What is PEP's Intrinsic value?

PepsiCo Inc (PEP) Intrinsic Value Analysis

Executive Summary

As of May 23, 2025, PepsiCo Inc's estimated intrinsic value ranges from $80.55 to $193.61 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $193.61 +48.8%
Discounted Cash Flow (5Y) $161.12 +23.8%
Dividend Discount Model (Multi-Stage) $141.85 +9.0%
Dividend Discount Model (Stable) $137.71 +5.8%
Earnings Power Value $80.55 -38.1%

Is PepsiCo Inc (PEP) undervalued or overvalued?

With the current market price at $130.12, the stock appears to be moderately undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate PepsiCo Inc's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.47 0.51
Cost of equity 6.0% 7.7%
Cost of debt 4.0% 4.8%
Tax rate 19.7% 19.8%
Debt/Equity ratio 0.24 0.24
After-tax WACC 5.5% 7.0%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 6.2% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $91,854 (FY12-2024) to $151,877 (FY12-2034)
  • Net profit margin expansion from 10% to 10%
  • Capital expenditures maintained at approximately 6% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $161 $261,162M 82.2%
10-Year Growth $194 $305,699M 69.1%
5-Year EBITDA $158 $257,081M 82.0%
10-Year EBITDA $188 $297,998M 68.3%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 78.4%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 6.9%
  • Long-term growth rate: 2.0%
  • Fair value: $141.85 (9.0% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 7.7% (Low) to 6.0% (High)
  • Long-term growth rate: 1.0% (Low) to 3.0% (High)
  • Fair value range: $71 to $204
  • Selected fair value: $137.71 (5.8% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $9,223M
Discount Rate (WACC) 7.0% - 5.5%
Enterprise Value $132,481M - $168,905M
Net Debt $40,250M
Equity Value $92,231M - $128,655M
Outstanding Shares 1,371M
Fair Value $67 - $94
Selected Fair Value $80.55

Key Financial Metrics

Metric Value
Market Capitalization $178405M
Enterprise Value $218655M
Trailing P/E 19.04
Forward P/E 18.97
Trailing EV/EBITDA 13.00
Current Dividend Yield 405.85%
Dividend Growth Rate (5Y) 7.03%
Debt-to-Equity Ratio 0.24

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $58.08
Discounted Cash Flow (5Y) 25% $40.28
Dividend Discount Model (Multi-Stage) 20% $28.37
Dividend Discount Model (Stable) 15% $20.66
Earnings Power Value 10% $8.06
Weighted Average 100% $155.44

Investment Conclusion

Based on our comprehensive valuation analysis, PepsiCo Inc's weighted average intrinsic value is $155.44, which is approximately 19.5% above the current market price of $130.12.

Key investment considerations:

  • Strong projected earnings growth (10% to 10% margin)
  • Consistent cash flow generation
  • Conservative capital structure (Debt/Equity of 0.24)
  • Historical dividend growth of 7.03%

Given these factors, we believe PepsiCo Inc is currently moderately undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.