PepsiCo Valuation

Ilya Reppo and Michelle Yan 4/13/2010

Contents
Company Description................................................................................................................. 3
1.1 1.2 1.3 Brands ............................................................................................................................ 3 Sources of Revenue ...................................................................................................... 3 Channels of Distribution............................................................................................ 4

Competitive Analysis
2.1 2.2 2.3 2.4 2.5 2.6 2.7 Competitive Environment .......................................................................................... 5 Competitive Advantages ............................................................................................ 6 Competitive Risks ........................................................................................................ 8 Relevant Current Events ............................................................................................. 9 Effect of Recent Market Trends ................................................................................ 10 Other Mergers and Acquisitions.............................................................................. 10 Revenue and Net Income .......................................................................................... 11

Valuation
3.1 3.2 3.3 3.4 3.5 Relative valuation ...................................................................................................... 12 Discounted cash flow ................................................................................................ 13 Estimating free cash flow to equity ......................................................................... 13 Cost of equity.............................................................................................................. 14 Valuation and Sensitivity analysis .......................................................................... 15

Conclusion
4.1 Recommendations ..................................................................................................... 16

Appendices
Appendix A: Increasing Obesity .............................................................................................. 17 Appendix B: Socially Conscious Company Rankings .............................................................. 17 Appendix C: Financials ............................................................................................................ 18 Appendix D: Financials ............................................................................................................ 18

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Company Description
PepsiCo was started in the 1890 when Caleb D. Bradham and a group of his acquaintances stumbled upon a new cola drink. With the help of his friends, he decided that the drink had a broader commercial demand and took the product to the market. In 1923 the company went bankrupt and sold to Roy C. Megargel who restructured the firm as the National Pepsi-Cola Company. Today PepsiCo is a snack, food, and beverage company. It has sense grown to have an international presence in over 200 countries, generating revenues of over $43 billion dollars and employing more than 198,000 people. Pepsi is divided into three main business units: the PepsiCo Americas Foods (PAF) division, the PepsiCo Americas Beverages (PAB), and the PepsiCo International (PI). These three units are then further broken down into 6 business divisions. They are as follows: Frito Lay North America (FLNA) Quaker Foods North America (QFNA), Latin America Foods (LAF), Pepsi American Beverages (PAB), Europe, and Asia Middle East Africa (AMEA).

Brands
Pepsi owns numerous brands including: including Alegro, Amp Energy, Aquafina, Aunt Jemima, Capn Crunch, Cheetos, Chesters Fries, Chipsy, Cracker Jack, Diet Pepsi, Doritos, Duyvis, Frito-Lay, Fritos, Fruktovy Sad, Frustyle, Gamesa, Gatorade, G2, Grandmas, Izze, Kurkure, Lays, Life, Manzanita Sol, Matutano, Mirinda, Miss Vickies, Mothers, Mountain Dew, Mug, Munchies Snack mix, Naked, Near East, Paso de los Toros, Pasta Roni, Pepsi, Pepsi Max, Pepsi One, Propel, Quaker, Quaker Chewy, Quakes, Red Rock Deli, Rice-A-Roni, Rold Gold, Ruffles, Sabritas, Sakata, 7UP and Diet 7UP (outside the United States), Santitas Tortilla Chips, Sierra Mist, Simba, Smartfood, Smiths, Snack a Jacks, SoBe, SoBe Lifewater, Sonrics, Stacys, SunChips, Tonus, Tostitos, Trop 50, Tropicana, Tropicana Pure Premium, Tropicana Twister, TrueNorth, V Water, Walkers and Ya.

Sources of Revenue
Contrary to popular belief, most of the revenue that Pepsi generates does not come from its soft drink or beverage division. In fact, the majority of the revenue comes from the Frito Lay snack foods segment. Below is a breakdown of the revenue per division for the past 3 years as well as a graph showing the % of total revenue by segment.

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Frito Lay North America Net Revenue, 2009 Net Revenue, 2008 Net Revenue, 2007 $ 13,224 $ 12,507 $ 11,586

Quaker Foods North America $ 1,884 $ 1,902 $ 1,860

Pepsi Pepsi International Bottlers TOTAL

$ 18,008 $ 17,713 $ 15,769

$ 10,116 $ 10,937 $ 11,090

$ 43,232 $ 43,251 $ 39,474

2009 Revenue % by segment

12% 15% 24% 31%

Frito-Lay NA Quaker Foods Latin America Foods Pepsi Carbonated and Non Europe

13%

5%

Asia, Middle East, Africa

Channels of distribution
Before the merger with the bottling companies, most of the revenue generated for Pepsi came as a result from the sales of their fountain concentrated syrup as well as their snack foods divisions. The products are delivered directly to stores or to customer warehouses where they can be divided up and shipped to their appropriate locations. In light of the merger with the bottlers, Pepsi will realize significant advantages in relation to their distribution system of various carbonated and non-carbonated carbonated bever beverages, ages, especially the smaller production run products. Because the bottlers have been a separate entity, they would resist accepting the products whose volume load was small. Now, due to the merger, PepsiCo will have full control of their distribution system m allowing them to experimental with products at a smaller production volume. This will ultimately aid them in their international and North American growth because it will allow them to experiment with the success of a larger multitude of products in a mo more seamless manner.

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Competitive Environment
Pepsi is a uniquely positioned company in that it incorporates both food processing and nonalcoholic beverage (NAB) segments in the booming convenience foods sector. Convenience foods are part of the fast moving consumer goods subsector which is marked by quick product turnover and relatively low cost. Its main competitor in the non-alcoholic beverage segment, Coca-Cola, forms a global reaching duopoly with Pepsi. Both companies have competed fiercely to gain market dominance by growing internationally and expanding product offerings from carbonated drinks to a wide variety of drinks in the non-alcoholic beverage category including teas, water, juices, coffee drinks, and energy drinks. The following figures showing current market share breakdowns:
U.S. Savory Snacks
% Retail Sales in Measured Channels
Other 24%

U.S. Liquid Refreshment Beverage Category Share

% Volume in Measured Channels
PepsiCo 40%

Other 16% Kraft 5% Nestle 8% PepsiCo 23%

Snyder's 2% Private Label 9% Conagra 4% Campbell 2% Kellogg's Procter & 5% Gamble General Mills 2% 2% Kraft Foods 10%

DPSG 10% Private Label 16%

Coca-Cola 22%

We also evaluated three other companies that matched competitive, segment or geographic similarities with Pepsi: Dr. Pepper Snapple as a smaller drink distributer,____ as an drink distributer in South American and Kraft Foods as a comparative base for Pepsis food processing segment. Current statistics for Pepsis competitors are found below:
Company PepsiCo Coca-Cola Kraft Foods Grupo Bimbo SAB Dr. Pepper Snapple Current price (4/11/09) 66.39 54.29 30.08 108.16 35.45 Price at purchase (2/11/10) 61.19 54.22 28.99 86.30 27.17 Market Cap 109,722 125,145 44,499 10,402 9,008 Dividend Yield 2.89 3.24 3.86 0.43 1.69

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Competitive Advantages
PepsiCo is increasing the stickiness of products. Pepsi products have increased product stickiness- the ability to gain repeat customers- and have established a defensible economic moat for the company over the recent past. By taking products and attaching values that people could desired, Pepsi was able to transform from a product to an identity. Specifically, Pepsi engineered the rebranding of its products to be more aspirational in its mid-to late 1990s turnaround by then-CEO Roger Enrico. By giving the products a cooler aesthetic through successful rounds of focused advertising campaigns, Pepsi products gained traction on Coke and effectively differentiated its image. Products in this category will also become more inelastic as convenience grows as a value among developed nations. As a result, PepsiCos core revenues come from a loyal, recurring customer that tends to feel strongly about a particular Pepsi product. Pepsi has diverse product lines within the convenience products industry. Pepsi has a large distinction from their competitors: a diverse and market segment leading product line. Excluding cola drinks, PepsiCo performs much better all drink segments compared to Coca-Cola as shown in the above figure. Gatorade has 81% of the market share in the industry.

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PepsiCo vs. Coca-Cola market share by segment (2009)

Companies PepsiCo Soft Drinks Pepsi 13.6% Coca-Cola Classic 20.40% Orange Juice Tropicana > 40% Minute Maid < 20% Bottled Water Aquafina 15.1% Dasani 8.7% Iced Tea Lipton 32.8% Nestea ~16% Specialty Drinks Starbucks Frappuccino Sobe

Coca-Cola

N/A

Sources: Annual reports & Industry surveys

While cola drinks have historically dominated the non-alcoholic beverage segment, the last decade has seen a reversal of this trend in favor of non-carbonated drink growth (NCDs), benefiting Pepsi. Unlike Coca-Cola, PepsiCo also has snack and quick preparation food categories as a result of its buyouts of FritoLay in 1965 and Quaker Oats in 2000 at 2.84x revenues. Pepsi will seek to continue its diversification strategy through planned experimentation with the flavored water and energy drink segments and healthier products in cola and snack segments. There are several reasons why a diverse product strategy works for Pepsi. One, Pepsis products do not cannibalize from each other; revenues for both drinks and food products rose when they were paired near each other at convenience store checkouts. Its product mix also balances the seasonality of their products lines as food products sell higher in the cooler months and drink sales sell higher in the warmer months. Last, Pepsi stands to gain as health conscious consumers switch from colas and soft drinks to water and tea because its non-carbonated drink brands are category leaders. Its customer base of Millenials and Generation Y-ers will provide decades of recurring revenues. The majority of PepsiCos revenues come from a customer base that is roughly 18-35. The younger customer demographic gives PepsiCo 30 to 40 years of protected revenues. Coca-Cola, on the other hand as the longer established company, has a largely baby boomer customer base with an average much shorter life span. Since both companies value proposition relies on the recurring revenues streams generated by their core customer, PepsiCo will replace Coca-Cola as the more successful company in the long run. Additionally, as Pepsi buyers age, their income will grow increasing demand and inelasticity for Pepsi products. Teens are the leading consumers of non-alcoholic beverages. Children, teens and young adults 18-24 are the leading consumers of NABs and are more willing than the average adult to try new products, such as sports or energy drinks. The 2009 Mintel subsector report indicates that of the 18-24 age group, 66% are likely to drink soda, more than the 55% for the average respondent and are more likely to take energy shots (11%) than the
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average respondent (5%). Of teens, 89% drink soda, 88% drink fruit juice, 75% use thirst quenchers, 75% use bottled water, 48% use RTD ice tea and 35% use energy drinks. Additionally, teens have the least sensitivity to the health implications of sugary carbonated drinks. Pepsi has been able to capture new market entrants (teens) with a focus on being hip and young. According to a 2008 study, Pepsi ranked 5th coolest brand among teenagers and was the only food or drink company on the list among powerhouses Sony and Nike. Since one of the most successful ad campaigns in 1984 that featured some of the hottest celebrities, Pepsi has angled itself to be tech-forward, fashion conscious, celebrity focused and socially conscious (See Appendix B). With our cultural emphasis on being young, Pepsis advertisements are not only attractive to new market entrants but also to a broad spectrum of existing customers and people who want to be young and hip. Pepsi recently elected to not participate in Super Bowl advertisements to launch the Pepsi Refresh Project, a digital ad campaign that distributes funding for the most popular, socially innovative ideas.

Competitive Risks
Changing customer preferences towards healthy and socially conscious alternatives. Evidence has been growing against the fast food and the convenience products industry with multiple studies linking obesity, cancer and health complications with the sugar and preservatives in these products. In particular, high fructose corn syrup, a common ingredient in Pepsis colas and snacks has come under criticism since a 2004 study showed a correlation between the growing use of high fructose corn syrup and the obesity epidemic. Revenues for fast food and convenience food companies could suffer from increased media attention on eating healthy and preventing obesity (See Appendix A). Celebrities who have begun talking about obesity include first lady Michelle Obama, Oprah Winfrey and recently, Jamie Oliver, host of Jamie Olivers Food Revolution series. Added pressures have recently caused Pepsi and Coke to drop out of vending machine sales in elementary and middle schools. Despite the short term negative impact of this to cola industry, we feel that Pepsi is well equipped to handle these challenges to its sales and image in the long run. Also, we do not expect that Pepsis withdrawal from the school systems will be a permanent move. The company is experimenting with replacing the use of high fructose corn syrup with agave nectar, a naturally occurring, sugar-free product in its drink lines. Meanwhile, PepsiCo is pushing sales of SunChips, its popular line of multigrain snacks by running ads that feature its new, fully biodegradable chip bag. Losses of key customers and trade consolidation. Efficiencies of globalization are continuing through the streamlined channels and cost reductions of a few, large multinationals. Walmart is a key player in the retail sector and is aggressive about cost cutting, negatively affecting profit margins of suppliers. 33% of 2009 revenues came
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from five major retailers and 13% of revenues (up from 9.9% in 2008) came from Walmart and its subsidiary, Sams Club. To forestall untenable future increases of lower pricing and higher promotional demands from Wal-mart, Pepsi lists maintaining a good working relationship with Wal-mart as one of its keys to success. A major reason that we think that Wal-mart will not try to squeeze PepsiCo is because the companys popular and diverse product mix make Pepsi a valuable supplier for Wal-mart. Food safety and regulatory risk. As evidenced by the Toyota recall this year, a recall of products concerning consumer safety could have a large negative impact on a companys reputation, especially one that receives as much media coverage as Pepsi does. Much of Pepsis challenge in going global is monitoring food quality through manufacturing and food integrity through distribution stages. In line with plans to establish more control over its distribution networks, Pepsi successfully completed a $7.8 billion repurchase of two of its major North American bottlers on February 26th. The restructuring aims to also give the company more flexibility in terms of evaluating new products and sending them to market quicker. Currently regulated by the Food Safety Act, Pepsis modus operandi from operating to distributing stages could also be also be affected by new governmental regulations. For instance, Proposition 65 requires companies selling in California to place warnings on products containing ingredients known to cause cancer or other birth defects. Increased volatility of international markets and commodity pricing. Recent trends indicate growing volatility of international markets with doubt being cast on the viability of major currencies such as the US dollar, the Japanese yen, the Australian dollar and the euro. As developed nations struggle with sovereign debt loads which threaten to affect credit ratings significantly, volatility will continue in the currency markets and multinationals such as Pepsi need to hedge effectively to prevent large losses. Other subcategories within country risk such as political unrest, could result in negative externalities for Pepsis business operations.

Relevant Current Events

Pepsi spun off its bottlers in 1999 into separate companies. This was done in order to decrease the load on balance sheet as well as allow the bottlers greater access to the capital markets. Pepsi has recently completed a buyback of PBG and PAI (more on the rational later). At the time of the PBG Merger, each share of PBG common stock outstanding could have been converted into the right to receive either 0.6432 of a share of PepsiCo common stock or$36.50 in cash. The merger is valued at $7.8 billion dollars. The purchase will give PepsiCo a full 80% control of its American beverage distribution market and is expected to save the company $300 million. Most of the financing for this acquisition will come in the form of newly expanded revolving debt, one time loans, as well as the cash proceeds from the sale of treasury stock. Lenders
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provided upward of $4.0 billion dollars in bridge financing in order for PepsiCo to complete the acquisition. Due to the new debt load, Standard & Poor's decreased the corporate credit rating on the company to 'A' from 'A+' and decreased the senior unsecured debt ratings to 'A-' from 'A+. Also, as a result of the purchase Interest expense in 2011 is scheduled to double from $347 million to $666 million. Because of the merger the company's PepsiCo Americas Beverages (PAB) segment has been restructured. Eric J. Foss, formerly chairman and CEO of The Pepsi Bottling Group, will now be in charge of combined bottling operations named Pepsi Beverages Company (PBC). Massimo F. d'Amore will stay on at the helm of Gatorade, Tropicana and Latin America Beverages as CEO of PepsiCo Beverages Americas (PBA). The Pepsi Bottling Group and PepsiAmericas in Europe will be consolidated into PepsiCo Europe, which will led by CEO Zein Abdalla. Because of the merger, more of the workforce will now belong to a labor union. Over 25% of the workforce will now be unionized. Pepsi CO is engaged in various legal disputes, however, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, results of operations or cash flows. The entire soft drink market has been affected by the global recessions. All across the industry sales volumes have been decreasing. PepsiCo, because of its diversified beverage portfolio, has seen smaller than average decreases on this front. Due to success of the current health movement, Pepsi has voluntarily decided to remove its fullcalorie, sweetened drinks from schools in more than 200 countries by 2012, becoming the first soft drink producer to do so.

Effects of Recent Market Trends

Traditionally, NABs are not very elastic and have been able to generate repeat business along with brand loyalty. Since the recession, however, 50% of NAB buyers changed their buying patterns as a result of the recession, especially households with children. Salty snacks have proven to be more recession-proof segment and have been able to increase sales by over 15% from 2007-2009 through brown-bagging it and eating-in trends.

Other Mergers and Acquisitions

Because PepsiCo is pursuing a more diversified and global strategy into the snack food and beverage arena, it has been involved in a number of acquisitions of international brands. The majority of these acquisitions were either in Europe, Asia, Middle East, Africa. In 2008, we used $2.7 billion for our investing activities, primarily reflecting $2.4 billion for capital spending and $1.9 billion for acquisitions. Significant acquisitions included our joint acquisition with PBG
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of Lebedyansky in Russia and the acquisition of a snacks company in Serbia. The use of cash was partially offset by net proceeds from sales of short-term investments of $1.3 billion and proceeds from sales of PBG and PAS stock of $358 million. In 2009, the net impact of acquisitions contributed 2 percent to the AMEA snacks volume growth. In total, acquisitions added 2 percent to the operating profit growth.

Revenue and Net Income

Pepsi has seen a steady 10 year average revenue growth over of 9%. Below is a breakdown of the sources of revenue per segment for the past 5 years. All of the revenue generated outside of American borders has been consolidated into the Pepsi International category. It becomes clear that the majority of the revenue generated by PepsiCo comes from international sources. Also, the clear stagnation in revenue growth from 2008 to 2009 can be attributed to the decline of the North American liquid refreshment sales volume. In 2009 the decrease was 15%. Also, the acquisition of PBG and PAS added to the international beverage sales decline in Latin America. In addition to the decreases in beverage volume, Pepsi also lost money in their foreign exchange market. The strength of the dollar and other negative effects due to the changes in foreign currency reduced operating profit growth by 6 percentage points.
FLNA $ 13,224 $ 12,507 $ 11,586 $ 10,844 $ 10,322 2.0% QFNA 1,884 1,902 1,860 1,769 1,718 0.1% PI 18,008 17,713 15,769 12,959 11,376 5.2% PAB 10,116 10,937 11,090 9,565 9,146 0.7% TOTAL $ 43,232 $ 43,251 $ 39,474 $ 35,137 $ 32,562 7.9%

Net Revenue, 2009 Net Revenue, 2008 Net Revenue, 2007 Net Revenue, 2006 Net Revenue, 2005 Average Weighted Growth

$ $ $ $ $

$ $ $ $ $

$ $ $ $ $

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Relative Valuation
We looked at relative valuation of Pepsi next to its competitors as the first gauge in valuing the company. Ratios are current as of 4/11/10: EV/T12M Price/Sales Price/FCF EBITDA 2.41 4.05 1.10 22.32 20.29 11.85 11.25 13.14 9.45

Company PepsiCo Coca-Cola Kraft Foods Grupo Bimbo SAB Dr. Pepper Snapple

P/E (ttm) 17.98 17.80 14.96

ROA 15.68 15.30 4.65

ROE 41.25 30.15 12.54

23.58

1.09

14.18

---

6.94

14.51

16.38

1.63

16.49

9.41

6.37

19.16

Pepsis ratios are most similar to that of its closest competitor, Coca-Cola as a result of its size, stage of growth and similarity of operations. As such, we used Coke as the most important comparison in evaluating company value and price potential. Pepsi is currently either slightly undervalued or equally valued to Coca-Cola. Coca-Colas trailing twelve month P/E and P/FCF is a bit undervalued next to Pepsi. However, Pepsis ROA and EV/trailing twelve month EBITDA is slightly undervalued next to Coke. Pepsis price to sales is far lower at 2.41 as compare to 4.05 and its ROE is also much higher than Cokes (41.25 to 30.15). Its smaller competitors, Kraft Foods, Grupo Bimbo SAB and Dr. Pepper Snapple, tend to have lower relative valuations based on price and enterprise value. However, their Return on Assets and Return on Equity are substantially lower than that of Coca-Cola and PepsiCo.

Relative valuations indicate that Pepsi is either a HOLD or a WEAK BUY.

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Discounted Cash Flow Valuation

We decided to use the FCFE as our primary input as this is the fundamental driver behind the issuance of dividends as well as the total money that can be potentially paid out to investors. Please see Appendix #4 for a breakdown of the numbers.

Estimating Free Cash Flow to Equity

In order to value the company and to see how much free cash flow PepsiCo generated we decided to figure out the free cash flows to equity. The formula used in the calculation was:
FCFE = NI - (CAPEX - Depreciation)*(1 - Debt Ratio) (Increase in Net Working Capital*(1 - Debt Ratio))

FCFE gives us the cash flow that the company can potentially pay out to investors. Accounting for the various mergers and acquisitions was ultimately negligible. Most of these acquisitions were funded through debt (which does increase the future interest expense) and through the sale of treasury stock. Despite this, we decreased the 2009 FCFE by the average of the investment outflows in the past 3 years that were used to acquire other companies ($1,243 million). The reason for this decrease stems from the fact that these investments were actually acquisitions and should have been treated as capital expenditures. The cash that is not paid out to investors is mainly used in the repurchasing of stock. On average, the dividend growth rate has been 14% from year to year with the company paying out 40% of their FCFE. While we understand that the payment of dividends is at the discretion of the management, FCFE has been increasing with revenue for the past 10 years at an average rate of 11%. As such, we believe that dividends will continue to increase with FCFE and that FCFE will continue to mirror revenue growth.
Average Dividends/FCFE 40% Average FCFE/Revenue 11% Average FCFE / # of Shares $ 2.00

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Cost of equity
In order to get a proper valuation of the company we needed to come up with a discount rate r for the FCFE. In order to come up with the beta figure for the next 5 years we compared the returns of PepsiCo to the S&P 500 for the past 100 months. The beta we got from running these regressions was .0633. In order to estimate the terminal value cost of equity we used the industry weighted average beta because ultimately we believe that Pepsis beta will converge to the industry. The beta for the terminal value was .908. We did not use the WACC becau because we are valuing PepsiCo based on their FCFE. The risk free rate used in our calculations was 3.75% and the market risk premium was 4.25%. Both of these numbers were provided by Professor rofessor Madigan.

Food Processing Industry Beta 0.86

Beverage Beta 1.04

PepsiCo WA Industry Beta 0.908

Beverage Revenue 2009 2008 2007 2006 2005 Average 23.40% 25.29% 28.09% 27.22% 28.09% 26.42%

Food Revenue 76.60% 74.71% 71.91% 72.78% 71.91% 73.58%

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Valuation and Sensitivity Analysis

We believe, conservatively, that for the next 5 years Pepsi will have a growth rate somewhere between 6-7%. Afterwards, PepsiCo will ultimately grow at the rate of the economy (GDP) which we set at 5%. The cost of equity for the first 5 years was based on a beta of .633 and the terminal cost of equity was based on a beta of .908. As such, the cost of equity for the 5 year growth is 6.44% and the terminal cost of equity is 7.61%. The sensitivity analysis of the value of a share of PepsiCo to a growth in NOI can be found below:
NI Growth Rate 5 Years 1% 2% 3% 4% 5% 6% 7% 8.0% 9% 10% Value (FCFE) $50.37 $53.66 $57.15 $60.83 $64.73 $68.85 $73.20 $77.80 $82.64 $87.76

Next, we ran a sensitivity analysis holding the NOI growth rate at 6% and varying the beta. In this scenario, we assumed that the Beta, and thus the cost of capital, would be the same for both the 5 year future as well as the terminal value. The results can be found below:

Cost of equity 5.45% 5.88% 6.30% 6.44% 6.73% 7.15% 7.58% 7.61% 7.80% 8.00% 8.43%

Beta 0.4 0.5 0.6 0.634 0.7 0.8 0.9 0.908 0.95 1 1.1

Value (@6% NOI) $ 398.77 $ 204.93 $ 137.83 $ 124.01 $ 103.79 $ 83.22 $ 69.43 $ 68.52 $ 63.83 $ 59.56 $ 52.13

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Conclusion
After careful evaluation and valuation of the FCFE we estimate the fair market price for a share of PepsiCo is somewhere in between $68.85 and $73.20. This assumes a 5 year NOI growth rate somewhere between six to seven percent and a terminal growth rate of five percent. The cost of equity for the first 5 years is 6.44% and the terminal cost of equity is 7.61%. We purchased the stock at a price of $61.19 on February 11 2010. As of April 9th 2010, the stock is trading at a price of $66.36. The recommendation at this time is either a weak buy or a strong hold.

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Appendices: A) Increasing obesity

B) Socially Conscious Company Rankings

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C)
2000 $ 1.51 $ 1.48 801 $ 0.55 $ 2,347 2001 $ 1.51 $ 1.47 1005 $ 0.57 3% $ 3,031 29% 34% 20438 0.11 $ 1.59 33% 26935 32% 0.11 $ 1.68 2002 $ 1.89 $ 1.85 1042 $ 0.59 4% $ 3,008 -1% 35% 25112 -7% 0.12 $ 1.68 2003 $ 2.07 $ 2.05 1082 $ 0.63 6% $ 3,253 8% 33% 26971 7% 0.12 $ 1.87 2004 $ 2.45 $ 2.41 1438 $ 0.85 35% $ 2,958 -9% 49% 29261 8% 0.10 $ 1.71 2005 $ 2.43 $ 2.39 1684 $ 1.01 19% $ 3,638 23% 46% 32562 11% 0.11 $ 2.13 2006 $ 3.42 $ 3.34 1912 $ 1.16 15% $ 3,331 -8% 57% 35137 8% 0.09 $ 1.97 2007 $ 3.48 $ 3.41 2306 $ 1.42 23% $ 3,692 11% 62% 39474 12% 0.09 $ 2.23 2008 $ 3.26 $ 3.21 2589 $ 1.65 16% $ 4,411 19% 59% 43251 10% 0.10 $ 2.75 2009 $ 3.81 $ 3.77 2769 $ 1.76 7% $ 3,772 -14% 73% 43232 0% 0.09 $ 2.39

EPS Basic EPS Diluted Common Dividends (Cash) DPS Change in DPS Equity Free Cash Flow Change in Equity Free Cash Flow Dividends/FCFE Sales (Net) %Change in Sales FCFE/Sales Equity Free Cash Flow/Share

D)

FCFE Projections 2009 2010 NOI at 1% growth $2,524.21 $ 2,549.45 NOI at 2% growth $2,524.21 $ 2,574.70 NOI at 3% growth $2,524.21 $ 2,599.94 NOI at 4% growth $2,524.21 $ 2,625.18 NOI at 5% growth $2,524.21 $ 2,650.42 NOI at 6% growth $2,524.21 $ 2,675.66 NOI at 7% growth $2,524.21 $ 2,700.91 NOI at 8% growth $2,524.21 $ 2,726.15 NOI at 9% growth $2,524.21 $ 2,751.39 NOI at 10% growth $2,524.21 $ 2,776.63

2011 $ 2,574.95 $ 2,626.19 $ 2,677.94 $ 2,730.19 $ 2,782.94 $ 2,836.20 $ 2,889.97 $ 2,944.24 $ 2,999.02 $ 3,054.30

2012 $ $ $ $ $ $ $ $ $ $

2,600.70 2,678.71 2,758.27 2,839.39 2,922.09 3,006.38 3,092.27 3,179.78 3,268.93 3,359.73

2013 $ $ $ $ $ $ $ $ $ $

2,626.70 2,732.29 2,841.02 2,952.97 3,068.20 3,186.76 3,308.73 3,434.16 3,563.13 3,695.70

2014 $ $ $ $ $ $ $ $ $ $

2,652.97 2,786.93 2,926.25 3,071.09 3,221.60 3,377.96 3,540.34 3,708.90 3,883.81 4,065.27

2015 $ $ $ $ $ $ $ $ $ $

2,679.50 2,842.67 3,014.04 3,193.93 3,382.69 3,580.64 3,788.16 4,005.61 4,233.36 4,471.80

2016 $ $ $ $ $ $ $ $ $ $

2,706.30 2,899.53 3,104.46 3,321.69 3,551.82 3,795.48 4,053.33 4,326.06 4,614.36 4,918.97

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