Abstract
This paper presents a financial analysis of the company PepsiCo according to the most relevant indicators in dynamics and comparison with a direct competitor Coca-Cola Company. In addition, each given value was evaluated from the point of view of the specifics of the organization’s activities. Finally, conclusions were presented for PepsiCo with possible forecasts and financial recommendations for business development.
Introduction
PepsiCo Inc. is an American and multinational food and beverage company, one of the leading producers of soft drinks, food, and snacks, serving customers and consumers in more than 200 countries and territories. It was founded in 1965. from the merger between Pepsi-Cola and Frito-Lay, Inc., a potato and corn chip maker. Since then, PepsiCo, Inc. has significantly expanded its range (Bishnoi & Poonam, 2020). The company’s product profile includes soft drinks, specialty sauces, snacks, corn and potato chips, cereals, rice, pasta, oatmeal, bars, tea and coffee products, snacks, dairy products, and more.
The company’s portfolio is a diverse mix of world-famous and popular national brands: Pepsi, Pepsi Next, Pepsi Zero Sugar, 7UP, Mirinda, Lay’s, Cheetos, Tropicana, and others. PepsiCo, Inc. trademarks are licensed and used by other joint ventures. In addition, the company licenses the use of retail brands, which increases brand awareness (Zhang, 2019). The company also has distribution rights to Rockstar Energy drinks, Muscle Milk protein shakes, and various Keurig Dr. Pepper Inc brands, including Dr. Pepper in some markets, Crush, and Schweppes.
The company’s production facilities are in the USA, Canada, Latin America, Europe, and Africa. A wide variety of ingredients are used in the production of products: apple, orange, and pineapple juices and another juice concentrate, corn, flavorings, flour, fruits, oats, potatoes, raw milk, rice, spices, sugar, vegetable, and essential oils, wheat and much more (Church, 2019). Many of these ingredients, raw materials, and products are purchased from the open market. The company interacts with many suppliers and contractors located all over the world.
PepsiCo’s customers include wholesalers, other distributors, the food service industry, grocery stores, convenience stores, and mass merchandisers. The products are also available on many e-commerce sites and mobile commerce apps. The company’s largest customer is Walmart Inc., which accounts for 13% of sales (Zhang, 2019). The top five retail customers account for approximately 33% of net income (Zhang, 2019). The company’s products belong to highly competitive product categories. The Coca-Cola Company is considered a significant competitor in many countries where PepsiCo products are sold. Other Competitors: Campbell Soup Company, Conagra Brands, Inc., Kellogg Company, Keurig Dr. Pepper Inc, The Kraft Heinz Company, Mondelez International, Inc, and more. PepsiCo competes based on global brand awareness, product diversity, innovation, distribution, advertising, marketing, and promotion. Nasdaq is the primary market for the company’s common stock. The company has paid quarterly cash dividends since 1965.
Analysis
Table 1. PepsiCo and Coca-Cola Financial Indicators
All considered indicators are shown in Table 1. Analysis of the Income Statement shows that the competitor represented by Coca-Cola is more efficient in the production and optimization of the production process, demonstrating a significantly more significant gross margin and net profit margin. On the other hand, PepsiCo has higher revenue but a quantitatively more minor net income due to its broader product line diversification (Dai, 2021). This competitive advantage shows up better in ratios based on Balance Sheet metrics. The assets and liabilities of both competitors are approximately the same, or at least on the same level. At the same time, the current ratio speaks in favor of Coca-Cola since, unlike PepsiCo, the company did not significantly increase its long-term liabilities during the pandemic and 2020 due to possible lending.
PepsiCo, unlike Coca-Cola, focuses not only on soft drinks but also on various brands of edibles and dairy products. Accordingly, PepsiCo’s asset turnover is higher as they are closer to retailers, who tend to have the highest asset turnover (Nurlaela et al., 2019). PepsiCo’s return on equity is also higher, even though its share price is twice that of Coca-Cola. ROA, naturally, according to the paragraph above, is higher for competitors since the efficiency of assets and their optimal use is the advantage of Coca-Cola.
The dynamics of financial indicators in this regard are better compared with 2019, before the global crisis events. Coca-Cola has overcome this period much better and more smoothly without sharp jumps in horizontal analysis in the balance sheet and income statement. One of PepsiCo’s few tangible advantages over its competitor is its EBITDA, which measures the company’s ability to pay for potential lending obligations. If a clear leader in the industry can be identified according to the assessment of liquidity, relevance, and profitability of companies, then everything is not so evident in the ratio of shares. PepsiCo shares are among the most expensive in the market in their area. At the same time, although PepsiCo currently has a larger P/E ratio, demonstrating investor attractiveness in a reasonable share price to EPS ratio, Coca-Cola has more potential.
At the same time, the forecast for the growth of shares over the course of five years, according to the stock growth rate calculated for three years, shows an increase in the indicator by almost 15%. It is worth noting the error due to the specifics of the pandemic year, which can give overestimated dynamics, which is why 2019 was also taken into account. The increase in free cash flows of companies in 2021 is a consequence of the recovery to the high levels of 2017-2019, although the dynamics of revenue growth remain (Macrotrends, 2022a, Macrotrends, 2022b). Accordingly, as soon as PepsiCo has the opportunity to develop the company further, it should continue the horizontal diversification of brands that have already proven themselves in many local markets. Marketing is a strength of the company due to the fact that many brands are adapted to the local culture of many countries of operation (Bishnoi & Poonam, 2020). In fact, while Coca-Cola’s leading brand is incomparably more recognizable and influential, the company’s satellite brands do not have the same power unless they are the result of acquisitions or mergers.
In this regard, the market cap indicators of both companies are also logical, which differ by almost 13% in favor of Coca-Cola. However, such a noticeable advantage over competitors in almost all indicators does not negate that PepsiCo is a gradually and positively developing company. Due to the broader diversification of products not only within one type of product, PepsiCo, on the one hand, works with a more competitive market, but on the other hand, it has more opportunities or vectors for development. The listed competitors all offer a variety of products, from drinks to food, to varying degrees, and therefore it is pretty challenging to conduct a deep, detailed vertical analysis of the effectiveness of individual components of diversification. Without many assumptions, the intrinsic value of the company’s shares is naturally higher for PepsiCo, which offers higher dividends to investors. On the one hand, this fact creates an essential attraction for potential investors, providing an inflow of capital; on the other hand, competitors, in percentage terms, more free cash flows can be directed in another direction, for example, to R&D or sustainable development, creating a different perspective of competitive advantage.
The WACCs of the companies, however, differ slightly. However, PepsiCo still has a slightly lower percentage. The lower the WACC, the greater the profit or capital gain from the transaction. The higher the WACC rate, the more income the company will have to generate to cover it to meet its investors’ expectations. Given the specifics of the companies’ activities, fluctuations in the indicators that form the WACC can change the value quickly and, accordingly, change the company with a higher indicator.
Conclusion
PepsiCo is a reasonably successful company in terms of its financial analysis. However, despite the broad diversification of the line, perhaps the largest of all direct and comparable competitors, the company does not perform in general compared with, for example, Coca-Cola. This development opportunity is compensated by relatively high dividends, which the organization pays investors, increasing its financial attractiveness. Therefore, the company’s potential is quite significant, although competitors have a certain margin in financial indicators. After all, it is the need for constant competition and such a market that requires companies to constantly develop, which is a crucial determinant of prosperity and sustainability.
References
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