Drip Portfolio Report
Tuesday, December 30, 1997
by Randy Befumo (RandyB@fool.com)

ALEXANDRIA, VA (Dec. 30, 1997) -- As we close in on the end of our food company analyses, today we take a look at PepsiCo (NYSE: PEP), recently shorn of its low-return restaurant business.

Description: After spinning off Tricon Global Restaurants (NYSE: YUM) to shareholders in November, PepsiCo now consists of two businesses that can only be called great and greater. The company has its core Pepsi Cola business, which is the number two global provider of soda pop in the world. While any comparison to number one Coca-Cola normally has Pepsi Cola pale in comparison, investors should keep in mind the economics of the soda business are still pretty awesome even if you are number two. PepsiCo also has the undisputed salty-snacks champion of the world, Frito Lay, under its belt. Frito Lay, simply put, is an amazing business and the company absolutely dominates the worldwide salty snacks food market. In fact, former number two Eagle Snacks went kaput last year, leaving Frito Lay with only a few regional competitors and one significant national competitor in the potato chip category -- Proctor & Gamble with Pringles.

Major brands include: Pepsi, Diet Pepsi, Mountain Dew, Slice, Mug root beer and All Sport sports drink make up Pepsi Cola's brands. Pepsi Cola also distributes 7-Up and Ocean Spray in some regions of the world through licensing agreements with their various parents. Frito Lay has Doritos, Tostitos, Lay's, Ruffles, Cheetos, Rold Gold pretzels, and Sunchips -- almost all of the major salty snack brands going.

Core Moneymakers: Pepsi, Lay's, Doritos, Tostitos, and Ruffles.

Financials: Because this is an overview, we'll only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation)?

Valuation, Growth, and Share Performance: At $36 11/16 per share, PepsiCo's market cap is $57.5 billion (share price multiplied by 1,566 million shares outstanding). With annualized sales for this fiscal year of $19.6 billion, the company trades at 2.9 times sales (which is the market cap divided by the trailing sales).

PepsiCo had $2.7 billion in cash and $3.6 billion in long-term debt. The enterprise value of PepsiCo (enterprise value was described a in our Dec. 4 report) is closer to $58.4 billion, and that value in relation to sales is 3.0. Although the absolute amount of debt is pretty significant, relative to sales, cash flow, and the cash the company has in the bank, PepsiCo is one of the more debt-free food companies we have looked at.

On the earnings per share side, PepsiCo trades at 78 times its annualized earnings per share. However, this number has been distorted because of the divestiture of the Tricon business, so we really won't pay this much mind. Much more importantly, the stock trades at 33.4 times earnings estimates for this year and 26.8 times fiscal 1998 estimates.

Investors should keep in mind that until recently PepsiCo earnings were suppressed by a lot of depreciation from the restaurants, as well as the bottling operations Pepsi Cola owns and the processing plants Frito Lay owns. Not all of this depreciation is going away, which means the actual cash generated by PepsiCo should be in excess of its earnings per share. If we decide to look more closely at PepsiCo, we will look at the cash flow the company generates and not just at the earnings.

Margins Reviewed: Again, operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.

For the last twelve months, PepsiCo had $19.6 billion in annualized sales and $2.6 billion in annualized operating income, giving operating margins of 13.3%. This is one of the higher numbers we have seen and reflects the incredible margins that Frito Lay can deliver, as it is one of the few food companies that has been able to raise prices in the last year.

Leverage reviewed: With $3.6 billion in long-term debt and $19.6 billion in sales, PepsiCo has a 18.3% debt-to-sales ratio. This level is just fine, given the company's ability to generate cash.

Capital allocation: The PepsiCo dividend is 1.4%, which is about average for an S&P 500 company. The company has been directing most of its cash flow to repurchasing stock and has decreased shares outstanding by a goodly amount over the past year. With significantly lower capital expenditure needs now that Tricon is a separate business, PepsiCo may be able to accelerate its share repurchases, which would be a boon to long-suffering PepsiCo investors who have seen their shares only perform in-line with the S&P 500 over the past few years.

The Snapshot for PepsiCo:

Ticker: PEP
Recent Price: $36 11/16

Annualized 12-month sales: $19.6 billion
Annualized 12-month oper. earnings: $2.6 billion
Operating Margins: 13.3%
Annualized 12-month EPS: $0.47

Fiscal '97 EPS estimates: $1.11 (only one quarter away)
Fiscal '98 EPS estimates: $1.37

Enterprise value to sales: 3.0
Current P/E:
P/E on 1998 EPS: 33.4
P/E on 1999 EPS: 26.8
Yield: 1.40%

Conclusion: I think PepsiCo is worth a further look, but I want to finish the survey first before I absolutely commit to this.

--Randy Befumo

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Stock   Close    Change
INTC  $71 11/16  +7/8
JNJ   $66 1/4    +15/16 
            Day        Month      Year      History
Drip         0.62%    (3.72%)   (13.96%)    (13.96%)
S&P 500      1.83%     1.62%     31.06%       2.05%
Nasdaq       1.82%    (2.19%)    21.26%      (1.78%)

Last Rec'd    Total #    Security    In At    Current
12/01/97      6.082       INTC     $81.346   $71.688
11/14/97      1.000       JNJ      $62.125   $66.250

Last Rec'd    Total # Security  In At    Value   Change
12/01/97      6.082    INTC   $494.72  $435.98 ($58.74)
11/14/97      1.000    JNJ     $62.13   $66.25   $4.13 

Base:  $1003.88
Cash:   $393.63**
Total:  $895.86

The Drip Portfolio has been divided into 41.647 shares with an average purchase price of $24.105 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 in stock by August of the year 2017.

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Sent $100 to purchase INTC on 12/19/97.