Pepsi and Coca-Cola Corporation - Research Paper Example

? Valuation [N a m e] VALUATION Coca-cola Corporation Coca-cola Corporation is one the leading brands of the worldthat offers non-alcoholic beverages. The company is an American based multinational enterprise having headquartered in Atlanta. Coca-cola Corporation has introduced more than 500 brands and some of the renowned brands are Coke, Diet Coke, Caffeine Free Coca-Cola and Coca-Cola Zero. The company has its presence in more than 200 countries of the world and is more renowned as Coke. More than 1.7 billion people are served every day with the products of Coca-Cola. In 2011, Coca-Cola was also recognized as the most valuable brand in the world on the basis of Interbrand’s best global brand. Pepsi Corporation Pepsi Corporation is another American based multinational enterprise that operates in the food and beverage industry. Headquarter of Pepsi is in Purchase, New York. The company was formed in 1965 and since that time it has expanded its brands to more than 200 countries. Pepsi is the fifth largest food and beverage company in the world in terms of total revenue however in the North American region it is the largest company. There are more than 285 thousand employees working for Pepsi around the world. INDUSTRY ANALYSIS Food and beverage industry includes food production, distribution, retailing and catering of food and beverages. The total value of this industry in the year 2008 was $5.7 trillion. The growth rate of the industry is expected to increase at a CAGR of 3.5% and it is estimated that the total value of this industry would reach up to $7 trillion by the end of 2014 (IMAP, 4). As other industry suffered because of financial crisis, food and beverage industry was also one of the victims of recession. The industry was affected and companies in the industry had to face different problems like increase in food prices, increase in transportation cost and a reduction in consumer spending thus, reducing the profitability of the companies in the industry. Pepsi Corporation is the fifth most important company in this industry with offering different products like snacks, carbonated and non-carbonated drinks. The total revenue of Pepsi is $43.3 billion USD with a net profit of $5.1 billion. Coca-Cola Corporation is considered to be the seventh most important company in the industry with total revenue of $31.9 billion and net income of $5.8 billion. The industry is lead by Nestle with total revenue of $101.8 billion which has grown by 13.5% in 2010 from 2009. The net profit of Nestle in 2010 was $16.7 billion. Other important players in the market are Bunge ltd, Unilever Archer-Daniels Midland Kraft Foods Tyson Foods Mars Inc Kirin Holdings etc. The future of this industry is bright as the economy is currently recovering from recession and many companies are planning to expand their businesses and acquire firms in the industry. Pepsi acquired a Brazilian based coconut water manufacturer company, Amacoco Nordeste while minority shares of Zico LLC were bought by Coca Cola thus reflecting potential in the industry. S&P 500 and Dow Jones US indexes indicate that the industry would grow with the passage of time as it is reflected in the following graph. (Source: IMAP, 4) FINANCIAL ANALYSIS Financial Highlights of Coca-Cola The revenues of Coca Cola Company have increased in 2010 from 2009 by 13% which has helped the company in improving its profitability considerably by 73%. The revenues of the company although decreased in 2009 in comparison to 2008 but still the company was able to generate 18% more profits than 2008 which reflected that the company was able to cut off several expenses and costs. In addition to this, the earning per share of the company has been increasing with an increasing rate since 2008. Earning per share increased by 18% in 2009 and then it increased by 74% in 2010 reflecting positive future of the company. 2010 Change in % 2009 Change in % 2008 Revenues 35,119 13% 30,990 -3% 31,944 Operating Profit 8,449 3% 8,231 -3% 8,446 Net Profit 11,809 73% 6,824 18% 5,807 EPS   5.12 74% 2.95 18% 2.51 The debt of Coca-Cola increased in 2010 as the debt/equity ratio increased from 48% to 57% thus increasing the risk of the company however with higher debt (Coca-Cola Company, 74). However, with an increase in debt, the total assets of the company also increased significantly. 2010 2009 Total Assets 72,921 48,671 Current Assets 21,579 17,551 Fixed Assets 51,342 31,120 Total Equity 31,317 25,346 Total Liabilities 41,604 23,325 Debt/Equity Ratio 57.05% 47.92% Financial Highlights Of Pepsi Corporation The revenues of Pepsi in 2009 did not change much in comparison to the revenues in 2008 however there was a significant change in the net profit of the company as the profitability of the company improved by 16% thus indicating that the company was able to produce at a lower cost and reduce its operational costs because of which operating profit as well as net profit of the company improved. Revenues of the company improved by 34% in 2010 in comparison to 2009 however increase of 34% in revenues was only able to improve the operating profits of the company by 4% and net profits by 6% thus indicating that the costs had increased in 2010. Earning per shares of Pepsi has been growing since 2008 thus reflecting positive sign for investors (Pepsi Co, 71). 2010 Change in % 2009 Change in % 2008 Revenues 57,838 34% $43,232 0% $43,251 Operating Profit 8,332 4% 8044 16% 6,959 Net Profit 6,320 6% 5,946 16% 5142 EPS 3.97 4% 3.81 17% 3.26 Debt to asset ratio of Pepsi increased in 2010 as the total liabilities of the company almost got doubled. The increase in debt of the company, increase the debt to equity ratio from 56% to 68.5% thus reflecting higher risk. In addition to this, the assets of the company also showed significant growth as they increased from $27 million in 2009 to $50.5 million (Pepsi Co, 74). 2010 2009 Total Assets $68,153 $39,848 Current Assets 17,569 12,571 Fixed Assets $50,584 $27,277 Total Equity 21,476 17,442 Total Liabilities $46,677 $22,406 Debt/Equity Ratio 68.49% 56.23% PROJECTED FINANCIALS The revenues of both the companies have improved in 2010 and as the economy is recovering gradually the food and beverage industry would experience further growth which will be an important factor in improving the revenues and profitability of both these companies therefore in future both the companies should expect higher revenues. However, earning more revenue is not as important as earning higher profits and earning per share and for this, both these companies need to analyze its costs as well. In future, there are several issues that could pose threats to the profitability of the company like increase in the prices of gasoline and labours demanding higher wages. Prices of gasoline are very significant for companies in the food and beverage industry because they have to maintain efficient distribution system and with increase in gasoline prices, the cost of distribution would increase therefore companies have to maintain efficient destruction system and manage their supply chain efficiently. In addition to this, the cost of ingredients has increased in the last few years which might affect the cost of production of the company thus reducing profitability. Therefore even if the industry experiences growth in future, the production and operational cost might increase which would affect the profitability of the company. Cost of production as well as operation costs are important for companies in this industry as after analyzing the financial statement of Pepsi and comparing the profit and loss statement of 2009 and 2010, it can be found that the company was able to increase its total revenue however, the profit margin of the company did not increase even after revenues increased. Therefore both companies; Pepsi and Coca-Cola need to be aware of this fact and they should analyze and evaluate their cost of production and operational costs. In addition to this, both Pepsi and Coca Cola Corporation have raised capital in 2010 from debt which have increased their risk and therefore both companies need to use more of the funds that have already been retained and not distributed to the shareholders. Management should only take debt if the opportunity cost of the investment is higher than the cost of debt however they have to keep in mind their optimal capital structure. EXPECTED VALUATION PROCESS Net Assets Value Net assets value can be calculated by subtracting the assets of the company by liabilities. The Net Assets Value of the company of Coca Cola is $ 31,317 million while the NAV of Pepsi is $21,476 million. Net Assets Value per share can also be calculated by dividing the NAV by number of shares of the company. NAV per share of Coca-Cola and Pepsi are: Coca Cola Pepsi NAV 31,317 million $21,476 million Outstanding Shares 2,294,316,831 1,586,503,366 NAV per share 13.65 13.54 Market Capitalization Market Capitalization is another method to calculate the value of the company. The value of the firm can be calculated by simply multiplying the market price of the share with number of outstanding shares of the company. Coca Cola Pepsi Price of share 67.47 63.91 Outstanding Shares 2,294,316,831 1,586,503,366 Value of the firm 154,797 million 101,393 million There are different methods to evaluate the value of a company and different investors use different techniques as some might prefer using discounted cash flow methods whereas some investors might prefer using Market Capitalization method. Every technique has its own advantages and disadvantages and it is up to the investor to select the kind of method he would like to use to identify the value of the firm. Works Cited Coca-Cola Company. “United States Securities And Exchange Commission.” Annual Report 2010. 2010. 16 Nov. 2011. < http://www.sec.gov/Archives/edgar/data/21344/000104746911001506/a2202147z10-k.htm#fc43001_the_coca-cola_company_and_subs__the02837> IMAP. Food and Beverage Industry Global Report. 2010. 15 Nov. 2011. Pepsi Co. “Annual Report 2010.” 2010. 15 Nov. 2011. Read More