Last week management of PepsiCo. Inc. (PEP) announced earnings for 4Q and full year 2013. The results were fairly mixed with revenue increasing around 1% over 2012. North American soda consumption continues to be a drag on the growth of the company as international beverage and snacks show solid growth. The Board of Directors also announced a huge 15.4% increase in the quarterly dividend from $0.5675 to $0.655, although the new dividend rate doesn't start until the June payment. PepsiCo Inc. was trading around $78.00 on Thursday, February 20th giving a forward yield of 3.36% based on the new dividend rate.
Analysts followed by Yahoo!Finance expect PepsiCo to grow earnings 7.86% per year over the next five years and I've assumed they can grow at 6.29% (80% of 7.86%) for the next 3 years and at 4.50% per year thereafter. Running these numbers through a three stage DCF analysis with a 9% discount rate yields a fair value price of $111.09. This means the shares are trading at a 29.8% discount to the discounted cash flow analysis.
The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value. PepsiCo Inc. earned $4.32 per share in fiscal year 2013 and ended with a book value per share of $15.96. The Graham Number is calculated to be $39.39, suggesting that it is overvalued by 98.0%.
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