ACC557 – Financial Accounting Essay
ACC557 – Financial Accounting
1. Analyze each company’s history, product/services, major customers, major suppliers, and leadership and provide a synopsis of each company. The Coca-Cola (NYSE: KO ) vs. PepsiCo (NYSE: PEP ) war is one of the greatest rivalries in corporate history, just like Apple vs. Microsoft. Coca-Cola and Pepsi are the two most popular and widely recognized beverage brands in the world. They have been competing in the soft drink sector for over a century and both companies enjoy a high degree of brand consciousness globally. Both companies try to market as part of a lifestyle. At the same time, these two soda giants are among the most popular and respected dividend growth companies in the market, so let’s take a look at the Coke vs. Pepsi debate from an investor’s perspective. Coca-Cola uses phrases such as “Coke side of life” in their website, while Pepsi uses phrases such as “Hot stuff” in their web, to promote the idea that Pepsi is “in sync” with the cool side of life.
Ironically, both Pepsi and Coke have similar beginnings: both were created in the 19th century and both were the results of the experimental work of innovative pharmacists. Coke was created in 1886 by Atlanta pharmacist John Pemberton while Pepsi was developed in 1898 by North Carolina pharmacist and drugstore owner, Caleb Bradham. The history of Pepsi began with a man named Caleb Davis Bradham. He was born in Chinquapin, North Carolina on May 27, 1867. He graduated from the University of North Carolina at Chapel Hill and attended the University of Maryland, School of Medicine, around 1890. After returning to North Carolina, Mr. Bradham taught public school for about a year, and later opened a drug store on the corner of Middle and Pollock Streets in downtown New Bern. In 1902, Bradham launched the Pepsi-Cola Company in the back room of his pharmacy and on December 24, 1902 the Pepsi-Cola Company was incorporated in the state of North Carolina.
The business began to grow, and on June 16, 1903, “Pepsi-Cola” was officially registered with the U.S. Patent Office. In 1910 there were 250 Pepsi-Cola franchises in 24 states and in January of that year the Pepsi Cola Company held their first Bottler Convention in New Bern. In 1926, Pepsi received its first logo redesign since the original design of 1905. In 1929, the logo was changed again. In 1931, at the depth of the Great Depression, the Pepsi-Cola Company entered bankruptcy. Assets were sold and Roy C. Megargel bought the Pepsi trademark. Megargel was unsuccessful, and soon Pepsi’s assets were purchased by Charles Guth, the President of Loft, Inc. Today PepsiCo, Inc. (PepsiCo) is a global food and beverage company. Through the Company’s bottlers, contract manufacturers and other partners, the Company makes, markets, sells and distributes a range of foods and beverages in more than 200 countries and territories.
PepsiCo is organized into four business units: PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of its Latin American food and snack businesses (LAF); PepsiCo Americas Beverages (PAB), which includes all of its North American and Latin American beverage businesses; PepsiCo Europe, which includes all beverage, food and snack businesses in Europe and South Africa, and PepsiCo Asia, Middle East and Africa (AMEA), which includes all beverage, food and snack businesses in AMEA, excluding South Africa. In 2011 the company had revenues of $66.504 billion and a net income of $6.462 billion. The company has around 29700 employees worldwide. PepsiCo is also listed on the NYSE and is also a part of the Dow Jones Industrial composite. Pepsi Co’s current chief executive is Indra Krishnamurthy Nooyi who has been at the helm since 2006. The history of Coca-Cola began with Col. John Pemberton.
He was wounded in the Civil War, became addicted to morphine, and began a quest to find a substitute to the dangerous opiate. The prototype Coca-Cola recipe was formulated at Pemberton’s Eagle Drug and Chemical House, a drugstore in Columbus, Georgia, originally as a coca wine. In 1885, Pemberton registered his French Wine Coca nerve tonic. In 1886, when Atlanta and Fulton County passed prohibition legislation, Pemberton responded by developing Coca-Cola, essentially a nonalcoholic version of French Wine Coca. By 1888, three versions of Coca-Cola – sold by three separate businesses – were on the market. A co-partnership had been formed on January 14, 1888 between Pemberton and four Atlanta businessmen: J.C. Mayfield, A.O. Murphey; C.O. Mullahy and E.H. Bloodworth. Charley Pemberton’s record of control over the “Coca-Cola” name was the underlying factor that allowed for him to participate as a major shareholder in the March 1888 Coca-Cola Company incorporation filing made in his father’s place. More so for Candler especially, Charley’s position holding exclusive control over the “Coca Cola” name continued to be a thorn in his side.
Today The Coca-Cola Company is an American multinational beverage corporation headquartered in Atlanta Georgia. It is best known for its flagship product Coca-Cola. The Company owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages, such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. It owns and markets a range of nonalcoholic sparkling beverage brands, which includes Coca-Cola, Diet Coke, Fanta and Sprite. The Company’s segments include Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling Investments and Corporate. In January 2013, Sacramento Coca-Cola Bottling Company announced that it had been acquired by the Company. Effective February 22, 2013, Coca-Cola Co acquired interest in Fresh Trading Ltd.
In November 2013, Coca-Cola Company and ZICO Beverages LLC announced that Coca-Cola has acquired the ownership interest in ZICO. The company offers more than 500 brands in over 200 countries and serves over 1.7 billion servings per day. The company’s stock is listed on the NYSE and it is a part of the DJIA, S&P index and the Russell 1000 index. The company had revenues of $48.01 billion in the year 2012 and a net income of $9.01 billion. Coca-Cola has a total asset base of $86.17 billion and 146,200 employees worldwide. Pepsi and Coca-Cola customers include authorized bottlers and independent distributors, including foodservice distributors and retailers. Both companies normally grant their bottlers exclusive contracts to sell and manufacture certain beverage products bearing the respective trademarks within a specific geographic area.
These arrangements provide both companies with the right to charge their bottlers for concentrate, finished goods and bottled water (Aquafina & Dasani) royalties and specify the manufacturing process required for product quality (Wyatt, 2012). Since The Coca-Cola Company and PepsiCo do not sell directly to the consumer, they both rely on and provide financial incentives to their distributors to assist in the distribution and promotion of their respective products. For the independent distributors and retailers, these incentives include volume-based rebates, product placement fees, promotions and displays. For their bottlers, these incentives are referred to as bottler funding and are negotiated annually with each bottler to support a variety of trade and consumer programs, such as consumer incentives, advertising support, new product support, and vending and cooler equipment placement. Consumer incentives include coupons, pricing discounts and promotions, and other promotional offers.
New product support includes targeted consumer and retailer incentives and direct marketplace support, such as point-of-purchase materials, product placement fees, media and advertising. Pepsi supplies its concentrates to restaurants that they have contracts with. Another market segment that Pepsi targets are grade schools, colleges and universities. PepsiCo main suppliers include; Sandora, Sadochok and Toma juice brands which supply Pepsi’s concentrate, while G.D Searle and company supplies PepsiCo with NutraSweet for PepsiCo diet soft drinks. Ball Metal Beverage Packaging produces Pepsi’s aluminum cans. Amcor produces PETS for Pepsi. It also manufactures plastic bottles for Gatorade (Wyatts, 2012). PepsiCo products generate approximately $108 billion in cumulative annual retail sales. Here are PepsiCo products which had revenues of over $1 billion as of 2009; Pepsi cola, Mountain Dew, Lays, Gatorade, Tropicana, 7up, Doritos, Lipton teas, Quaker foods, Cheetos, Miranda, Ruffles, Aquafina, Pepsi max, Tostitos, Sierra mist, Fritos and Walker’s. PepsiCo foods generated 63% of the net worldwide revenues while 37% of the revenue came from beverages in 2012.
Pepsi brand generated the most revenues with about $20 billion in revenues, followed by mountain dew with around $12 billion, the others followed in the order they are listed in above with Walker’s potato chips being the last of the 21 brands listed above. PepsiCo distributes its own product in parts of Europe while it uses contract manufacturers in other areas (PepsiCo, 2013). The main target markets for PepsiCo include the age group 14-30 which has always been the main target market for Pepsi. Historically, Pepsi has always targeted teens with heavy advertising, teen-oriented ads. Coca-Cola customers include large international chains of retailers and restaurants and small independent businesses. Coca-Cola works with them equally to create mutual benefit. Together with their bottling partners, they serve their customers through account management teams, providing services and support tailored to their needs.
Coca-Cola’s suppliers offer different services from packaging, information technology services, bottles and package labeling. The Coca-Cola Company’s main suppliers include; Alcan packaging which offers plastic bottle labels, Alcoa plastic caps, and Cannon provides steam boilers, water treatment systems and plastic products. EDS provides information technology services to Coca- cola for its operation in Latin America. Coca-Cola purchases syrups and concentrates from TCCC and other licensors to manufacture products. They also purchase their raw materials, other than concentrates, syrups, mineral waters, and sweeteners, from multiple suppliers. The beverage agreements with TCCC provide that all authorized containers, closures, cases, cartons and other packages, and labels for the products of TCCC must be purchased from manufacturers approved by TCCC.
Leadership at PepsiCo – Indra Nooyi is the CEO of Pepsi she describes her leadership style as “Performance with Purpose,” a mantra that has become central to the PepsiCo journey over these past seven years. Nooyi has chronicled five leadership lessons that together form the roadmap for global leaders in the 21st century (Snyder, 2013). 1. Balance the short-term and long-term. Today’s leaders are, all too often, driven only by short-term quarterly results, yielding decisions that are counterproductive for the longer-term health of the organization and society. Effective leaders must strike a balance.
2. Develop a deep understanding of public/private partnerships. Nooyi points out that many private sector leaders treat the public sector (NGOs, governments) as the enemy—and vice versa. ” She believes that NGO leaders do their jobs as a “labor of love.” Treating them with respect and understanding, as opposed to distain and condescension can go a long way (Snyder, 2013).
3. Think global, act local. Nooyi argues this is not an outdated cliché, but instead, sounds advice that can yield innovative, out-of-the box solutions. She showed part of a nine-minute commercial video, produced for the 2012 Chinese New Year.
4. Keep an open mind to adapt to changes. The art of asking probing questions to facilitate dialog and exploration. All-too-often, leaders close their minds to dissent, cutting off much needed debate. To lead in an ever-changing world, Nooyi says, leaders must adapt and stay nimble (Snyder, 2013).
5. Lead with your head and your heart. Leaders must develop deep emotional intelligence, and bring “their whole selves to work every day.” They must continually remind themselves that everyone who works for them is a unique human being and seek to strengthen this human connection and bond. Leadership at Coca-Cola is expected from the CEO Muhtar Kent. He runs his company by being an entrepreneur and focusing on cash. He calls his leadership philosophy “constructively discontent.” (Bhasin, 2012). – According to Kent his preferred description of his leadership – means ‘It’s all about an entrepreneurial mentality. Injecting entrepreneurial religion involves getting Coke’s 146,000 employees to think like owners. “People need to feel like they are chasing pennies down the hallway.” It’s about the respect for cash,” Kent told Sellers. His devotion to that manifests itself in many ways.
For instance: And at Coke, managers have to pay $15 a month if they want to use their cellphones for personal calls (and yes, that rule applies to the CEO too). “When you don’t see cash, all sorts of things go wrong,” he told Sellers. “You overspend as an individual and overspend as a company.” Kent suggests that people need to be connected with the cash impact of choices and decisions in order to make rational choices. 2. Based on the stock price for the timeline listed below, present a graph that illustrates the stock price of each company. Indicate conclusions that can be drawn based on the trend:
a. The day of its initial public offering
b. January 1, 2012
c. January 1, 2011
d. January 1, 2010
PepsiCo’s initial public offering was $23 a share in 1999. Coca-Cola’s initial public offering was in 1919, by a consortium of businessmen led by Ernest Woodruff, Robert W. Woodruff’s father, purchased The Coca-Cola Company for $25 million. The business was re-incorporated as a Delaware Corporation and its stock was put on public sale on the New York Stock Exchange, with common stock at $40 per share, and preferred stock at $100 per share. The chart below shows the changes in the stock prices of the organization from January 1, 2010, January 1, 2011 and January 1, 2012.
While PepsiCo has outgrown Coca-Cola in terms of revenue over the last five years, Coke is doing better than its rival when it comes to earnings-per-share growth over the same period. Coke has considerably higher profit margins than Pepsi, in the area of 21.8% at the op Even if both companies have seen decreasing margins due to bottler acquisitions over the last years, Coke’s dominance in drinks seems to provide an advantage when it comes to margins on sales. As incomes rise, so does health awareness. But does any of this actually matter to Coke and Pepsi shareholders? Pricing here is complicated. Coke may have the most valuable brand in the world, and Pepsi’s brands are also quite valuable. It is the value of these brands that allows the stocks to trade at premiums to the market even while their basic products are seeing weak demand.
3. Research and summarize at least two (2) news events (this may include mergers, acquisitions, or political issues) that occurred from 2010 to the present day and the potential impact on the stock price of each company. Indicate how this influences your investment decision related to the company. Events that occurred in 2013 and the potential impact to be on the stock price for both PepsiCo and Coca-Cola. A New York Times article, published October 1st 2013 by Keith Bradsher, expressed concern about land grabs related to the sugar industry and the companies that supplied from it. The advocacy group Oxfam has accused three big international food companies of buying sugar from what they described as a plantation that had unfairly taken land from farmers in Cambodia and Brazil without proper compensation (Bradsher, 2013). Oxfam, called on the food and beverage companies to disclose more about the sources of their sugar supplies. It contended in a report that sugar, soybeans and palm oil were the three crops producing the fiercest competition for land by large, often foreign, investors.
The group’s report assailed three companies by name: Coca-Cola, PepsiCo and Associated British Foods. Coca-Cola stated that it asked suppliers “to recognize and safeguard the rights of communities and traditional peoples to maintain access to land and natural resources. According to” Amanda Rosseter, a company spokeswoman, Coca-Cola does not buy sugar directly from farms but from larger suppliers. These purchases have included buying from Tate & Lyle Sugars, which in turn has bought limited quantities from Cambodia, but Tate & Lyle Sugars has already said that it has no further plans to buy from Cambodia. PepsiCo stated in a statement that it also paid attention to social responsibility issues in its contracting. The company added that it had “reached out to the suppliers; they have assured us they are in compliance with applicable laws.” How will it impact the stock price of Coca-Cola and PepsiCo being associated with the idea of taking land away from indigenous poor people so they have access to cheap sources of sugar?
In another New York Times article published December 12th 2013 by Stephanie Strom, PepsiCo sealed an unusual deal that goes far beyond the soda wars, PepsiCo is expected to announce soon that it is unseating Coca-Cola as the beverage supplier to one of the nation’s hottest restaurant chains, Buffalo Wild Wings (Strom, 2013). The deal, which will start with the introduction of Pepsi, Mountain Dew and other drink brands in 2014, is the biggest sign so far of how PepsiCo is deploying its thriving snacks business and Quaker, which it also owns, to offset declines in its traditional soda business. “But what this partnership does is give Buffalo Wild Wings a full access pass to all that PepsiCo has to offer.” And the deal also allows Buffalo Wild Wings to capitalize on PepsiCo’s relationships with major sports organizations like the National Football League and Major League Baseball.
4. Provide an overall financial analysis for each company that highlights the key characteristics for investment and how this may impact an investor’s decision. While PepsiCo has outgrown Coca-Cola in terms of revenue over the last five years, Coke is doing better than its rival when it comes to earnings-per-share growth over the same period. Coke has considerably higher profit margins than Pepsi, in the area of 21.8% at the operating level for the soda giant versus 14.3% for the salty snacks leader. Even if both companies have seen decreasing margins due to bottler acquisitions over the last years, Coke’s dominance in drinks seems to provide an advantage when it comes to margins on sales.
Coca-Cola has also done better than PepsiCo in terms of reducing share count via stock buybacks; the company has reduced the amount of shares outstanding by 4.6% over the last five years while Pepsi has not managed to reduce its share count by more than 1.3% over that period. On the other hand, the trend could be reversing in the middle term as Pepsi’s buyback program for 2013 will likely have a bigger impact on shareholder’s returns. As of the third quarter of 2013 Coke had spent $2.8 billion in stock buybacks during the first nine months of the year, and the company is planning to end 2013 with a repurchase of between $3.0 billion and $3.5 billion for the full year. Pepsi is planning to end 2013 with nearly $3 billion in buybacks. Even if Coke repurchases $3.5 billion during the year, that would represent roughly 2% of the company’s $174.8 billion market cap. While Pepsi’s buyback would still be smaller in absolute terms, $3 billion would account for a slightly higher 2.3% of the company’s market value around $130.1 billion.
Coke’s buyback program has been bigger in recent years, but the company may be losing that advantage over PepsiCo in 2013, so it’s hard to tell which company will return more capital to shareholders via repurchases in the coming years. 5. Based on your review of the financial data for each company, indicate the accuracy and reliability of the data for making investment decision. Provide support for your conclusion. When the ratios of the two companies are compared, Coca Cola has a higher return on asset ratio, a higher dividend yield and a higher dividend growth rate over the last five years. Coca Cola also has a higher P/E ratio but PepsiCo has a higher EPS compared to Coca Cola. From the above information I would advise an investor to buy Coca Cola stock as compared to PepsiCo.
My recommendation is based on expected earnings from the stock in terms of dividends and dividend yield, return on assets and the P/E ratio. A higher return on assets shows that a company is utilizing its assets effectively and efficiently in generating earnings. A higher P/E ratio also shows that the investors expect more earnings from the stock. Both Coca-Cola and PepsiCo are Dividend Aristocrats, meaning they have been able to increase dividends over the last 25 consecutive years. Coke has an amazing track record of 51 consecutive dividend increases in a row, while Pepsi has a smaller but still impressive trajectory of 41 consecutive dividend increases. When it comes to dividend growth, however, Coke has a better trajectory than Pepsi over the long term, and the company also delivered a bigger increase for 2013 with a 10% hike versus Pepsi’s 6% dividend rise for the year.
6. Recommend which company you consider as the better investment for your client and how you will present your recommendation. Support your recommendation with data from your analysis. Recommendations for Investment – In order to make an investment in a particular organization, it is necessary for the investors to make sure that, the investors consider certain key things. The points to be considered by the investors include earning per share, net income and trend in movement of the price of the security of the organization (Pogue, 2010). The price of the stock of the organization Coca Cola Company is $37.67 whereas; the price of stock of PepsiCo is $70.27. This shows that, PepsiCo has a better stock price in comparison to Coca Cola. The earnings per share of PepsiCo is $3.76 whereas, the earnings per share of Coca Cola Company is $1.91.
PepsiCo has net income of $6443000 whereas; Coca Cola Company has net income of $8572000. Both Coca-Cola and PepsiCo have earned their rights to be among the most popular dividend growth names in the market due to their rock-solid competitive strengths and time-tested dividend growth trajectories. However, Coke has been able to deliver superior dividend growth over the last few years thanks to its higher profitability and earnings growth rates. Valuations are very similar so, for the same price of a Pepsi, I’m having a Coke. Therefore, from this, one can make a conclusion on the expected future earnings and capital gains. The information deducted from the ratios presented above show that Coca Cola is the best buy. This therefore, shows that before buying a stock there is a rigorous exercise that must be undertaken to gather financial information and from that deduct the effect that information will have on the stock prices. (Cardenal, 2013).
1. Bhasin, Kim (2012). Coca-Cola CEO Muhtar Kent Explains Why Everything’s All About Cash. Retrieved on March 14, 2014 http://www.businessinsider.com/coca-cola-ceo-muhtar-kents-leadership-philosophy-2012-5 2. Bradsher, Keith (2013). Worried About Land Grabs, Group Presses 3 Corporations to Disclose Sugar Purchases. Retrieved on March 12, 2014 http://www.nytimes.com/2013/10/02/business/3-corporations-pressed-to-disclose-data-on-sugar-purchases.html?ref=pepsicoinc&_r=0 3. Cardenal, Andres (2013) Better Buy: Coca-Cola vs. PepsiCo. Retrieved on March 12, 2014 http://www.fool.com/investing/general/2013/11/06/better-buy-coca-cola-vs-pepsico.aspx 4. -Cola (2013). Bloomberg Business Week. Retrieved on March 12, 2014 investing.businessweek.com/research/stocks/financials/ratios.asp? 5. “History of Pepsi vs. Coke Rivalry at Rivals4Ever”. Rivals4ever.com.