While there are industries which provide a wide spectrum of companies that fashion distinct results and possibilities, the carbonated and soft drinks industry has been dominated by two companies for a long time. PepsiCo Inc. (PEP) and Coca-Cola Co. (KO) are two of the most recognizable brands across the globe and have spread their operations across continents. Naturally, it is a fair question to evaluate the better investment for one's portfolio. By the end of this analysis, I aim to have tangible justification for choosing one over the other - but don't be surprised to see that even the second best in this analysis is way ahead of the rest.
There is a marked distinction between the two companies to start with. While Coca-Cola completely operates in beverages e.g. Coke, Sprite, Minute Maid, Dasani, PepsiCo is more diversified in its products on sale. PepsiCo has not restricted its brands from being beverage-only as is suggested by Doritos, Frito-Lays and Quaker. Undoubtedly, the company's strongest and most identifiable brand is indeed Pepsi but it has a certain advantage over Coca-Cola since it has a diversified product risk. The two companies also fall in the 1-100 category of the Fortune 500 list.
Coca-Cola on the other hand, has a second-to-none global supply chain system which provides its products to more than 200 countries worldwide - making it almost impossible to have its retail strength and brand identity replicated by a new firm. Furthermore, global diversification and being one of the most valuable brands in the world only helps to make the case for Coca-Cola.
(3 Yr Avg)
Dividend Yield, %
Return on Equity
Current Stock Valuation
Premium over the Fair Stock Value
Data from Morningstar as of February 17, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the two competitors, suggests that currently both stocks are slightly overvalued. In addition, EFS' fair stock price valuation indicates that currently, PepsiCo and Coca-Cola are trading at least 7% and 5% premium over their fair value, respectively.
From the outset, Coca-Cola has an advantage over its rival because of the stock price it is being traded on. Coca-Cola will cost an investor half of what PepsiCo costs. However, unless Coca-Cola can provide enough to match its rival's results, quarter after quarter, it will not become a preferred brand despite having the upper hand when it comes to pricing. The valuation of the two companies is more or less the same, with PepsiCo taking the lead by just 0.1 point. Both companies have a very close ROE and continue to have high operating margins; Coca-Cola's TTM operating margin is 22.1% while PepsiCo stood at 13.9%. This is a testament to the different models adopted by the two companies.
On the profitability front, Coca-Cola has outperformed PepsiCo continuously over the past years as the associated growth with its EPS has been phenomenal. For the year 2011 and 2012, Coca-Cola's earnings per share have a combined three year average of 14.0% whereas PepsiCo only manages a combined average of 7.9%. Coca-Cola and Pepsi-Co have been paying a dividend since 1920 and 1952 respectively, and in my opinion, the former has been more consistent in providing dividends to its investors - albeit, my perspective on this is on the conservative side. For the time being, PepsiCo offers a better dividend yield than Coca-Cola but as I mentioned before - with both companies nearing a 3% dividend yield, even second best is well above average.
Coca-Cola takes the lead when it comes to evaluating the company's debt management. In absolute terms, Coca-Cola has more debt than Pepsi, but by taking into account the fact that Coca-Cola as a company is larger than Pepsi, the debt/equity ratio seriously tilts in Coca-Cola's favor. The company's debt figures have a larger presence of short-term debt while PepsiCo's consist of long-term debt. I may add here that short-term debt is mainly beneficial for a company that aims to take on credit looking to expand. Keeping in mind Coca-Cola's recent resurgence in the above noted metrics - it is quite obvious that the company's measures have been pleasantly successful.
The graph below is an illustration of the two companies' relative performance over the past 5 years. Furthermore, they are also compared to the market averages, Dow Jones Industrial Average and Standards & Poors 500 index. The two companies have experienced a slowing demand in developed markets over fears of health drawbacks caused by the consumption of products that are rich in sugar. As Coca-Cola and PepsiCo's flagship products are carbonated drinks, it is understandable why their revenues have taken a hit in Europe and in the United States. However, all of this fails to translate into the stock chart. Why? Well, simply because the two companies are so well spread across the world that a negative result from one part of the world is easily counterweighted by the other part. This held true more for Coca-Cola which, as a soft drinks behemoth, saw most of its revenue come from Africa, Asia and Eastern Europe in the last quarter. With a growth rate of 28.81% over the past five years, Coca-Cola has easily outperformed the market and its primary competitor.
Things look a little different when we look at performance over the past year. The two companies had a very strong Q3 2012 but PepsiCo managed to beat Coca-Cola in Q4 2012 as its profits rose by 17% and it came out with a 5.6% dividend increase. PepsiCo also announced a $10 billion share buyback program which will continue till 2016.
Make or Break for Investors
The two companies make a solid case for either one to be invested in. So which one would I invest in? I would choose PepsiCo over Coca-Cola at this point in time- even though the stock is a lot more expensive and Coca-Cola has outperformed PepsiCo over the recent history. The reason why I am more inclined towards PepsiCo is because of the increased dividend announced recently and the company's share buyback program, which is bound to accentuate the stock price over the next few years.
While Coca-Cola is in a dip right now and offers good value for short-term investors, I see PepsiCo as being in the dip right now when put in perspective over the next three years. In case you are only willing to invest in the stock for a year, perhaps Coca-Cola will be able to offer you a more stable and consistent return.
From 89 cents in Q4 2011, PepsiCo's net income rose to $1.06 in Q4 2012. I understand that the company has been under tremendous pressure to get its act together after having weak results in the previous years, but I believe that Indira Nooyi has put her house in order and has fixed the operating woes of the company. While Coca-Cola's past has been bright, its future seems likely to be overshadowed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.