Accounting 6351, Spring 2010 A01 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 2
Executive Summary This report compares two dominant companies, PepsiCo and Coca-Cola, in soft drink/beverage industry in order to recommend the better company for investment. The introduction covers soft drink/beverage industry economics and different strategies employed by each company. The financial analysis covers both companies common-size income statements and balance sheets, comparative income statements and balance sheets, and various financial statement ratios such as liquidity, capital structure and solvency, return on investment, operating performance, asset utilization and market measures from year 2004 to year 2008. The conclusions are drawn based upon results of financial analysis. A recommendation is given at the end of the report. Both PepsiCo and Coca-Cola are strong leaders in the highly profitable soft drink/beverage industry. Coca-Cola owns the best-known brand worldwide, whereas PepsiCo also has great brand-name reorganization but is more diversified than Coca-Cola. From year 2004 to year 2008, PepsiCo achieved slightly better growth rate in sales and net profit, whereas Coca-Cola have maintained better profit margin with lower cost of sales. PepsiCo posed lower short-term liquidity risk to its investors compared to Coca-Cola. Both companies exhibited low long-term solvency risk with PepsiCos risk being slightly higher than Coca-Colas. PepsiCos overall asset utilization was more efficient than Coca-Cola. Both companies experienced a similar level of investors confidence and stock pricing. Both companies stocks are dividend generating stocks, but Coca-Cola had higher dividend yield and dividend payout rate. Coca- Colas higher profit margin and dividends are certainly very attractive to a potential investor, but PepsiCos growth potentials, business diversification, low short-term liquidity risk, low long- term solvency risk, good return on investment and efficient asset utilization definitely make the companys stock a better investment choice. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 3
Table of Contents Introduction ....................................................................................................................................4 Soft Drink/Beverage Industry ...................................................................................................4 PepsiCo vs. Coca-Cola Strategies.............................................................................................4 Objectives .................................................................................................................................4 Financial Analysis ..........................................................................................................................5 Common-size Analysis .............................................................................................................5 Common-size Income Statement Analysis ........................................................................5 Common-size Balance Sheet Analysis ..............................................................................5 Comparative Analysis ...............................................................................................................7 Comparative Income Statement Analysis .........................................................................7 Comparative Balance Sheet Analysis ................................................................................7 Financial ratio analysis .............................................................................................................8 Liquidity ............................................................................................................................8 Capital Structure and Solvency .......................................................................................10 Return on Investment ......................................................................................................12 Operating Performance ....................................................................................................12 Asset Utilization ..............................................................................................................14 Market Measures .............................................................................................................16 Conclusions and Recommendation for Investment ..................................................................17 References .....................................................................................................................................20 Appendices ....................................................................................................................................21 Graded Project 1 ..........................................................................................................................31 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 4
Introduction Soft Drink/Beverage Industry The soft drink/beverage industry is dominated by two major competitors, PepsiCo and Coca-Cola. The industry is highly profitable, with an average return on assets rate of 14.70%, much higher than average return on assets rate for S&P 500 companies of roughly 7.00%. In spite of market maturity and saturation during recent years in the United States, the growth in international market is very strong and promising. Both PepsiCo and Coca-Cola had large market shares, dominated distribution channels, well-established brand names and consumer loyalty. And both companies possess their own secrete formulas. All of these serve as entry barriers that make it very difficult for a new company to enter soft drink/beverage industry. These high entry barriers also protect the profitability of the industry. PepsiCo vs. Coca-Cola Strategies The competition between PepsiCo and Coca-Cola is intense, but both companies have successfully avoided price competition in order to maintain high profit margin. Instead, both companies have focused on improving brand images through effective advertising efforts and marketing campaigns, and reducing costs and expenses by improving quality of operation and management. According to Bloomberg BusinessWeek, Coca-Cola remains the best globally recognized brand across all industries for years, while PepsiCos brand ranked number 26 in year 2008. Thus, Coca-Cola is able to charge premiums for its syrup concentrates due to its larger market shares and better brand-name recognition. In order to compete against Coca-Cola and increase revenue, PepsiCo has diversified its businesses into other markets such as snacks, chips and breakfast food, with its core business focusing on soft drink. Objectives The main objectives of this report are to compare two major players in soft drink/beverage industry, PepsiCo and Coca-Cola, and to make recommendation for investment. The analysis will be made based on each companys common-size income statement, common- size balance sheet, comparative income statement, comparative balance sheet and financial statement ratios from year 2004 to year 2008. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 5
Financial Analysis Common-size Analysis Common-size Income Statement Analysis The common-size income statement shows PepsiCos cost of sales to sales percentage rose slightly from 43.31% in year 2004 to 47.05% in year 2008 with a five-year average of 44.89%. Coca-Colas five-year average cost of sales to sales percentage was only 35.26%, much lower than PepsiCo. Coca-Cola was able to obtain higher gross profit margin with lower cost of sales to sales percentage, the result of its stronger pricing power than PepsiCo and other soft drink companies. Coca-Cola is able to charge premiums for its syrup concentrates due to its larger market shares and better brand-name recognition in soft drink/beverage industry. PepsiCos slightly increasing trend of cost of sales as a percentage of sales from year 2004 to year 2007 should not be a concern, but there was a relatively larger increase to 47.05% in year 2008 from 45.70% in previous year. According to PepsiCos Management's Discussion and Analysis, this was due to the unfavorable net mark-to-market impact of their commodity hedges. PepsiCo and Coca-Colas five-year average selling, general and administrative expenses to sales percentages are 36.85% and 37.61% respectively. With only slightly higher selling, general and administrative expenses as a percentage of sales than its rival PepsiCo, Coca-Cola was able to maintain higher operating profit margin and net profit margin from its higher gross profit margin. PepsiCos net profit margin averaged at 13.84%, 6.83% less than Coca-Colas average net profit margin of 20.67%. In year 2008, PepsiCos profit margin decreased to 11.89%. According to PepsiCos Management's Discussion and Analysis, reduced profit margin in year 2008 was caused by unfavorable net mark-to-market impact of their commodity hedges, the absence of the tax benefits recognized in the prior year, their increased restructuring and impairment charges and their share of Pepsi Bottling Group 's restructuring and impairment charges. Common-size Balance Sheet Analysis On average, PepsiCos current assets made up 30.73% of its total assets, whereas the companys short-term liabilities made up 24.70% of its total liabilities and shareholdersequity FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 6 from year 2004 to 2008. The companys short-term liabilities percentage fluctuated up and down with its current assets percentage each year and always stayed at least 7% above. Apparently, PepsiCo had enough cushion to cover its short-term liabilities from it current assets. Coca-Cola, on the other hand, exhibited slightly higher short-term liabilities percentage than current assets percentage in the most recent three years. This could be a warning sign that the company experienced some degree of difficulties to cover its short-term liabilities. Among its current assets, PepsiCos accounts and notes receivable to total assets percentage went up from 10.28% in year 2005 to 13.01% in 2008, due to increased collection period of the companys accounts and notes receivable. PepsiCo inventories to total assets percentage also went up from 5.34% in year 2005 to 7.01% in year 2008, caused by increased number of days to sell its inventories. Increased accounts and notes receivable and increased inventories as percentages of total assets should raise some concerns and thus need to be analyzed further with liquidity ratios and asset utilization ratios to decide whether these are warning signs of the companys financial health or mostly caused by other current or non-current assets decreasing over those years. Among its short-term liabilities, PepsiCos accounts payable to its total liabilities and shareholdersequity went up from 18.82% in year 2005 to 22.98% in year 2008, indicating the company could have been extending its accounts payable outstanding period slightly to leverage off the effect of increasing accounts and notes receivable percentage to its total assets. PepsiCos property, plant and equipment made up 30.73% of its total assets on average from year 2004 to year 2008, indicating the company is not capital intensive. PepsiCo and its rival Coca-Cola had always contracted out their more capital intensive bottling operations to their affiliated bottlers. Coca-Cola operated on an even lower average property, plant and equipment percentage, only 20.48% to its total assets. PepsiCos long-term debt obligations to total liabilities and shareholdersequity percentage was steady from year 2004 to year 2006 with an average of 8.12% but increased sharply to 12.14% in year 2007 and 21.83% in year 2008, indicating the company relied much more heavily on long-term debt to finance its property, plant and equipment growth in addition to other sources of financing in the most recent two years. The sharp increase in long-term debt accompanied by decreased stock price during economic downturn in year 2008 led to more FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 7 liabilities than shareholdersequity, 66.37% and 33.90% respectively. This exposed PepsiCo to a certain degree of risk to fulfill its long-term debt obligations. Further analysis of long-term solvency ratios is needed to determine the severity of this higher total liabilities percentage. Comparative Analysis Comparative Income Statement Analysis PepsiCos sales growth rate averaged at 9.92% each year from year 2004 to year 2008. But cost of sales grew 11.74% yearly on average. The faster growth of cost than sales lowered the companys gross profit growth rate to an average of 8.45% yearly and operating profit growth rate to an average of 7.89% yearly. The companys yearly growth rate of selling, general and administrative expenses averaged at 9.44%, slightly slower than average sales growth rate. From year 2004 to 2007, PepsiCo maintained its selling, general and administrative expenses growth rate below sales growth rate to protect its operating profit margin. Unfortunately, in year 2008, the companys selling, general and administrative expense grew 11.92% but sales only grew 9.57%. This, together with 12.82% rising cost, caused PepsiCos operating profit to decrease by 3.28% in year 2008. The combination of decreased bottling equity income by 33.21% and other unfavorable conditions in interest expense and interest income negatively impacted and reduced PepsiCos net profit by 9.12% from previous year 2007. PepsiCo also posted reduced net profit by 3.18% in year 2005, but operating profit rose a healthy 13.79%. The major impact of reduced net profit in year 2005 was due to a large increase in provision for incomes taxes by 67.93%. Coca-Cola was able to grow its sales every year by an average rate of 9.05% from year 2004 to year 2008, slightly slower than PepsiCo. But Coca-Cola maintained its yearly cost of sales growth rate, 8.37% on average, below its sales growth rate. This could indicate that Coca- Cola was successful in controlling its raw ingredients cost either by buying with lower price or by effective commodity hedging. Coca-Colas net profit grew 6.22% yearly on average, slower than PepsiCos 8.88%. Comparative Balance Sheet Analysis PepsiCos five-year average total current assets growth rate was 10.13%, higher than its average total short-term liabilities growth rate of 8.77%, consistent with the common-size FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 8 analysis of the companys capability to cover short-term liabilities with its current assets. Its rival Coca-Colas higher average short-term liabilities growth rate of 13.38% than its average current assets growth rate of 11.22% was also consistent with the common-size analysis of the companys higher risk in short-term liabilities coverage. PepsiCos account and notes receivable grew 10.69% on average each year, faster than its average sales growth rate of 9.92%. This could indicate a slight increase in number of days it takes for the company to collect from its customers. With an average growth rate of 12.36% yearly, PepsiCos inventories also grew fast than its sales. This could be the result of an increase in number of days needed to sell its inventories over years. On average, PepsiCos property, plant and equipment grew 8.40% yearly, supporting its average sales growth rate of 9.05%. But long-term debt grew 39.87% on average each year. The debt seemed to grow too fast in effort to finance its property, plant and equipment growth. This shows PepsiCo relied more and more heavily on debt financing toward year 2008. PepsiCos total liabilities growth rate averaged at 13.69%, whereas total liabilities and shareholder equity growth rate only averaged at 7.57%. This also signals the companys elevated long-term solvency risk. Financial ratio analysis Liquidity Current Ratio and Acid-test Ratio PepsiCos five-year average current ratio of 1.25 and acid-test ratio of 0.89 were better than Coca-Colas 0.99 and 0.66, indicating PepsiCo had a larger margin of short-term assets to cover its short-term liabilities and thus was less risky in short-term liquidity. PepsiCos current ratio from year 2004 to year 2008 always stayed well above 1.0. A current ratio under 1.0 suggests a company experiencing possible difficulties meeting its short- term obligations and having a high level of potential liquidity risk. Thus, PepsiCo did not have much short-term liquidity risk. The trend of PepsiCos acid-test ratio was consistent with the trend of its current ratio, indicating its inventory level remained relatively stable over years. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 9 The five-year average current ratio of Coca-Cola was roughly 1 (0.99). This should raise some concerns whether the company was in good financial health to pay off its short-term obligations. The trend showed that current ratio of the company decreased from 1.10 at the end of year 2004 to 0.92 at the end of year 2007. There was a slight increase to 0.94 at the end of year 2008 from the previous year. Considering Coca-Cola as a solid company with a 9.05% average sales growth rate and a 6.22% average net income growth rate each year, we can speculate that the company was well aware its short-term financial health and would make an effort to bring its current ratio above 1 in order to reduce its short-term liquidity risk. As a matter of fact, Coca-Colas current ratio did increase dramatically in year 2009 to 1.28 at the year end. But the effort made to improve current ratio should not be the only reason of such a large increase. Another factor of this dramatic increase in current ratio could be recession in year 2009 when the company experienced some degree of difficulties in selling its inventories or collecting cash from accounts receivable. The trend of acid-test ratio of Coca-Cola highly correlated with the trend of its current ratio, decreasing from 0.81 at the end of year 2004 to 0.58 at the end of year 2007, followed by a slight increase to 0.62 at the end of year 2008. Further increase of acid- test ratio to 0.9 in year 2009 supports the speculation of Coca-Cola making an effort to improve financial health by increasing its current assets to current liabilities ratio. Collection Period The collection period measures how many days that accounts receivable are outstanding. PepsiCo and Coca-Cola had similar collection period, 36.70 and 36.59 on average respectively. Both companies had longer collection period than 30 days. PepsiCo and Coca-Cola sell syrup concentrates mainly to their bottling companies rather than directly through retail channels. This allows both companies to grant their business partners more favorable payment terms than average. The collection period was relatively steady with a very slight increasing trend from year to year for both companies. The healthy business cycle and relationship with their major customers, bottling companies, made this minor fluctuation less of a concern as the collection period stayed within a certain range. Overall, the collection period was stable and predictable. Days to Sell Inventory PepsiCo held inventories much shorter than Coca-Cola. The five-year average of 66.36 days to sell inventory for Coca-Cola was 23.99 days longer than the average of 42.37 days for FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 10 PepsiCo. One major factor could be that PepsiCo had more efficient inventory control than Coca-Cola. Another factor could be the shorter shelf life of PepsiCos diversified product lines of snacks and chips other than soft drinks. With similar collection period between PepsiCo and Coca-Cola, the larger number of days it took Coca-Cola to sell its inventories translated into the longer period required from working capital financing. Apparently, PepsiCo managed its inventories more efficiently and turned its inventories into sales faster than Coca-Cola. One possible adverse effect of less number of days to sell inventory is that the shorter holding period of inventories could indicate shortage of inventories on hand. This was not a concern for either PepsiCo or Coca-Cola. Days to sell inventory for PepsiCo maintained relatively steady around its five-year average with a slight increase from 41.63 days in year 2005 to 43.15 days in year 2008. But Coca-Cola experienced relatively larger increase in number of days to sell inventory, gapped up from 62.33 days in year 2005 to 67.51 days in year 2006 and from 67.71 days in 2007 to 70.17 days in 2008. This increasing trend was another indicator that Coca-Colas inventory control was less effective than PepsiCos. Capital Structure and Solvency Total Debt to Equity Ratio and Long-term Debt to Equity Ratio PepsiCos five-year average of total debt to equity ratio was 1.24. On average, Pepsi had more debt financing than equity financing. Coca-Cola had a lower average total debt to equity ratio of 0.90, which indicating the companys use of more equity financing than debt financing. The long-term debt to equity ratio for PepsiCo averaged at 0.68, much higher than the 0.29 average long-term debt to equity ratio for Coca-Cola. PepsiCos higher debt to equity ratio put the company in a riskier position in the times of rising interest rates. PepsiCos debt to equity ratio increased sharply in year 2008. The economic downturn in year 2008 that led to depression in year 2009 brought down the companys stock price significantly. As shown in its comparative balance sheet, in order to finance the asset growth of 3.94% in year 2008, PepsiCo increased its debt borrowing by 37.33% from previous year. The major source of this increase in debt borrowing was long-term. Thus, the decreased shareholders equity and increased debt financing, especially long-term debt financing, raised PepsiCos debt FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 11 to equity ratio in year 2008 significantly. Having a high 1.96 total debt to equity ratio and a 1.24 long-term debt to equity ratio, PepsiCo appeared to have experienced greater long-term solvency risk in year 2008. With recession arrived in year 2009 and interest rate decreased to all-time low through 2010, this higher debt to equity ratio should not be too much a cause of concern as long as PepsiCo could manage to stop the increasing trend. In fact, PepsiCo did improve its debt to equity ratio with a slight decrease in year 2009. Coca-Cola, PepsiCos rivalry company, adopted a different strategy to deal with the economic downturn in year 2008. Coca-Cola was able to stabilize its debt to equity ratio from year 2004 to year 2008, with only slight increases in year 2007 and 2008. Coca-Colas comparative balance sheet shows that with only 5.85% decrease in shareholders equity from year 2007, the company did not have to increase debt borrowing when its assets decreased at a slightly higher rate of 6.36% than shareholders equity. Coca-Cola was able to keep total debt to equity ratio under 1.0, positioning the company at a less risky level regarding long-term capital structure and solvency. Times Interest Earned Times interest earned ratio shows how well a company could cover its interest expense on a pretax base. PepsiCo had a better five-year of average of 29.56 than Coca-Colas average of 25.75, indicating PepsiCo had enough operating profitability to cover its interest payments with a slightly larger cushion than Coca-Cola. But, both companies times interest earned ratios were well above 2.0, which is a margin value typically considered a warning sign of high long-term solvency risk. Thus, both PepsiCo and Coca-Cola exhibited very low long-term solvency risk considering each companys times interest earned ratio was at a very high level. PepsiCo experienced decreases in times interest earned ratio in year 2005 and 2008, mainly due to decreased profitability and increased debt level in those two years. These same factors also caused sharp decrease in Coca-Colas times interest earned ratio from 30.90 in year 2006 to 18.27 and 17.98 in year 2007 and year 2008 respectively. The economic downturn in 2008 should play an important role in the decreased times interest earned ratio of that year for both PepsiCo and Coca-Cola. But these ratios were well above 2.0. So it should not cause any concern to be raised at this point other than this downward trend should be noted and continuously monitored. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 12 Return on Investment Return on Assets and Return on Common Equity The return on assets ratio is an important profitability measure that shows how successfully a company manages to generate earnings on every dollar of its assets independent of sources of financing. PepsiCos five-year average return on asserts was 16.48%. Coca-Cola had a five-year average return on asserts of 16.54%. Both were above soft drink/beverage industry average of 14.70% with Coco-Cola slightly better than PepsiCo. With a 14.70% industry average return on assets well above S&P 500 average of roughly 7.00%, soft drink/beverage industry is highly profitable. Both PepsiCo and its rival Coca-Cola have large market shares in this highly profitable soft drink/beverage industry and have developed consumer brand loyalty over years. The return on common equity ratio is another important profitability measure that indicates how effectively a company manages to generate earnings on its capital investments provided by common shareholders. The return on common equity rate for both PepsiCo and Coca-Cola were above soft drink/beverage industry average of 30.70%. A noticeable 21.00% higher industry average return on common equity rate over S&P 500 average also indicated soft drink/beverage industry is highly profitable. PepsiCo had a better average return on common equity of 33.92% than Coca-Colas average of 30.29%. Apparently, PepsiCo was able to generate more profit for its common stock investors. This made PepsiCo more attractive to a potential investor by profitability measures. Its worth noting that both PepsiCo and Coca-Colas profitability went down in year 2008 due to the economic downturn. The lower profitability in a time of economic downturn is highly correlated with higher number of days to sell inventory, lower times interest earned ratio and other financial ratio changes. Operating Performance Profit Margin Ratios PepsiCos five-year average gross profit margin was 55.11%, much lower than its rival Coca-Colas average of 64.74%. PepsiCos lower gross profit margin was a direct result of its higher cost of sales to sales percentage. On their common-size income statements, PepsiCos five-year average cost of sales to sales percentage was 44.89%, noticeably higher than the FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 13 35.26% average cost of sales to sales percentage for Coca-Cola. One major contributing factor to Coca-Colas lower cost of sales percentage was that Coca-Cola was able to charge premiums for its syrup concentrates compared to Pepsi. Another factor could be Coca-Cola had always been able to effectively lower the cost of raw ingredients by acquiring from suppliers with lower price or by favorable commodity hedging. A third factor could be that PepsiCos diversified businesses other than soft drink/beverage had lower gross profit margin in general. By examining common-size income statements, PepsiCo and Coca-Cola had similar five- year average selling and administrative expenses as a percentage of sales. So operating profit margin, pretax profit margin and net profit margin highly correlated with gross profit margin. Coca-Cola was able to obtain higher net profit margin compared to PepsiCo by maintaining lower cost of sales to sales percentage. Its worth noting that PepsiCo did have a slightly lower five-year average selling and administrative expenses to sales percentage of 36.85% than 37.61% for Coca-Cola. PepsiCos slightly lower selling and administrative expenses and other miscellaneous expenses to sales percentage helped to bring its profit margin a little closer to its rival, from 9.63% lagging behind in gross profit margin to only 6.83% lagging behind in net profit margin on average. Over years, PepsiCos gross profit margin decreased from 56.69% in year 2004 to 52.95% in year 2008, caused by increased cost of sales to sales percentage from 43.31% in year 2004 to 47.05% in year 2008. This should raise some concerns whether this trend could continue in future years. On the other side, Coca-Colas gross profit margin had been relative steady with well-maintained cost of sales to sales percentage. By decreasing selling and administrative expenses to sales percentage from 37.70% in year 2004 to 35.99% in year 2007 with a slight increase to 36.76% in year 2008, PepsiCos operating profit margin and pretax profit margin from year to year was steady without declining trend. The changes of income taxes percentage over years caused PepsiCos yearly net profit margin to fluctuate a little bit. The lower profit margin in year 2008 was consistent with the economic downtown started from that year. Coca-Cola was able to maintain its gross profit margin in a relatively steady level year after year with only a slight increase in year 2006. The decreased cost of sales to sales percentage FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 14 in year 2006 was the reason for the slight increase in its gross profit margin. We dont have enough information to find out why Coca-Cola could only bring down cost of sales to sales percentage in that particular year but could speculate on very successful commodity hedging. The overall trend of Coca-Colas gross profit margin as well as operating profit margin, pretax profit margin and net profit margin were flat and steady with the exception of lower pretax profit margin and net profit margin in year 2008. By examining its common-size balance sheet, the economic downturn in year 2008 appeared to hurt profitability of Coco-Colas bottling company and thus an equity loss of 2.74% to sales was posted to Coco-Colas balance sheet. The equity loss in year 2008 brought down Coca-Colas pretax profit margin and net profit margin. Asset Utilization Cash Turnover Cash turnover ratio indicates how efficient a company uses its cash and cash equivalents to generate sales. PepsiCo had a much larger average cash turnover ratio of 26.08 than Coca- Colas average of 6.24, indicating PepsiCo used its cash much more efficiently to generate revenue. Coca-Colas lower cash turnover was the result the company keeping a larger amount of cash and cash equivalents that averaged at 13.30% of its total assets compared to PepsiCos average 4.77%. Over recent years, both companies improved efficiency of cash usage with the exception of a slight decrease in year 2008 due to economic downturn. Pepsis cash turnover trended up from 21.74 in year 2005 to 30.09 in year 2007, and Coca-Colas cash turnover trended up from 4.05 in year 2005 to 8.83 in year 2007. Accounts Receivable Turnover Accounts receivable turnover indicates how fast a company can collect cash from its accounts receivable. It is inversely related to the liquidity measure of collection period discussed above. PepsiCo and Coca-Cola had similar accounts receivable turnover, 9.95 and 9.98 on average respectively. PepsiCo experienced a slight increase in accounts receivable turnover in year 2005 followed by a slight decrease from 10.40 in year 2005 to 9.54 in year 2008. Coca- Colas accounts receivable turnover slightly increased in year 2005, trended down from year 2005 to year 2007, and followed by a slight increase in year 2008. Slightly slower accounts FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 15 receivable turnover shouldnt be a concern for both companies as they sell mainly to their bottling companies which allow them to grant better payment terms than average. Inventory Turnover Inventory turnover indicates how quickly a company can turn inventories into sales. It is inversely related to the liquidity measure of days to sell inventory discussed above. PepsiCo had faster inventory turnover of 8.62 on average than Coca-Colas 9.98 due to its more efficient inventory control and shorter shelf life of its other products such as snacks and chips. Both companies experienced slowdown of inventory turnover over years, most likely due to the changes of average inventory turnover in soft drink/beverage industries. But PepsiCo appeared to have better control over the decline of inventory turnover than Coca-Cola. Working Capital Turnover Working capital turnover indicates how efficiently a company can turn working capital into sales. A companys working capital is calculated by total current assets minus total short- term liabilities. When total short-term liabilities are less than total current assets, working capital becomes negative and current ratio becomes less than 1.0, which could indicate the company has trouble fulfilling its short-term liabilities. Coca-Cola apparently exhibited this risk in year 2006, 2007 and 2008. But the trend of negative working capital turnover reduced each of those years with a dramatic improvement from -602.20 in year 2006 to -36.78 in year 2007, indicating the company made efforts to improve the coverage of its short-term liabilities. In year 2004 and 2005, Coca-Colas working capital turnover was 26.23 and 30.46, better than those of PepsiCo. But overall, PepsiCo maintained steady working capital turnover with a five-year average of 20.85, indicating the company was consistent in generating sales from the funding working capital efficiently. PPE Turnover PPE turnover indicates how efficiently a company uses its property, plant and equipment to generate sales. PepsiCo had a slight better average PPE ratio of 3.78 over 5 years than Coco- Colas 3.75, which could relate to its better inventory control system. Total Assets Turnover FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 16 Total assets turnover indicates how efficiently a company uses total assets to generate sales. PepsiCo had a much better average total assets turnover of 1.16 over 5 years than Coco- Colas 0.77. This is consistent with previous analysis of other asset utilization turnover ratios indicating PepsiCo was able to generate sales more efficiently from different types of assets than Coca-Cola. Market Measures Price-to-earnings Ratio and Earnings Yield PepsiCos five-year average price-to-earnings ratio was 20.30, slightly lower than Coca- Colas 21.34. This indicates Coca-Colas investors had slightly higher expectations to the company from year 2004 to year 2008, and thus were willing to pay a little bit more to acquire the companys stock. On the other hand, PepsiCos relatively lower price-to-earnings ratio presented a good buying opportunity to a potential investor when the company demonstrated better liquidity, return on investment and asset utilization than Coca-Cola. Earnings yield is the inverse of price-to-earnings ratio. PepsiCos slightly higher five- year average earnings yield 4.96% than Coca-Colas 4.70% indicates PepsiCo generated a bit more earnings than Coca-Cola on each dollar invested. This once again presented a good reason to acquire PepsiCos stocks as it was properly priced in terms of earnings yield in those years. Dividend Yield and Dividend Payout Rate Coca-Cola delivered average dividend yield rate of 2.59% and dividend payout rate of 55.08%, whereas PepsiCo had relatively lower dividend yield rate of 1.99% and dividend payout rate of 38.74% on average. It was definitely an added bonus to Coca-Colas investors to get much more dividends out of their investments. But PepsiCos dividend yield and payout were good and strong as well, even though Coca-Colas were much better. Price-to-book PepsiCos average price-to-book ratio was 6.86, slightly higher than Coca-Colas average price-to-book ratio of 6.24. This measure indicates that PepsiCos investors paid slightly higher price for its stocks due to relatively higher expectation on the company. PepsiCos price-to-book jumped to 8.49 in 2008 due to investors confidence into the company. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 17
Conclusions and Recommendation for Investment Both PepsiCo and Coca-Cola are strong industry players in soft drink/beverage industry. From year 2004 to year 2008, Coca-Colas sales grew 9.05% each year on average and net profit grew 6.22% each year on average. PepsiCo achieved even better average sales growth rate of 9.92% yearly and average net profit growth rate of 8.88% yearly. As the soft drink/beverage market approaches maturity and saturation, the rapid growth and potential strength in international markets keep earnings strong for both companies. With a common understanding to avoid price competition in order to protect profitability, both companies spent a great deal of effort to boost their brand images domestically and internationally through advertisement and effective marketing. Coca-Cola, possessing the best recognized brand worldwide, incurred a lower average cost of sales to sales percentage of 35.26% compared to PepsiCos average 44.89%, by charging premiums for its syrup concentrates and by reducing the cost of raw ingredients with the help of favorable commodity hedging. Coca-Cola exhibited higher net profit margin than PepsiCo due to its lower cost of sales to sales percentage. PepsiCos also experience a downward trend in its gross profit margin. But, through slightly decreasing selling and administrative expenses to sales percentage, PepsiCo was able to stabilize its profit margin and pretax profit margin from year to year without a declining trend. Higher net profit margin certainly made Coca-Cola attractive to a potential investor, but it should be noted that both companies were highly profitable even in the times of economic downturn. And it also should be noted that PepsiCo was able to deliver slightly higher sales growth rate and net profit growth rate from year 2004 to year 2008, which could make the company a better candidate for potential growth. PepsiCo, in an effort to battle its rival Coca-Cola, diversified its businesses into other products such as snacks, chips and breakfast food with core business focusing on soft drinks. But Coco-Cola has been staying primarily in soft drink/beverage industry. PepsiCos diversity is directly related to lower business risk. This is certainly an added bonus to a potential investor. PepsiCos current assets averaged 30.73% of its total assets, and short-term liabilities averaged 24.70% of its total liabilities and shareholders equity. Thus, it had a healthy average current ratio of 1.25. Coca-Colas current assets average of 31.99% and short-term liabilities FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 18 average of 32.22% presented an average current ratio of 0.99. Apparently, PepsiCo was more liquid than Coca-Cola and thus posed a lower liquidity risk to its investors in terms of current ratio as well as acid-test ratio. PepsiCos short-term finance remained healthy over years and did not present much short-term liquidity risk, whereas Coca-Cola had a marginal current ratio around 1.0 from year 2004 to 2008 that could raise some concerns about its ability to cover its short-term obligations. In addition, PepsiCo had better inventory control than Coca-Cola and was able to turn its inventories into sales much faster than Coca-Cola. Thus, PepsiCo could gain favoritism from a potential investor in the measure of liquidity. PepsiCo exhibited higher long-term solvency risk due to its higher debt to equity ratio of 1.24 and higher long-term debt to equity ratio of 0.68 on average, compared to Coca-Colas 0.90 and 0.29. But both companies long-term finances are within a healthy range. PepsiCo had better coverage of its debt responsibilities than Coca-Cola by the measure of times interest earned ratio, while both were well above the alarming margin value of 2.0. This better interest payments coverage should slightly offset the concern about PepsiCos elevated debt to equity ratios. Overall, both PepsiCo and its rival Coca-Cola exhibited low long-term solvency risk with PepsiCos risk being slightly higher than Coca-Colas because PepsiCo relied on more debt to finance its continued growth than Coca-Cola. This could lead a potential investor to consider lower long-term solvency risk as an added bonus to invest in Coca-Cola. PepsiCo had a better average return on common equity of 33.92% than Coca-Colas 30.29%, whereas both companies had similar return on assets with Coca-Colas 16.54% average only being slightly better. These results are consistent with both companies being major players in highly profitable soft drink/beverage industry. With return on assets and return on common equity being two major measurements of a companys profitability, PepsiCos higher return on common equity could gain a certain degree of favoritism for the company from a potential investor. PepsiCo demonstrated more efficient asset utilization than Coca-Cola. PepsiCo had better cash turnover, inventory turnover, working capital turnover, PPE turnover and total assets turnover on average, and roughly the same account receivable turnover as Coca-Cola. PepsiCo exhibited much more efficient cash usage towards revenue generation, with an average cash turnover ratio of 26.08 compared to Coca-Colas average of 6.24. Coca-Cola kept a much larger FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 19 amount of cash and cash equivalents as 13.30% of its total assets, whereas PepsiCos cash to total assets percentage only averaged at 4.77%. With a better inventory control system, PepsiCos inventory turnover and PPE turnover were also better than Coca-Cola. PepsiCo maintained a steady working capital turnover ratio averaged at 20.85. But Coca-Colas negative but improving working capital turnover in year 2006 and 2007 should raise some concerns. Overall, PepsiCo should be a winner in terms of better asset utilization. PepsiCo exhibited slightly lower investors confidence and slightly cheaper stock pricing by the measure of price-to-earnings ratio and earnings yield but slightly higher investors confidence and slightly more expensive stock pricing by the measure of price-to-book than Coca-Cola. Overall, both companies are at a similar level in terms of investors confidence and stock pricing. But it is noticeable that PepsiCos price-to-book had a big increase from 6.39 in year 2007 to 8.49 in year 2008, indicating that the company experienced increasing investors confidence over Coca-Cola. On the other hand, it clearly is an added bonus to Coca-Colas investors that the company had much better dividend yield and dividend payout rate. The analysis shows that both companies are strong leaders in the highly profitable soft drink/beverage industry. PepsiCo is definitely a better investment choice if we keep a scoreboard for both companies in terms of growth, diversity, operating performance, liquidity, capital structure and solvency, return on investment, asset utilization and market measures. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 20
References Clyde P. Stickney, Paul Brown and James M. Wahlen (2006). Financial Reporting, Financial Statement Analysis and Valuation. South-Western. Investopedia (n.d.). Retrieved from http:// www.investopedia.com Yahoo! Finance (n.d.). Retrieved from http://finance.yahoo.com Yahoo! industry center (n.d.). Retrieved from http://biz.yahoo.com/ic MSN Money (n.d.). Retrieved from http://moneycentral.msn.com Google Finance (n.d.). Retrieved from http://www.google.com/finance PepsiCo, Inc. and Subsidiaries. (February 19, 2009). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 15, 2008). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 20, 2007). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 27, 2006). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 28, 2005). Form 10-K. The Coca-Cola Company and Subsidiaries. (February 26, 2009). Form 10-K. The Coca-Cola Company and Subsidiaries. (February 28, 2008). Form 10-K. The Coca-Cola Company and Subsidiaries. (February 21, 2007). Form 10-K. The Coca-Cola Company and Subsidiaries. (February 28, 2006). Form 10-K. The Coca-Cola Company and Subsidiaries. (March 4, 2005). Form 10-K. FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 21
Appendices Table 1. PepsiCo Common-size Statement of Income
Common-size Statement of Income PepsiCo, Inc. and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. Net Revenue 100.00 100.00 100.00 100.00 100.00 100.00 Cost of sales 47.05 45.70 44.86 43.54 43.31 44.89 Selling, general and administrative expenses 36.76 35.99 36.18 37.63 37.70 36.85 Amortization of intangible assets 0.15 0.15 0.46 0.46 0.50 0.34 Restructuring and impairment charges sts 0.51 0.10 Operating Profit 16.03 18.16 18.50 18.38 17.97 17.81 Bottling equity income 0.86 1.42 1.57 1.52 1.30 1.34 Interest expense (0.76) (0.57) (0.68) (0.79) (0.57) (0.67) Interest income 0.09 0.32 0.49 0.49 0.25 0.33 Income from Continuing Operations before Income Taxes 16.23 19.33 19.89 19.60 18.95 18.80 Provision for Income Taxes 4.34 5.00 3.83 7.08 4.69 4.99 Income from Continuing Operations 11.89 14.33 16.06 12.52 14.26 13.81 Tax Benefit from Discontinued Operations 0.13 0.03 Net Income 11.89 14.33 16.06 12.52 14.39 13.84 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 22
Table 2. PepsiCo Common-size Balance Sheet
Common-size Balance Sheet PepsiCo, Inc. and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. ASSETS Current Assets Cash and cash equivalents 5.73 2.63 5.52 5.41 4.57 4.77 Short-term investments 0.59 4.54 3.91 9.98 7.74 5.35 Accounts and notes receivable, net 13.01 12.67 12.45 10.28 10.72 11.82 Inventories 7.01 6.61 6.44 5.34 5.51 6.18 Prepaid expenses and other current assets 3.68 2.86 2.20 1.95 2.34 2.60 Total Current Assets 30.02 29.31 30.50 32.95 30.87 30.73 Property, Plant and Equipment, net 32.40 32.42 32.37 27.36 29.12 30.73 Amortizable Intangible Assets, net 2.03 2.30 2.13 1.67 2.14 2.05 Goodwill 14.24 14.93 15.35 12.88 13.97 14.27 Other nonamortizable intangible assets 3.13 3.60 4.05 3.42 3.33 3.51 Nonamortizable Intangible Assets 17.37 18.53 19.40 16.31 17.30 17.78 Investments in Noncontrolled Affiliates 10.79 12.57 12.33 10.98 11.73 11.68 Other Assets 7.38 4.86 3.27 10.73 8.84 7.02 Total Assets 100.00 100.00 100.00 100.00 100.00 100.00 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities Short-term obligations 1.03 0.92 9.11 3.77 2.96 Accounts payable and other current liabilities 22.98 21.95 21.70 18.82 20.01 21.09 Income taxes payable 0.40 0.44 0.30 1.72 0.35 0.64 Total Current Liabilities 24.41 22.39 22.92 29.65 24.13 24.70 Long-Term Debt Obligations 21.83 12.14 8.52 7.29 8.56 11.67 Other Liabilities 19.49 13.84 15.45 13.63 14.65 15.41 Deferred Income Taxes 0.63 1.87 1.76 4.52 4.34 2.62 Total Liabilities 66.37 50.23 48.65 55.08 51.68 54.40 Commitments and Contingencies Preferred Stock, no par value 0.11 0.12 0.14 0.13 0.15 0.13 Repurchased Preferred Stock (0.38) (0.38) (0.40) (0.35) (0.32) (0.37) Common Shareholders Equity Common stock, par value 1 2/3 per share (i ssued 1,782 shares) 0.08 0.09 0.10 0.09 0.11 0.09 Capital in excess of par value 0.98 1.30 1.95 1.94 2.21 1.67 Retained earnings 85.12 81.39 82.98 66.56 66.92 76.59 Accumulated other comprehensive loss (13.04) (2.75) (7.50) (3.32) (3.17) (5.96) 73.14 80.03 77.53 65.27 66.07 72.41 Less: repurchased common stock, at cost (229, 177, 144, 126 and 103 shares, respecti vel y for 2008-2004) (39.23) (30.00) (25.92) (20.13) (17.58) (26.57) Total Common Shareholders Equity 33.90 50.03 51.61 45.14 48.49 45.83 Total Liabilities and Shareholders Equity 100.00 100.00 100.00 100.00 100.00 100.00 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 23
Table 3. PepsiCo Comparative Statement of Income
Comparative Statement of Income PepsiCo, Inc. and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. Net Revenue 9.57 12.34 7.91 11.28 8.49 9.92 Cost of sales 12.82 14.44 11.19 11.85 8.41 11.74 Selling, general and administrative expenses 11.92 11.78 3.75 11.07 8.70 9.44 Amortization of intangible assets 10.34 (64.20) 8.00 2.04 1.38 (8.49) Restructuring and impairment charges sts (100.00) 2.04 (19.59) Operating Profit (3.28) 10.27 8.66 13.79 10.00 7.89 Bottling equity income (33.21) 1.27 11.72 30.26 17.65 5.54 Interest expense 46.88 (6.28) (6.64) 53.29 2.45 17.94 Interest income (67.20) (27.75) 8.81 114.86 45.10 14.76 Income from Continuing Operations before Income Taxes (7.99) 9.19 9.51 15.07 11.10 7.37 Provision for Income Taxes (4.76) 46.47 (41.54) 67.93 (3.65) 12.89 Income from Continuing Operations (9.12) 0.28 38.35 (2.30) 16.98 8.84 Tax Benefit from Discontinued Operations (100.00) (20.00) Net Income (9.12) 0.28 38.35 (3.18) 18.05 8.88 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 24
Table 4. PepsiCo Comparative Balance Sheet
Comparative Balance Sheet PepsiCo, Inc. and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. ASSETS Current Assets Cash and cash equivalents 126.81 (44.88) (3.79) 34.06 56.10 33.66 Short-term investments (86.44) 34.16 (63.01) 46.24 83.32 2.85 Accounts and notes receivable, net 6.70 17.83 14.23 8.74 5.97 10.69 Inventories 10.13 18.90 13.76 9.86 9.14 12.36 Prepaid expenses and other current assets 33.60 50.84 6.31 (5.50) (4.80) 16.09 Total Current Assets 6.45 11.18 (12.67) 21.01 24.66 10.13 Property, Plant and Equipment, net 3.87 15.91 11.59 6.53 4.10 8.40 Amortizable Intangible Assets, net (8.04) 24.96 20.19 (11.37) (16.71) 1.80 Goodwill (0.87) 12.52 12.38 4.58 2.98 6.32 Other nonamortizable intangible assets (9.62) 2.97 11.60 16.40 7.36 5.74 Nonamortizable Intangible Assets (2.57) 10.52 12.21 6.86 3.79 6.16 Investments in Noncontrolled Affiliates (10.82) 17.99 5.88 6.12 12.47 6.33 Other Assets 58.03 71.63 (71.20) 37.49 9.22 21.04 Total Assets 3.94 15.70 (5.66) 13.36 10.50 7.57 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities Short-term obligations (100.00) (90.52) 174.10 78.34 12.38 Accounts payable and other current liabilities 8.83 17.03 8.79 6.64 7.40 9.74 Income taxes payable (3.97) 67.78 (83.52) 451.52 (83.80) 69.60 Total Current Liabilities 13.34 13.02 (27.07) 39.31 5.25 8.77 Long-Term Debt Obligations 86.96 64.82 10.25 (3.50) 40.83 39.87 Other Liabilities 46.43 3.63 6.96 5.46 0.59 12.62 Deferred Income Taxes (65.02) 22.35 (63.18) 17.93 (3.57) (18.30) Total Liabilities 37.33 19.45 (16.67) 20.82 7.52 13.69 Commitments and Contingencies Preferred Stock, no par value 0.00 0.00 0.00 0.00 0.00 0.00 Repurchased Preferred Stock 4.55 10.00 9.09 22.22 42.86 17.74 Common Shareholders Equity Common stock, par value 1 2/3 per share (issued 1,782 shares) 0.00 0.00 0.00 0.00 0.00 0.00 Capital in excess of par value (22.00) (22.95) (4.89) (0.65) 12.77 (7.54) Retained earnings 8.71 13.48 17.62 12.74 17.35 13.98 Accumulated other comprehensive loss 393.07 (57.61) 113.30 18.85 (30.07) 87.51 (5.01) 19.42 12.06 11.98 21.08 11.91 Less: repurchased common stock, at cost (229, 177, 144, 126 and 103 shares, respectively for 2008-2004) 35.96 33.89 21.47 29.82 45.73 33.37 Total Common Shareholders Equity (29.56) 12.16 7.87 5.51 14.09 2.01 Total Liabilities and Shareholders Equity 3.94 15.70 (5.66) 13.36 10.50 7.57 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 25
Table 5. Coca-Cola Common-size Statement of Income
Common-size Statements of Income The Coca-Cola Company and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. NET OPERATING REVENUES 100.00 100.00 100.00 100.00 100.00 100.00 Cost of goods sold 35.61 36.06 33.89 35.47 35.30 35.26 GROSS PROFIT 64.39 63.94 66.11 64.53 64.70 64.74 Selling, general and administrative expenses 36.86 37.93 39.15 37.82 36.29 37.61 Other operating charges 1.10 0.88 0.77 0.37 2.21 1.06 OPERATING INCOME 26.44 25.13 26.19 26.34 26.21 26.06 Interest income 1.04 0.82 0.80 1.02 0.72 0.88 Interest expense 1.37 1.58 0.91 1.04 0.90 1.16 Equity income (loss)net (2.74) 2.31 0.42 2.94 2.86 1.16 Other income (loss)net (0.09) 0.60 0.81 (0.40) (0.38) 0.11 Gains on issuances of stock by equity method investees 0.10 0.11 0.04 INCOME BEFORE INCOME TAXES 23.29 27.28 27.31 28.96 28.62 27.09 Income taxes 5.11 6.56 6.22 7.87 6.32 6.42 NET INCOME 18.18 20.73 21.09 21.09 22.29 20.67 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 26
Table 6. Coca-Cola Common-size Balance Sheet
Common-size Balance Sheets The Coca-Cola Company and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. ASSETS CURRENT ASSETS Cash and cash equivalents 11.60 9.46 8.14 15.98 21.33 13.30 Marketable securities 0.69 0.50 0.50 0.22 0.19 0.42 Trade accounts receivable, less allowances 7.63 7.67 8.63 7.75 7.14 7.76 Inventories 5.40 5.13 5.48 4.69 4.52 5.04 Prepaid expenses and other assets 4.74 5.22 5.42 6.04 5.88 5.46 TOTAL CURRENT ASSETS 30.05 27.98 28.17 34.68 39.06 31.99 INVESTMENTS Equity method investments: Coca-Cola Enterprises Inc. 3.78 4.38 5.88 4.99 3.81 Coca-Cola Hellenic Bottling Company S.A. 3.67 3.58 4.18 3.53 3.39 3.67 Coca-Cola FEMSA, S.A.B. de C.V. 2.16 2.30 2.79 3.34 2.52 2.62 Coca-Cola Amatil Limited 1.57 1.86 2.73 2.54 2.34 2.21 Other, principally bottling companies and joint ventures 5.71 5.32 6.99 7.01 5.51 6.11 Cost method investments, principally bottling companies 1.14 1.13 1.58 1.22 1.13 1.24 TOTAL INVESTMENTS 14.26 17.97 22.64 23.52 19.88 19.66 OTHER ASSETS 4.28 6.18 9.01 9.00 9.48 7.59 PROPERTY, PLANT AND EQUIPMENTnet 20.55 19.63 23.04 19.82 19.37 20.48 TRADEMARKS WITH INDEFINITE LIVES 14.95 11.91 6.83 6.61 6.48 9.36 GOODWILL 9.94 9.84 4.68 3.56 3.49 6.30 OTHER INTANGIBLE ASSETS 5.97 6.49 5.63 2.81 2.23 4.63 TOTAL ASSETS 100.00 100.00 100.00 100.00 100.00 100.00 LIABILITIES AND SHAREOWNERS EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses 15.31 15.98 16.87 15.27 14.00 15.49 Loans and notes payable 14.97 13.68 10.80 15.35 14.41 13.84 Current maturities of long-term debt 1.15 0.31 0.11 0.10 4.74 1.28 Accrued income taxes 0.62 0.60 1.89 2.71 2.26 1.61 TOTAL CURRENT LIABILITIES 32.05 30.56 29.67 33.43 35.41 32.22 LONG-TERM DEBT 6.86 7.57 4.39 3.92 3.68 5.28 OTHER LIABILITIES 8.39 7.24 7.45 5.88 8.95 7.58 DEFERRED INCOME TAXES 2.16 4.37 2.03 1.20 1.28 2.21 SHAREOWNERS EQUITY Common stock, $0.25 par value 2.17 2.03 2.93 2.98 2.78 2.58 Capital surplus 19.66 17.05 19.97 18.66 15.67 18.20 Reinvested earnings 95.05 83.74 111.70 106.36 92.57 97.88 Accumulated other comprehensive income (loss) (6.60) 1.45 (4.31) (5.67) (4.29) (3.88) Treasury stock (59.76) (54.02) (73.82) (66.76) (56.06) (62.08) TOTAL SHAREOWNERS EQUITY 50.52 50.25 56.47 55.58 50.68 52.70 TOTAL LIABILITIES AND SHAREOWNERS EQUITY 100.00 100.00 100.00 100.00 100.00 100.00 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 27
Table 7. Coca-Cola Comparative Statement of Income
Comparative Statements of Income The Coca-Cola Company and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. NET OPERATING REVENUES 10.70 19.80 4.26 6.26 4.24 9.05 Cost of goods sold 9.30 27.46 (0.38) 6.79 (1.31) 8.37 GROSS PROFIT 11.48 15.87 6.81 5.98 7.55 9.54 Selling, general and administrative expenses 7.57 16.05 7.92 10.76 8.28 10.12 Other operating charges 37.80 37.30 117.65 (82.29) (16.23) 18.84 OPERATING INCOME 16.46 14.97 3.66 6.79 9.14 10.20 Interest income 41.10 22.28 (17.87) 49.68 (10.80) 16.88 Interest expense (3.95) 107.27 (8.33) 22.45 10.11 25.51 Equity income (loss)net (230.84) 554.90 (85.00) 9.50 52.96 60.30 Other income (loss)net (116.18) (11.28) (309.68) 13.41 (40.58) (92.86) Gains on issuances of stock by equity method investees (100.00) (4.17) 200.00 19.17 INCOME BEFORE INCOME TAXES (5.51) 19.69 (1.67) 7.52 13.23 6.65 Income taxes (13.74) 26.30 (17.60) 32.22 19.77 9.39 NET INCOME (2.91) 17.74 4.27 0.52 11.50 6.22 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 28
Table 8. Coca-Cola Comparative Balance Sheet
Comparative Balance Sheets The Coca-Cola Company and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 (in percentage) 2008 2007 2006 2005 2004 5-Yr Avg. ASSETS CURRENT ASSETS Cash and cash equivalents 14.85 67.75 (48.10) (29.91) 99.49 20.82 Marketable securities 29.30 43.33 127.27 8.20 -49.17 31.79 Trade accounts receivable, less allowances (6.84) 28.22 13.42 1.65 7.32 8.75 Inventories (1.49) 35.28 19.00 (2.89) 13.42 12.67 Prepaid expenses and other assets (15.04) 39.25 (8.72) (3.84) 17.7 5.87 TOTAL CURRENT ASSETS 0.59 43.41 (17.29) (16.90) 46.27 11.22 INVESTMENTS Equity method investments: Coca-Cola Enterprises Inc. (100.00) 24.77 (24.21) 10.33 24.52 (12.92) Coca-Cola Hellenic Bottling Company S.A. (4.00) 23.82 20.40 (2.62) 13.39 10.20 Coca-Cola FEMSA, S.A.B. de C.V. (11.95) 19.28 (14.97) 23.99 17.51 6.77 Coca-Cola Amatil Limited (20.84) (1.35) 9.22 1.63 12.88 0.31 Other, principally bottling companies and joint ventures 0.56 9.83 1.60 18.98 2.12 6.62 Cost method investments, principally bottling companies (5.12) 3.17 31.39 1.41 13.06 8.78 TOTAL INVESTMENTS (25.69) 14.65 (2.01) 10.72 12.89 2.11 OTHER ASSETS (35.21) (0.96) 2.00 (11.17) -10.26 (11.12) PROPERTY, PLANT AND EQUIPMENTnet (1.97) 23.03 18.38 (4.27) -0.1 7.02 TRADEMARKS WITH INDEFINITE LIVES 17.58 151.98 5.09 (4.47) 2.93 34.62 GOODWILL (5.33) 203.35 34.00 (4.56) 6.61 46.81 OTHER INTANGIBLE ASSETS (13.99) 66.57 103.74 17.95 -28.44 29.17 TOTAL ASSETS (6.36) 44.41 1.82 (6.41) 14.99 9.69 LIABILITIES AND SHAREOWNERS EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses (10.27) 36.80 12.51 2.04 8.5 9.92 Loans and notes payable 2.48 82.97 (28.40) (0.29) 75.42 26.44 Current maturities of long-term debt 249.62 303.03 17.86 (98.12) 361.3 166.74 Accrued income taxes (2.33) (54.50) (28.86) 12.41 -23.1 (19.27) TOTAL CURRENT LIABILITIES (1.79) 48.76 (9.62) (11.65) 41.17 13.38 LONG-TERM DEBT (15.14) 149.39 13.86 (0.26) -54.03 18.77 OTHER LIABILITIES 8.55 40.43 28.96 (38.52) 12.02 10.29 DEFERRED INCOME TAXES (53.60) 210.86 72.73 (12.44) 19.29 47.37 SHAREOWNERS EQUITY Common stock, $0.25 par value 0.00 0.23 0.11 0.23 0.11 0.14 Capital surplus 7.97 23.32 8.94 11.44 12.13 12.76 Reinvested earnings 6.29 8.27 6.93 7.54 9.06 7.62 Accumulated other comprehensive income (loss) (527.16) (148.49) (22.65) 23.81 -32.43 (141.38) Treasury stock 3.59 5.68 12.59 11.46 11.05 8.87 TOTAL SHAREOWNERS EQUITY (5.85) 28.51 3.45 2.64 13.09 8.37 TOTAL LIABILITIES AND SHAREOWNERS EQUITY (6.36) 44.41 1.82 (6.41) 14.99 9.69 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 29
Table 9. PepsiCo Financial Statement Ratios
Financial Statement Ratios PepsiCo, Inc. and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 2008 2007 2006 2005 2004 5-Yr Avg. Liquidity Current ratio 1.23 1.31 1.33 1.11 1.28 1.25 Acid-test ratio 0.79 0.89 0.95 0.87 0.95 0.89 Collection period (in days) 38.28 37.51 36.28 35.09 36.36 36.70 Days to sell inventory 43.15 42.66 41.90 41.63 42.52 42.37 Capital Structure and Solvency Total debt to equity 1.96 1.00 0.94 1.22 1.07 1.24 Long-term debt to equity 1.24 0.56 0.50 0.56 0.57 0.68 Times interest earned 22.34 35.07 30.24 25.93 34.21 29.56 Return on Investment Return on assets 15.17% 17.98% 18.81% 14.22% 16.21% 16.48% Return on common equity 34.83% 34.53% 37.91% 29.24% 33.08% 33.92% Operating Performance Gross profit margin 52.95% 54.30% 55.14% 56.46% 56.69% 55.11% Operating profit margin (pretax) 16.03% 18.16% 18.50% 18.38% 17.97% 17.81% Pretax profit margin 16.23% 19.33% 19.89% 19.60% 18.95% 18.80% Net profit margin 11.89% 14.33% 16.06% 12.52% 14.39% 13.84% Asset Utilization Cash turnover 29.09 30.83 20.87 21.74 27.87 26.08 Accounts receivable turnover 9.54 9.73 10.06 10.40 10.04 9.95 Inventory turnover 8.46 8.56 8.71 8.77 8.58 8.62 Working capital turnover 19.58 16.91 21.18 22.19 24.36 20.85 PPE turnover 3.78 3.77 3.83 3.87 3.66 3.78 Total assets turnover 1.22 1.22 1.14 1.09 1.10 1.16 Market Measures Price-to-earnings ratio 20.20 19.63 17.86 22.87 20.94 20.30 Earnings yield 4.95% 5.09% 5.60% 4.37% 4.78% 4.96% Dividend yield 2.51% 2.09% 1.90% 1.82% 1.66% 1.99% Dividend payout rate 49.69% 39.08% 32.75% 40.33% 31.84% 38.74% Price-to-book 8.49 6.39 6.52 6.48 6.41 6.86 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 30
Table 10. Coca-Cola Financial Statement Ratios
Financial Statement Ratios The Coca-Cola Company and Subsidiaries Years 2008, 2007, 2006, 2005, 2004 2008 2007 2006 2005 2004 5-Yr Avg. Liquidity Current ratio 0.94 0.92 0.95 1.04 1.10 0.99 Acid-test ratio 0.62 0.58 0.58 0.72 0.81 0.66 Collection period (in days) 36.60 37.34 36.88 35.74 36.39 36.59 Days to sell inventory 70.71 67.71 67.51 62.33 63.54 66.36 Capital Structure and Solvency Total debt to equity 0.98 0.99 0.77 0.80 0.97 0.90 Long-term debt to equity 0.34 0.38 0.25 0.20 0.27 0.29 Times interest earned 17.98 18.27 30.90 28.88 32.74 25.75 Return on Investment Return on assets 14.54% 17.14% 17.59% 16.52% 16.92% 16.54% Return on common equity 27.51% 30.94% 30.53% 30.18% 32.29% 30.29% Operating Performance Gross profit margin 64.39% 63.94% 66.11% 64.53% 64.70% 64.74% Operating profit margin (pretax) 26.44% 25.13% 26.19% 26.34% 26.21% 26.06% Pretax profit margin 23.29% 27.28% 27.31% 28.96% 28.62% 27.09% Net profit margin 18.18% 20.73% 21.09% 21.09% 22.29% 20.67% Asset Utilization Cash turnover 7.26 8.83 6.75 4.05 4.32 6.24 Accounts receivable turnover 9.97 9.78 9.90 10.21 10.03 9.98 Inventory turnover 5.16 5.39 5.41 5.86 5.74 5.51 Working capital turnover (33.07) (36.78) (602.20) 30.46 26.23 (123.07) PPE turnover 3.80 3.75 3.78 3.88 3.57 3.75 Total assets turnover 0.76 0.79 0.81 0.76 0.74 0.77 Market Measures Price-to-earnings ratio 21.41 20.77 20.31 20.96 23.22 21.34 Earnings yield 4.67% 4.81% 4.92% 4.77% 4.31% 4.70% Dividend yield 2.83% 2.53% 2.83% 2.62% 2.15% 2.59% Dividend payout rate 60.56% 52.51% 57.41% 54.90% 50.00% 55.08% Price-to-book 6.08 5.73 6.08 6.25 7.07 6.24 FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 31