Stock Analysis on Net

PepsiCo Inc. (NASDAQ:PEP)

Present Value of Free Cash Flow to Equity (FCFE) 

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

PepsiCo Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 9.51%
01 FCFE0 3,025
1 FCFE1 3,424 = 3,025 × (1 + 13.19%) 3,127
2 FCFE2 3,832 = 3,424 × (1 + 11.91%) 3,195
3 FCFE3 4,239 = 3,832 × (1 + 10.63%) 3,228
4 FCFE4 4,636 = 4,239 × (1 + 9.35%) 3,223
5 FCFE5 5,010 = 4,636 × (1 + 8.07%) 3,181
5 Terminal value (TV5) 375,586 = 5,010 × (1 + 8.07%) ÷ (9.51%8.07%) 238,437
Intrinsic value of PepsiCo Inc. common stock 254,390
 
Intrinsic value of PepsiCo Inc. common stock (per share) $183.98
Current share price $164.01

Based on: 10-K (reporting date: 2021-12-25).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 3.47%
Expected rate of return on market portfolio2 E(RM) 12.75%
Systematic risk of PepsiCo Inc. common stock βPEP 0.65
 
Required rate of return on PepsiCo Inc. common stock3 rPEP 9.51%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rPEP = RF + βPEP [E(RM) – RF]
= 3.47% + 0.65 [12.75%3.47%]
= 9.51%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

PepsiCo Inc., PRAT model

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Average Dec 25, 2021 Dec 26, 2020 Dec 28, 2019 Dec 29, 2018 Dec 30, 2017
Selected Financial Data (US$ in millions)
Cash dividends declared, common 5,896  5,589  5,323  5,098  4,536 
Net income attributable to PepsiCo 7,618  7,120  7,314  12,515  4,857 
Net revenue 79,474  70,372  67,161  64,661  63,525 
Total assets 92,377  92,918  78,547  77,648  79,804 
Total PepsiCo shareholders’ equity 16,043  13,454  14,786  14,518  10,889 
Financial Ratios
Retention rate1 0.23 0.22 0.27 0.59 0.07
Profit margin2 9.59% 10.12% 10.89% 19.35% 7.65%
Asset turnover3 0.86 0.76 0.86 0.83 0.80
Financial leverage4 5.76 6.91 5.31 5.35 7.33
Averages
Retention rate 0.27
Profit margin 9.56%
Asset turnover 0.82
Financial leverage 6.13
 
FCFE growth rate (g)5 13.19%

Based on: 10-K (reporting date: 2021-12-25), 10-K (reporting date: 2020-12-26), 10-K (reporting date: 2019-12-28), 10-K (reporting date: 2018-12-29), 10-K (reporting date: 2017-12-30).

2021 Calculations

1 Retention rate = (Net income attributable to PepsiCo – Cash dividends declared, common) ÷ Net income attributable to PepsiCo
= (7,6185,896) ÷ 7,618
= 0.23

2 Profit margin = 100 × Net income attributable to PepsiCo ÷ Net revenue
= 100 × 7,618 ÷ 79,474
= 9.59%

3 Asset turnover = Net revenue ÷ Total assets
= 79,474 ÷ 92,377
= 0.86

4 Financial leverage = Total assets ÷ Total PepsiCo shareholders’ equity
= 92,377 ÷ 16,043
= 5.76

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.27 × 9.56% × 0.82 × 6.13
= 13.19%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (226,774 × 9.51%3,025) ÷ (226,774 + 3,025)
= 8.07%

where:
Equity market value0 = current market value of PepsiCo Inc. common stock (US$ in millions)
FCFE0 = the last year PepsiCo Inc. free cash flow to equity (US$ in millions)
r = required rate of return on PepsiCo Inc. common stock


FCFE growth rate (g) forecast

PepsiCo Inc., H-model

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Year Value gt
1 g1 13.19%
2 g2 11.91%
3 g3 10.63%
4 g4 9.35%
5 and thereafter g5 8.07%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 13.19% + (8.07%13.19%) × (2 – 1) ÷ (5 – 1)
= 11.91%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 13.19% + (8.07%13.19%) × (3 – 1) ÷ (5 – 1)
= 10.63%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 13.19% + (8.07%13.19%) × (4 – 1) ÷ (5 – 1)
= 9.35%