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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3 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%%.
Thanks. This is a tough market to find massive margin of safety. I agree, still a solid DCF valuation, but I’ll be patient and see if Mr. Market decides to panic about some future event and increase the margin of safety. All the best, and thank you for the content! I’m a happy ZIG and DEEP shareholder who believes in having a portion of my capital in the Acquired Multiple style approach.