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Pepsi to Return to Growth in 2013

Written by on April 3, 2013

Pepsi’s wide economic moat is derived from its direct store delivery system which sells a vast portfolio of snacks and beverages, global scale, and strong brands which dominate the snack business. Pepsi has a lower Cash Flow Cushion than our typical AA- issuer as the firm has significant debt repayments over the next few years.

However, given Pepsi’s relatively low free cash flow variability, this seemingly modest ratio is more robust than it might otherwise appear. This risk is more than offset by the firm’s strong business risk score driven by its wide economic moat, solid customer/ product diversity, and low cyclicality. Worth noting is that around half of Pepsi’s revenue is generated by its snacks segment, a business that diversifies Pepsi’s revenue and has proven to be robust in both weak and strong economic environments.

We estimate Pepsi will generate $68 billion in sales and $13 billion of EBITDA in 2013 with resulting interest coverage of 13.1 times and debt leverage of 2.2 times. Debt leverage is high for the rating, but we project leverage will decline to 1.7 times in 2017. During 2013, we expect Pepsi will continue to face economic weakness in Europe and weakening soft drink demand in North America.

Nonetheless, PepsiCo is geographically diversified and we expect that its sales will continue to grow in the mid-singledigits. Additionally, the company plans to return $6.4 billion to shareholders during 2013 via dividends and share repurchases. Although rumors occasionally surface speculating that PepsiCo will break up into two separate businesses, we do not believe that will happen during 2013. Pepsi CEO Indra Nooyi has remained steadfast in the belief that the combined firm benefits from the “Power of One.” In February 2012, Nooyi stated that the combined operation derives almost $1 billion per year of synergies under the same corporate umbrella.



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