A Paper on Pepsico

PepsiCo is a good investment because it is a well managed company with strong sales in a large market that is both diverse and world wide. PepsiCo continues to innovate and penetrate new markets (for example the flavored water market), and is not losing market share to competitors. PepsiCo is a safe investment because there will always be a demand for Pepsi's products, even during recessions, and therefore the stock will be resistant to cyclical changes in the market and economy. The dividend does not provide huge amounts of income, but it is a nice cushion.

PepsiCo's income statement shows that 2006 Net Income was significantly higher than both 2004 and 2005 (35% and 38%). One of the key factors that account for this growth is between 2004 and 2005 cost of sales (or cost of goods sold)only increased by 12% and by only 11% between 2005 and 2006. Selling, General & Administrative Expense increased only 4% between 2005 and 2006 while revenues increased by 8% meaning that revenues increased twice as fast as SG&A between 2005 and 2006. This analysis of the income statement illustrates Pepsi's ability to increase revenues while keeping costs under control. Pepsi is thus becoming more efficient while growing.

PepsiCo's Balance sheet shows that liabilities have decreased 17% between 2005 and 2006. The Balance sheet also shows that assets only declined 6%. The larger decrease in liabilities than assets means there has been an increase in stockholder's equity. The increase comes from an increase of 18% in retained earnings. The increase in retained earnings came principally from greater net income, not from a decrease in dividends. There was an increase of 13% in cash dividends paid in 2006 over 2005. This illustrates Pepsi is reinvesting its earnings, and generating more revenue with less debt and fewer assets.

PepsiCo's international growth has been twice as great as North American growth. Pepsi's focus on the international market, especially in second and third world countries, is a good strategy for future growth. Second and third world countries will experience more rapid GDP per capita growth than the developed North American Market. This increase in per capita GDP will mean that consumers will have more to spend on snacks.

The Processed & Packaged Goods Industry is a good industry to invest in overall. The Processed & Packaged Goods Industry has both: room for continued expansion because of ever changing demand and steady and safe sales. This makes for a good combination to invest in. PepsiCo is a leader in this industry. Consumers will always need to drink and snack, and will not change their consumption habits if the price of gas increases from $2.00 per gallon to $3.00. If anything, consumers will eat out less and snack more. If they do eat out more, the drinks at restaurants are supplied by soft drink companies such as PepsiCo. This provides a natural hedge to this type of situation, but it is more illustrative of the general constant demand for Pepsi's products.

The Ratio Analysis for PepsiCo shows that PepsiCo is a strong, growing company. PepsiCo management is good at generating revenue from assets while controlling debt and at the same time encouraging growth and keeping overall costs down.

Liquidity Ratios

The Current Ratio for PepsiCo indicates they would easily be able to pay off current liabilities. The Acid Test Ratio indicates that would have some difficulty in paying off current liabilities. The difference is the inclusion of inventory in the Current Ratio. Since PepsiCo is primarily a retail company the difference is to be expected and not alarming. A .95 Acid Ratio is very good for a retail business. The operating cash flow ratio is strong. It indicates that PepsiCo is able to turn credit sales into cash quickly and does not over extend their credit. The Liquidity Ratios all indicate that PepsiCo is in a better position in 2006 than 2005.

Activity Ratios

The Receivables Turnover Ratio indicates that PepsiCo's extension of credit and collection of accounts receivable is efficient. This is important in developing sales in second and third world countries. The Decline in 2006 compared to 2005 is primarily from these increased international sales. The Asset turnover ratio combined with the Operating Margins (trailing twelve month period) of 18.44% indicates that PepsiCo is efficient at generating revenue form its assets.

Profitability Ratios

The Profit Margin on Sales and Rate of Return on Assets indicate that PepsiCo is a profitable company, and is seeking ways to increase profits. The Pay Out Ratio is smaller for 2006 than 2005 but is not informative taken by itself. Net Income and Cash dividends both increased in 2006