Intrinsic value of PepsiCo - PEP

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$116.96

  Intrinsic Value

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  Value-price divergence*

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$116.96

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of PEP stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 168.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -0.41
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  62,799
  64,055
  65,528
  67,212
  69,103
  71,198
  73,497
  76,000
  78,709
  81,628
  84,761
  88,112
  91,688
  95,496
  99,543
  103,836
  108,387
  113,204
  118,298
  123,680
  129,363
  135,359
  141,682
  148,348
  155,371
  162,768
  170,556
  178,753
  187,379
  196,453
  205,998
Variable operating expenses, $m
 
  55,571
  56,816
  58,239
  59,837
  61,607
  63,549
  65,664
  67,954
  70,421
  73,068
  74,457
  77,479
  80,696
  84,116
  87,744
  91,589
  95,660
  99,964
  104,512
  109,314
  114,381
  119,725
  125,357
  131,292
  137,542
  144,123
  151,050
  158,339
  166,007
  174,073
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  53,014
  55,571
  56,816
  58,239
  59,837
  61,607
  63,549
  65,664
  67,954
  70,421
  73,068
  74,457
  77,479
  80,696
  84,116
  87,744
  91,589
  95,660
  99,964
  104,512
  109,314
  114,381
  119,725
  125,357
  131,292
  137,542
  144,123
  151,050
  158,339
  166,007
  174,073
Operating income, $m
  9,785
  8,484
  8,712
  8,973
  9,266
  9,591
  9,947
  10,335
  10,755
  11,208
  11,693
  13,655
  14,210
  14,800
  15,427
  16,092
  16,798
  17,544
  18,334
  19,168
  20,048
  20,978
  21,958
  22,991
  24,079
  25,225
  26,432
  27,703
  29,040
  30,446
  31,925
EBITDA, $m
  12,153
  10,528
  10,770
  11,047
  11,357
  11,702
  12,079
  12,491
  12,936
  13,416
  13,931
  14,482
  15,069
  15,695
  16,360
  17,066
  17,814
  18,605
  19,443
  20,327
  21,261
  22,247
  23,286
  24,381
  25,536
  26,751
  28,031
  29,379
  30,796
  32,288
  33,856
Interest expense (income), $m
  1,102
  1,052
  950
  993
  1,042
  1,097
  1,158
  1,225
  1,297
  1,376
  1,461
  1,552
  1,650
  1,754
  1,864
  1,982
  2,107
  2,239
  2,380
  2,528
  2,684
  2,850
  3,024
  3,208
  3,402
  3,606
  3,821
  4,048
  4,286
  4,537
  4,801
Earnings before tax, $m
  8,553
  7,432
  7,762
  7,981
  8,225
  8,494
  8,790
  9,111
  9,458
  9,831
  10,232
  12,103
  12,560
  13,046
  13,562
  14,110
  14,691
  15,305
  15,954
  16,640
  17,364
  18,128
  18,934
  19,783
  20,677
  21,619
  22,611
  23,655
  24,753
  25,909
  27,124
Tax expense, $m
  2,174
  2,007
  2,096
  2,155
  2,221
  2,293
  2,373
  2,460
  2,554
  2,654
  2,763
  3,268
  3,391
  3,522
  3,662
  3,810
  3,966
  4,132
  4,308
  4,493
  4,688
  4,895
  5,112
  5,341
  5,583
  5,837
  6,105
  6,387
  6,683
  6,995
  7,324
Net income, $m
  6,329
  5,426
  5,667
  5,826
  6,004
  6,201
  6,416
  6,651
  6,904
  7,177
  7,469
  8,835
  9,169
  9,524
  9,901
  10,300
  10,724
  11,172
  11,646
  12,147
  12,676
  13,234
  13,822
  14,441
  15,094
  15,782
  16,506
  17,268
  18,070
  18,914
  19,801

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  16,125
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  73,490
  59,146
  60,506
  62,061
  63,807
  65,741
  67,864
  70,175
  72,677
  75,372
  78,265
  81,359
  84,661
  88,177
  91,914
  95,879
  100,080
  104,528
  109,231
  114,201
  119,448
  124,985
  130,824
  136,979
  143,463
  150,293
  157,484
  165,053
  173,018
  181,397
  190,211
Adjusted assets (=assets-cash), $m
  57,365
  59,146
  60,506
  62,061
  63,807
  65,741
  67,864
  70,175
  72,677
  75,372
  78,265
  81,359
  84,661
  88,177
  91,914
  95,879
  100,080
  104,528
  109,231
  114,201
  119,448
  124,985
  130,824
  136,979
  143,463
  150,293
  157,484
  165,053
  173,018
  181,397
  190,211
Revenue / Adjusted assets
  1.095
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
  1.083
Average production assets, $m
  29,711
  4,804
  4,915
  5,041
  5,183
  5,340
  5,512
  5,700
  5,903
  6,122
  6,357
  6,608
  6,877
  7,162
  7,466
  7,788
  8,129
  8,490
  8,872
  9,276
  9,702
  10,152
  10,626
  11,126
  11,653
  12,208
  12,792
  13,406
  14,053
  14,734
  15,450
Working capital, $m
  5,315
  -3,331
  -3,407
  -3,495
  -3,593
  -3,702
  -3,822
  -3,952
  -4,093
  -4,245
  -4,408
  -4,582
  -4,768
  -4,966
  -5,176
  -5,399
  -5,636
  -5,887
  -6,151
  -6,431
  -6,727
  -7,039
  -7,367
  -7,714
  -8,079
  -8,464
  -8,869
  -9,295
  -9,744
  -10,216
  -10,712
Total debt, $m
  36,945
  27,142
  28,367
  29,766
  31,337
  33,078
  34,989
  37,069
  39,320
  41,746
  44,349
  47,134
  50,106
  53,270
  56,633
  60,202
  63,983
  67,986
  72,219
  76,692
  81,414
  86,398
  91,653
  97,192
  103,028
  109,175
  115,647
  122,459
  129,627
  137,169
  145,101
Total liabilities, $m
  62,395
  53,231
  54,456
  55,855
  57,426
  59,167
  61,078
  63,158
  65,409
  67,835
  70,438
  73,223
  76,195
  79,359
  82,722
  86,291
  90,072
  94,075
  98,308
  102,781
  107,503
  112,487
  117,742
  123,281
  129,117
  135,264
  141,736
  148,548
  155,716
  163,258
  171,190
Total equity, $m
  11,095
  5,915
  6,051
  6,206
  6,381
  6,574
  6,786
  7,018
  7,268
  7,537
  7,826
  8,136
  8,466
  8,818
  9,191
  9,588
  10,008
  10,453
  10,923
  11,420
  11,945
  12,499
  13,082
  13,698
  14,346
  15,029
  15,748
  16,505
  17,302
  18,140
  19,021
Total liabilities and equity, $m
  73,490
  59,146
  60,507
  62,061
  63,807
  65,741
  67,864
  70,176
  72,677
  75,372
  78,264
  81,359
  84,661
  88,177
  91,913
  95,879
  100,080
  104,528
  109,231
  114,201
  119,448
  124,986
  130,824
  136,979
  143,463
  150,293
  157,484
  165,053
  173,018
  181,398
  190,211
Debt-to-equity ratio
  3.330
  4.590
  4.690
  4.800
  4.910
  5.030
  5.160
  5.280
  5.410
  5.540
  5.670
  5.790
  5.920
  6.040
  6.160
  6.280
  6.390
  6.500
  6.610
  6.720
  6.820
  6.910
  7.010
  7.100
  7.180
  7.260
  7.340
  7.420
  7.490
  7.560
  7.630
Adjusted equity ratio
  -0.088
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  6,329
  5,426
  5,667
  5,826
  6,004
  6,201
  6,416
  6,651
  6,904
  7,177
  7,469
  8,835
  9,169
  9,524
  9,901
  10,300
  10,724
  11,172
  11,646
  12,147
  12,676
  13,234
  13,822
  14,441
  15,094
  15,782
  16,506
  17,268
  18,070
  18,914
  19,801
Depreciation, amort., depletion, $m
  2,368
  2,044
  2,057
  2,073
  2,091
  2,110
  2,132
  2,155
  2,181
  2,208
  2,238
  826
  860
  895
  933
  973
  1,016
  1,061
  1,109
  1,159
  1,213
  1,269
  1,328
  1,391
  1,457
  1,526
  1,599
  1,676
  1,757
  1,842
  1,931
Funds from operations, $m
  11,250
  7,469
  7,724
  7,899
  8,095
  8,311
  8,548
  8,806
  9,085
  9,385
  9,707
  9,661
  10,028
  10,419
  10,834
  11,274
  11,740
  12,234
  12,755
  13,307
  13,889
  14,503
  15,150
  15,832
  16,551
  17,308
  18,105
  18,944
  19,827
  20,755
  21,732
Change in working capital, $m
  846
  -65
  -77
  -88
  -98
  -109
  -120
  -130
  -141
  -152
  -163
  -174
  -186
  -198
  -210
  -223
  -237
  -250
  -265
  -280
  -296
  -312
  -329
  -347
  -365
  -385
  -405
  -426
  -449
  -472
  -496
Cash from operations, $m
  10,404
  7,591
  7,801
  7,987
  8,193
  8,420
  8,668
  8,936
  9,226
  9,537
  9,870
  9,836
  10,214
  10,617
  11,044
  11,497
  11,977
  12,484
  13,020
  13,587
  14,184
  14,814
  15,479
  16,179
  16,916
  17,693
  18,510
  19,370
  20,275
  21,227
  22,228
Maintenance CAPEX, $m
  0
  -586
  -601
  -614
  -630
  -648
  -667
  -689
  -712
  -738
  -765
  -795
  -826
  -860
  -895
  -933
  -973
  -1,016
  -1,061
  -1,109
  -1,159
  -1,213
  -1,269
  -1,328
  -1,391
  -1,457
  -1,526
  -1,599
  -1,676
  -1,757
  -1,842
New CAPEX, $m
  -3,040
  -114
  -110
  -126
  -142
  -157
  -172
  -188
  -203
  -219
  -235
  -251
  -268
  -286
  -303
  -322
  -341
  -361
  -382
  -404
  -426
  -450
  -474
  -500
  -527
  -555
  -584
  -615
  -647
  -681
  -716
Cash from investing activities, $m
  -7,148
  -700
  -711
  -740
  -772
  -805
  -839
  -877
  -915
  -957
  -1,000
  -1,046
  -1,094
  -1,146
  -1,198
  -1,255
  -1,314
  -1,377
  -1,443
  -1,513
  -1,585
  -1,663
  -1,743
  -1,828
  -1,918
  -2,012
  -2,110
  -2,214
  -2,323
  -2,438
  -2,558
Free cash flow, $m
  3,256
  6,891
  7,090
  7,246
  7,421
  7,615
  7,828
  8,060
  8,310
  8,580
  8,870
  8,790
  9,120
  9,472
  9,845
  10,242
  10,662
  11,107
  11,577
  12,074
  12,598
  13,152
  13,735
  14,351
  14,999
  15,681
  16,400
  17,157
  17,953
  18,790
  19,671
Issuance/(repayment) of debt, $m
  3,746
  -2,911
  1,224
  1,400
  1,571
  1,741
  1,910
  2,080
  2,252
  2,426
  2,603
  2,785
  2,972
  3,164
  3,363
  3,568
  3,782
  4,003
  4,233
  4,473
  4,723
  4,983
  5,255
  5,539
  5,836
  6,147
  6,472
  6,812
  7,168
  7,541
  7,932
Issuance/(repurchase) of shares, $m
  -2,542
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,285
  -2,911
  1,224
  1,400
  1,571
  1,741
  1,910
  2,080
  2,252
  2,426
  2,603
  2,785
  2,972
  3,164
  3,363
  3,568
  3,782
  4,003
  4,233
  4,473
  4,723
  4,983
  5,255
  5,539
  5,836
  6,147
  6,472
  6,812
  7,168
  7,541
  7,932
Total cash flow (excl. dividends), $m
  4,289
  3,980
  8,314
  8,645
  8,992
  9,356
  9,738
  10,140
  10,562
  11,006
  11,473
  11,575
  12,092
  12,636
  13,208
  13,810
  14,444
  15,110
  15,810
  16,547
  17,321
  18,135
  18,991
  19,890
  20,835
  21,828
  22,872
  23,969
  25,121
  26,331
  27,603
Retained Cash Flow (-), $m
  828
  -4,053
  -136
  -156
  -175
  -193
  -212
  -231
  -250
  -270
  -289
  -309
  -330
  -352
  -374
  -396
  -420
  -445
  -470
  -497
  -525
  -554
  -584
  -615
  -648
  -683
  -719
  -757
  -796
  -838
  -881
Prev. year cash balance distribution, $m
 
  9,233
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  9,161
  8,178
  8,490
  8,818
  9,163
  9,526
  9,909
  10,312
  10,736
  11,184
  11,265
  11,762
  12,284
  12,835
  13,414
  14,023
  14,665
  15,340
  16,050
  16,796
  17,581
  18,407
  19,274
  20,187
  21,145
  22,153
  23,212
  24,324
  25,493
  26,722
Discount rate, %
 
  5.70
  5.99
  6.28
  6.60
  6.93
  7.27
  7.64
  8.02
  8.42
  8.84
  9.28
  9.75
  10.24
  10.75
  11.29
  11.85
  12.44
  13.06
  13.72
  14.40
  15.12
  15.88
  16.67
  17.51
  18.38
  19.30
  20.27
  21.28
  22.34
  23.46
PV of cash for distribution, $m
 
  8,667
  7,280
  7,071
  6,829
  6,555
  6,251
  5,919
  5,563
  5,186
  4,793
  4,242
  3,852
  3,460
  3,074
  2,698
  2,337
  1,997
  1,682
  1,395
  1,139
  913
  719
  555
  420
  311
  225
  159
  110
  74
  48
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

PepsiCo, Inc. operates as a food and beverage company worldwide. Its Frito-Lay North America segment offers Lay’s and Ruffles potato chips; Doritos, Tostitos, and Santitas tortilla chips; and Cheetos cheese-flavored snacks, branded dips, and Fritos corn chips. The company’s Quaker Foods North America segment provides Quaker oatmeal, grits, rice cakes, granola, and oat squares; and Aunt Jemima mixes and syrups, Quaker Chewy granola bars, Cap’n Crunch cereal, Life cereal, and Rice-A-Roni side dishes. Its North America Beverages segment offers beverage concentrates, fountain syrups, and finished goods under the Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain Dew, Tropicana Pure Premium, Mist Twst, and Mug brands; and ready-to-drink tea and coffee, and juices. The company’s Latin America segment provides snack foods under the Doritos, Cheetos, Marias Gamesa, Ruffles, Emperador, Saladitas, Sabritas, Lay’s, Rosquinhas Mabel, and Tostitos brands; cereals and snacks under the Quaker brand; and beverage concentrates, fountain syrups, and finished goods under the Pepsi, 7UP, Gatorade, Toddy, Mirinda, Manzanita Sol, H2oh!, and Diet Pepsi brands. Its Europe Sub-Saharan Africa segment offers snack foods under the Lay’s, Walkers, Doritos, Cheetos, and Ruffles brands; cereals and snacks under the Quaker brand; beverage concentrates, fountain syrups, and finished goods under the Pepsi, 7UP, Pepsi Max, Mirinda, Diet Pepsi, and Tropicana brands; ready-to-drink tea products; and dairy products under the Chudo, Agusha, and Domik v Derevne brands. The company’s Asia, Middle East and North Africa segment provides snack foods under the Lay’s, Kurkure, Chipsy, Doritos, Cheetos, and Crunchy brands; cereals and snacks under the Quaker brand; beverage concentrates, fountain syrups, and finished goods under the Pepsi, Mirinda, 7UP, Mountain Dew, Aquafina, and Tropicana brands; and tea products. The company was founded in 1898 and is headquartered in Purchase, New York.

FINANCIAL RATIOS  of  PepsiCo (PEP)

Valuation Ratios
P/E Ratio 26.4
Price to Sales 2.7
Price to Book 15.1
Price to Tangible Book
Price to Cash Flow 16.1
Price to Free Cash Flow 22.7
Growth Rates
Sales Growth Rate -0.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.2%
Cap. Spend. - 3 Yr. Gr. Rate 1.7%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 270.9%
Total Debt to Equity 333%
Interest Coverage 9
Management Effectiveness
Return On Assets 10%
Ret/ On Assets - 3 Yr. Avg. 9.5%
Return On Total Capital 13.6%
Ret/ On T. Cap. - 3 Yr. Avg. 12.8%
Return On Equity 55%
Return On Equity - 3 Yr. Avg. 41.1%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 55.1%
Gross Margin - 3 Yr. Avg. 54.2%
EBITDA Margin 19.1%
EBITDA Margin - 3 Yr. Avg. 18.2%
Operating Margin 15.6%
Oper. Margin - 3 Yr. Avg. 14.4%
Pre-Tax Margin 13.6%
Pre-Tax Margin - 3 Yr. Avg. 12.9%
Net Profit Margin 10.1%
Net Profit Margin - 3 Yr. Avg. 9.5%
Effective Tax Rate 25.4%
Eff/ Tax Rate - 3 Yr. Avg. 25.5%
Payout Ratio 66.8%

PEP stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PEP stock intrinsic value calculation we used $62799 million for the last fiscal year's total revenue generated by PepsiCo. The default revenue input number comes from 2016 income statement of PepsiCo. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our PEP stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.7%, whose default value for PEP is calculated based on our internal credit rating of PepsiCo, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of PepsiCo.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of PEP stock the variable cost ratio is equal to 86.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for PEP stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for PepsiCo.

Corporate tax rate of 27% is the nominal tax rate for PepsiCo. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the PEP stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for PEP are equal to 7.5%.

Life of production assets of 8 years is the average useful life of capital assets used in PepsiCo operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for PEP is equal to -5.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $11095 million for PepsiCo - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1441.72 million for PepsiCo is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of PepsiCo at the current share price and the inputted number of shares is $168.6 billion.


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Stock chart of PEP Financial statements of PEP Annual reports of PEP
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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