As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, PepsiCo Inc (PEP).
Profile
PepsiCo is a global leader in snacks and beverages, owning well-known household brands including Pepsi, Mountain Dew, Gatorade, Lay’s, Cheetos, and Doritos, among others. The company dominates the global savory snacks market and also ranks as the second-largest beverage provider in the world (behind Coca-Cola) with diversified exposure to carbonated soft drinks, or CSD, as well as water, sports, and energy drink offerings. Convenience foods account for approximately 55% of its total revenue, with beverages making up the rest. Pepsi owns the bulk of its manufacturing and distribution capacity in the US and overseas. International markets make up 40% of total sales and one third of operating profits.
Recent Performance
Over the past twelve months the share price is down 2.66%.
Source: Google Finance
Inputs
- Discount Rate: 6%
- Terminal Growth Rate: 3%
- WACC: 6%
Forecasted Free Cash Flows (FCFs)
| Year | FCF (billions) | PV(billions) |
| 2024 | 8.12 | 7.66 |
| 2025 | 8.78 | 7.81 |
| 2026 | 9.48 | 7.96 |
| 2027 | 10.25 | 8.12 |
| 2028 | 11.08 | 8.28 |
Terminal Value
Terminal Value = FCF * (1 + g) / (r – g) = 380.41 billion
Present Value of Terminal Value
PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 284.27 billion
Present Value of Free Cash Flows
Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 39.83 billion
Enterprise Value
Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 324.10 billion
Net Debt
Net Debt = Total Debt – Total Cash = 36.96 billion
Equity Value
Equity Value = Enterprise Value – Net Debt = 287.14 billion
Per-Share DCF Value
Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $209.29
Conclusion
| DCF Value | Current Price | Margin of Safety |
|---|---|---|
| $209.29 | $159.47 | 23.80%% |
Based on the DCF valuation, the stock is undervalued. The DCF value of $209.29 share is higher than the current market price of $159.47. The Margin of Safety is 23.80%%.
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2 Comments on “PepsiCo Inc (PEP) DCF Valuation: Is The Stock Undervalued?”
Just wondering where these FCF numbers came from? I don’t think your starting FCF is accurate. Cash from operations looks to be around $12B, and they lately have maintenance and growth cap ex of around $5B, so it seems FCF is more like $7-8B, not $16.86B. If indeed your FCF numbers are accurate, this is a wonderful opportunity. Just wondering how you got there.
Thanks for your thoughts. I think you make a good point re the starting FCF. I’ve done a revised calculation based on approx $8B FCF. The revised calculation has the new DCF value of $209.29 per share, which is still significantly higher than the current market price of $159.47. The Margin of Safety is 23.80%%.