottling equity income Interest expense Interest income & other Income before income taxes Total current provision (benefit) for income taxes Total deferred provision (benefit) for income taxes Provision for income taxes Net income

2009 100.00% 46.49% 34.76% 0.15% 18.61% 0.84% 0.92% 0.15% 18.69% 4.24% 0.61% 4.86% 13.83%

2010 100.00% 45.95% 39.44% 0.20% 14.41% 1.27% 1.56% 0.12% 14.23% 3.11% 0.17% 3.27% 10.96%

2011 100.00% 47.51% 37.81% 0.20% 14.48% 0.00% 1.29% 0.09% 13.28% 2.43% 1.14% 3.57% 9.72%

2012E 100.00% 48.15% 37.35% 0.20% 14.30% 0.00% 1.35% 0.10% 13.05% 2.45% 1.20% 3.65% 9.40%

2013E 100.00% 48.00% 36.90% 0.20% 14.90% 0.00% 1.40% 0.12% 13.62% 2.90% 1.20% 4.10% 9.52%

2014E 100.00% 47.80% 37.10% 0.20% 14.90% 0.00% 1.35% 0.10% 13.65% 2.90% 0.75% 3.65% 10.00%

2015E 100.00% 47.60% 37.40% 0.20% 14.80% 0.00% 1.45% 0.15% 13.50% 2.85% 0.75% 3.60% 9.90%

2016E 100.00% 47.20% 37.40% 0.20% 15.20% 0.00% 1.50% 0.18% 13.88% 2.95% 0.85% 3.80% 10.08%

2017E 100.00% 47.20% 37.50% 0.20% 15.10% 0.00% 1.55% 0.20% 13.75% 2.95% 0.85% 3.80% 9.95%

PepsiCo, Inc. CommonSizeBalanceSheet FiscalYearsEndingDec.31

Cash & cash equivalents Short-term investments Accounts & notes receivable, net Inventories Prepaid expenses & other current assets Total current assets Property, plant & equipment, gross Less accumulated depreciation Property, plant & equipment, net Amortizable intangible assets, net Goodwill Nonamortizable intangible assets Non-current notes & accounts receivable Deferred marketplace spending Pension plans Other investments Other assets Total assets Current maturities of long-term debt Amounts reclassified to long-term debt Short-term obligations Accounts payable Accrued marketplace spending Accrued compensation & benefits Dividends payable Other current liabilities Accounts payable & other current liabilities Income taxes payable Total current liabilities Long-term debt obligations Other liabilities Deferred income taxes Total liabilities Total stock Retained earnings Currency translation adjustment Unamortized pension & retiree medical, net of tax Accumulated other comprehensive income (loss) Repurchased common stock, at cost Total PepsiCo, Inc. common shareholders' equity Noncontrolling interests Total equity

2009 9.12% 0.44% 10.70% 6.06% 2.76% 29.08% 57.62% 28.31% 29.31% 1.95% 15.11% 23.36% 0.27% 0.42% 0.15% 10.70% 3.29% 92.17% 0.24% 0.00% 1.91% 6.66% 3.83% 2.99% 1.63% 3.68% 18.80% 0.38% 20.25% 17.12% 12.93% 1.52% 51.83% 1.08% 78.19% 3.50% 5.38% 8.67% 30.96% 39.11% 1.48% 40.35%

2010 10.28% 0.74% 10.93% 5.83% 2.60% 30.38% 57.13% 24.18% 32.95% 3.50% 25.35% 66.09% 0.29% 0.35% 0.21% 3.49% 3.87% 117.83% 0.20% 0.00% 16.74% 6.68% 3.18% 3.08% 1.32% 4.62% 18.89% 0.12% 27.48% 34.58% 11.63% 7.01% 80.70% 8.21% 64.13% 2.18% 4.22% 6.15% 28.95% 36.78% 0.54% 37.13%

2011 6.12% 0.54% 10.39% 5.75% 3.42% 26.23% 52.84% 23.22% 29.62% 2.84% 25.26% 69.04% 0.24% 0.28% 0.10% 2.35% 2.32% 109.59% 3.83% 0.00% 14.83% 6.14% 2.88% 2.66% 1.22% 4.77% 17.68% 0.29% 27.30% 30.93% 12.43% 7.51% 78.17% 7.05% 60.62% 4.30% 5.14% 9.30% 26.88% 31.13% 0.47% 31.43%

2012E 7.89% 0.55% 10.50% 5.75% 3.56% 28.25% 55.06% 23.50% 31.56% 2.75% 24.51% 67.05% 0.23% 0.28% 0.09% 2.38% 2.30% 110.37% 3.38% 0.00% 12.34% 6.31% 3.06% 2.99% 1.24% 4.75% 18.35% 0.32% 29.77% 30.90% 13.00% 7.50% 81.18% 6.88% 64.04% 3.90% 4.44% 6.84% 27.00% 28.74% 0.45% 29.19%

2013E 9.24% 0.53% 10.28% 5.85% 3.56% 29.46% 56.33% 23.50% 32.83% 2.63% 23.50% 64.32% 0.22% 0.28% 0.09% 2.16% 2.18% 110.67% 3.33% 0.00% 9.49% 6.27% 3.03% 2.95% 1.25% 4.78% 18.28% 0.33% 30.18% 30.99% 13.00% 7.50% 81.66% 6.60% 67.06% 4.15% 4.17% 8.24% 28.54% 28.57% 0.43% 29.00%

2014E 10.28% 0.65% 10.30% 5.95% 3.49% 30.67% 57.24% 23.50% 33.74% 2.51% 22.51% 61.68% 0.23% 0.26% 0.08% 2.10% 2.06% 110.82% 4.22% 0.00% 5.68% 6.32% 3.04% 2.97% 1.23% 4.82% 18.38% 0.33% 28.60% 31.03% 13.34% 7.39% 80.36% 6.39% 69.59% 3.74% 3.92% 9.58% 28.71% 30.04% 0.42% 30.46%

2015E 11.68% 0.65% 10.65% 5.86% 3.50% 32.34% 57.94% 23.50% 34.44% 2.41% 21.59% 59.20% 0.20% 0.26% 0.08% 2.13% 2.09% 111.56% 3.00% 0.00% 7.71% 6.40% 3.07% 2.99% 1.26% 4.75% 18.48% 0.32% 29.50% 31.24% 13.21% 7.36% 81.31% 6.19% 72.30% 4.65% 5.99% 9.08% 28.91% 29.85% 0.40% 30.25%

2016E 13.52% 0.67% 10.60% 5.80% 3.52% 34.11% 58.71% 23.50% 35.21% 2.31% 20.78% 57.03% 0.19% 0.26% 0.08% 2.08% 2.05% 112.54% 1.03% 0.00% 10.64% 6.38% 3.07% 2.99% 1.25% 4.61% 18.30% 0.32% 30.29% 31.51% 13.13% 7.39% 82.32% 6.85% 74.75% 3.45% 5.65% 13.44% 29.22% 29.83% 0.38% 30.22%

2017E 15.29% 0.68% 10.55% 5.73% 3.55% 35.80% 60.30% 23.50% 36.80% 2.26% 20.37% 55.95% 0.18% 0.27% 0.08% 2.14% 2.05% 115.16% 0.30% 0.00% 12.14% 6.36% 3.08% 3.00% 1.27% 4.67% 18.38% 0.32% 31.14% 32.25% 13.13% 7.32% 83.83% 7.73% 68.31% 2.25% 2.13% 10.63% 30.08% 30.95% 0.38% 31.33%

PepsiCo, Inc. ValueDriverEstimation FiscalYearsEndingDec.31 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

NOPLATComputation: EBITA:
Revenues (-)Cost of Goods Sold (-) SG+A (+) Interest on Leases Amortization of intangible assets

EBITA Less:AdjustedTaxes:
Provision for Income Taxes (Expense) (+) Tax Shield on Interest Expense (+) Tax Shield on Lease Interest Expense (-) Tax on Interest (or Investment) Income

43,232 20,099 15,026 208 63 8252

57,838 26,575 22,814 335 117 8667

66,504 31,593 25,145 365 133 9998

68532.16 32998.24 25596.76 383.25 137.06 10183.35

71503.14 34321.51 26384.66 402.41 143.01 11056.38

74623.80 35670.17 27685.43 422.53 149.25 11541.48

77807.77 37036.50 29100.11 443.66 155.62 11959.21

80841.96 38157.41 30234.89 465.84 161.68 12753.82

82458.66 38920.49 30922.00 489.13 164.92 12940.39

TotalAdjustedTaxes Plus:ChangeinDeferredTaxLiabilities
Net DT Liabilities for Current Net DT Liabilities for Prior

2,100 106 56 18 2244

1,894 242 90 18 2208

2,372 229 98 15 2684

2501.42 247.95 102.71 18.37 2833.72

2931.63 268.28 107.85 23.00 3284.76

2723.77 269.99 113.24 20.00 3087.00

2801.08 302.36 118.90 31.28 3191.06

3071.99 324.98 124.85 39.00 3482.83

3133.43 342.53 131.09 44.20 3562.85

NetChangeinDTLiabilities NOPLAT:EBITAAdjustedTaxes+ChangeinD InvestedCapitalComputation:

Operating Current Assets: Normal Cash (lesser of actual or %) Accounts Receivable, Net Inventory PPD Expenses & Other Current Assets

659 226 433 6441

4,057 659 3398 9857

4,995 4,057 938 8252

5139.91 4,995 144.91 7494.54

5362.74 5139.91 222.82 7994.44

5512.36 5362.74 149.62 8604.11

5724.14 5512.36 211.78 8979.93

5975.32 5724.14 251.18 9522.17

6034.44 5975.32 59.12 9436.66

OperatingCurrentAssets
Operating Current Liabilities: Accounts Payable Accrued Marketplace Spending Other Current Liabilities Income Tax Payable

865 4,624 2,618 1,194 9301

1157 6,323 3,372 1,505 12357

1330 6,912 3,827 2,277 14346

1370.64 7195.88 3940.60 2439.74 14946.86

1430.06 7350.52 4182.93 2545.51 15509.03

1492.48 7686.25 4440.12 2604.37 16223.21

1556.16 8286.53 4559.54 2723.27 17125.49

1616.84 8569.25 4688.83 2845.64 17720.56

1649.17 8699.39 4724.88 2927.28 18000.73

OperatingCurrentLiabilities NetOperatingWorkingCapital Plus:NetPPE Plus:PVofOperatingLeases Plus:OtherOperatingAssets: Less:OtherOperatingLiabilities InvestedCapital 2011ValueDrivers: ROIC=NOPLAT/InvestedCapital NOPLAT InvestedCapital ROIC EP=Beg.IC*(ROICWACC) BeginningIC ROIC WACC EP FCF=NOPLAT(ChangeinIC)
NOPLAT ChangeinIC FCF

2,881 1,656 1,593 165 6295.00 3005.64 12,671 1426.8 1423 5,591 12935.44

3,865 1,841 2,672 71 8449.00 3907.76 19,058 2203.5 2236 6,729 20676.26

4,083 1,915 3,175 192 9365.00 4981.08 19,698 2395.5 1543 8,266 20351.58

4325.48 2098.93 3255.28 219.30 9898.99 5047.87 21630.81 2515.28 1573.86 8909.18 21858.64

4481.96 2163.54 3417.63 238.81 10301.94 5207.09 23472.74 2641.04 1559.51 9295.41 23584.97

4716.90 2270.21 3595.35 245.61 10828.06 5395.15 25177.27 2773.09 1537.62 9956.73 24926.40

4983.28 2386.21 3695.87 248.98 11314.34 5811.15 26796.47 2911.75 1625.80 10279.64 26865.53

5160.06 2479.26 3724.94 258.69 11622.96 6097.60 28462.52 3057.33 1658.32 10613.55 28662.22

5242.80 2535.60 3851.05 263.87 11893.33 6107.40 30342.72 3210.20 1691.48 10823.89 30527.91

6441 12935.44 49.79%

9857 20676.26 47.68%

8252 20351.58 40.55%

7494.54 21858.64 34.29%

7994.44 23584.97 33.90%

8604.11 24926.40 34.52%

8979.93 26865.53 33.43%

9522.17 28662.22 33.22%

9436.66 30527.91 30.91%

12342.02 49.79% 6.44% 5350.51

12935.44 47.68% 6.44% 5333.95

20676.26 40.55% 6.44% 7052.15

20351.58 34.29% 6.44% 5667.18

21858.64 33.90% 6.44% 6001.58

23584.97 34.52% 6.44% 6622.20

24926.40 33.43% 6.44% 6726.50

26865.53 33.22% 6.44% 7195.14

28662.22 30.91% 6.44% 7014.10

6441 593.42 5847

9857 7740.82 2117

8252 324.68 8577

7494.54 1507.06 5987.48

7994.44 1726.33 6268.11

8604.11 1341.43 7262.68

8979.93 1939.13 7040.80

9522.17 1796.69 7725.49

9436.66 1865.69 7570.97

PepsiCo, Inc. WeightedAverageCostofCapital(WACC)Estimation RiskFreeRate RiskPremium Beta CostofEquity TaxRate PreTaxCostofdebt CostofDebt Dividend SharePrice CostofPreffered MarketValueofDebt PVofOperatingLeases MarketValueofEquity MarketValueofPreffered TotalEnterpriseValue %EquityCapital %DebtCapital %PrefferedCapital WACC 3.50% 4.80% 0.75 7.10% 26.80% 4.36% 3.19% 5.46 329.05 1.66% 20568000000.00 2395.50 102521000000.00 68000000 123157002395.50 83.24% 16.70% 0.06% 6.44%

PepsiCo, Inc. DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModels KeyInputs: CVGrowth CVROIC WACC CostofEquity FiscalYearsEndingDec.31 DCFModel: GrowthRates NOPLAT InvestedCapital ROIC NOPLAT ()CapEx FCF CV CFtoDiscount PeriodstoDiscount DiscountFactor PV(CF) ValueofOperatingAssets (+)ExcessCash ()PVOperatingLeases ()UnderfundedPension ()PostRetirementBenefits ()Debt ()PrefferedStock ()EmployeeStockOptions ValueofEquity SharesOutstanding IntrinsicValueofStock PartialYearAdjustment EPModel: NOPLAT Beg.IC ROIC WACC EP CV Discounting: Beg.IC EP PeriodstoDiscount DiscountFactor PVofEP ValueofOperatingAssets (+)ExcessCash ()PVOperatingLeases ()UnderfundedPension ()PostRetirementBenefits ()Debt ()PrefferedStock ()EmployeeStockOptions ValueofEquity SharesOutstanding IntrinsicValueofStock PartialYearAdjustment

2.00% 30.91% 6.44% 7.10% 2011 2012E 2013E 2014E 2015E 2016E 2017E

3.05% 8252 20676 0.399 8252 3339 4913.05

4.34% 7495 20352 0.368 7495 2596 4898.67

4.36% 7994 21859 0.366 7994 2540 5454.33

4.27% 8604 23585 0.365 8604 2438 6166.23

3.90% 8980 24926 0.360 8980 2367 6612.49

2.00% 9522 26866 0.354 9522 2379 7143.09

2.00% 9437 28662 0.329 9437 2260 7176.53 199626.5

4913 1 1.06 4648.11 171867 10959 3210 4963 1373 41436 6800 2747 122297 1563 78 79.63

4899 2 1.12 4384.59

5454 3 1.18 4618.67

6166 4 1.25 4939.92

6612 5 1.32 5011.76

7143 199626 6 6 1.39 1.39 5121.96 143142.38

8252 20676 0.399 6.44% 6920.50

7495 20352 0.368 6.44% 6183.90

7994 21859 0.366 6.44% 6586.75

8604 23585 0.365 6.44% 7085.23

8980 24926 0.360 6.44% 7374.67

9522 26866 0.354 6.44% 7792.03

9437 28662 0.329 6.44% 7114.00 162719.9

20676 6920.50 1 1.06 6547.30 171867 10959 3210 4963 1373 41436 6800 2747 122297 1563 78 79.63

6183.90 2 1.12 5534.94

6586.75 3 1.18 5577.58

7085.23 4 1.25 5676.16

7374.67 5 1.32 5589.43

7792.03 162719.86 6 6 1.39 1.39 5587.29 116678.45

PepsiCo, Inc. DividendDiscountModel(DDM)orFundamentalP/EValuationModel

FiscalYearsEndingDec.31 EPS KeyAssumptions CVgrowth CVROE CostofEquity DividendsPerShare FutureCashFlows(Numerator) (Denominator) Total DiscountPeriods DiscountedCashFlows IntrinsicValue

2012E

2013E

2014E

2015E

2016E

2017E

$4.11 $ 4.36 $ 4.77 $ 4.91 $ 5.17 $5.23

2.00% 31.76% 7.10% 2.06 2.18 2.39 2.46 2.59 2.62 4.90 0.05 96.17 5 68.25

1 1.92 $77.72

2 1.90

3 1.94

4 1.87

5 1.84

PepsiCo, Inc. DividendDiscountModel(DDM)orFundamentalP/EValuationModel EPS EPS Ticker Company Price 2012E 2013E P/E12 KO $4.08 $4.47 17.5 TheCocaColaCompany $71.49 DPS $1.93 $2.31 20.1 DrPepperSnapple $38.77 $2.52 $2.80 15.2 KFT KraftFoods,Inc. $38.25 MNST $2.29 $2.59 26.4 MonsterBeverageCorp. $60.53 GIS $2.54 $2.76 15.3 GeneralMills,Inc. $38.85 $2.29 $2.54 12.4 CCE CocaColaEnterprisesIn $28.30 Average 17.8 PEP PepsiCo $65.30 $4.11 $4.36 15.9

P/E13 16.0 16.8 13.7 23.4 14.1 11.1 15.8 15.0

Est. 5yrGr. 6.37 15.00 9.33 9.17 7.44 8.07

PEG12 2.75 1.34 1.63 2.88 2.06 1.53 2.0

PEG13 2.51 1.12 1.46 2.55 1.89 1.38 1.8 2.0

7.6 2.1

ImpliedValue: RelativeP/E(EPS12) RelativeP/E(EPS13) PEGRatio(EPS12) PEGRatio(EPS13)

$73.26 $ 69.05 $ 63.49 $ 60.27

PepsiCo, Inc. KeyManagementRatios

FiscalYearsEndingDec.31 LiquidityRatios CurrentRatio QuickRatio ActivityorAssetManagementRatios AssetstoSales A/PtoSales AssetTurnover ReceivablesTurnover InventoryTurnover FinancialLeverageRatios DebttoEquity InterestCoverage DebtRatio DebttoNonCashAssets ProfitabilityRatios GrossMargin OperatingMargin NetProfitMargin ReturnonAssets ReturnonEquity PayoutPolicyRatios PayoutRatio

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E

1.44 1.00 0.92 0.07 1.08 5.55 4.67 0.42 14.25 0.56 0.62 53.51% 18.61% 13.83% 15.00% 34.28% 47.61%

1.11 0.80 1.18 0.07 0.85 5.91 5.03 0.93 5.69 0.68 0.75 54.05% 14.41% 10.96% 9.30% 29.51% 47.61%

0.96 0.62 1.10 0.06 0.91 6.33 5.45 0.98 6.98 0.71 0.76 52.49% 14.48% 9.72% 8.87% 30.92% 50.00%

0.95 0.64 1.10 0.06 0.91 6.30 5.47 1.06 6.85 0.74 0.79 51.85% 14.30% 9.40% 8.52% 32.20% 50.00%

0.98 0.66 1.11 0.06 0.90 6.39 5.36 1.07 6.46 0.74 0.81 52.00% 14.90% 9.52% 8.60% 32.82% 50.00%

1.07 0.74 1.11 0.06 0.90 6.31 5.31 1.02 6.39 0.73 0.80 52.20% 14.90% 10.00% 9.02% 32.83% 50.00%

1.10 0.78 1.12 0.06 0.90 6.19 5.36 1.03 6.03 0.73 0.81 52.40% 14.80% 9.90% 8.87% 32.72% 50.00%

1.13 0.82 1.13 0.06 0.89 6.26 5.41 1.04 6.15 0.73 0.83 52.80% 15.20% 10.08% 8.96% 33.36% 50.00%

1.15 <CurrentAssets/CurrentLiabilities 0.85 <(Cash&Equivalents+A/R)/CurrentLiabilities 1.15 0.06 0.87 9.48 8.24 1.03 6.03 0.73 0.84 52.80% 15.10% 9.95% 8.64% 31.76% <Assets/Sales <(A/P)/Sales <Sales/Assets <Sales/AvgA/R <COGS/AvgInventory <MVDebt/MVEquity <OperatingIncome/InterestExpense <TotalLiabilities/TotalAssets <TotalLiabilities/(TotalAssetsCash&Equivalents) <(SalesCOGS)/Sales <OperatingProfit/Sales <NetIncome/Sales <NetIncome/BeginngingAssets <NetIncome/BVBeginningEquity

50.00% <(Dividends/Share)/(NetIncome/Share)

PepsiCo
Sensitivity Analysis CV Growth 0.025 190.001 149.286 122.143 102.755 88.214 CV Growth 0.025 120.657 102.451 97.483 96.593 86.569 CV Growth 0.025 116.945 106.653 102.644 98.465 96.323

WACC

79.63 0.045 0.05 0.055 0.06 0.065

0.01 108.490 93.232 81.365 71.871 64.104

0.015 126.604 106.579 91.560 79.878 70.533

0.02 151.963 124.373 104.667 89.887 78.391

0.03 253.399 186.656 146.610 119.913 100.843

Beta

79.63 0.06 0.065 0.075 0.08 0.085

0.01 83.587 79.529 76.421 70.643 64.819

0.015 88.413 85.386 80.612 77.651 72.136

0.02 97.056 94.589 89.636 87.563 79.915

0.03 132.839 117.852 112.457 105.248 101.540

MRP

79.63 0.035 0.04 0.045 0.05 0.055

0.01 82.479 78.351 75.622 71.489 63.621

0.015 91.286 87.884 84.614 79.632 74.823

0.02 101.452 98.352 95.287 86.741 84.196

0.03 134.738 124.389 121.979 112.493 108.057