PepsiCo (PEP) vs. Coca-Cola (KO) is usually all we hear about when it comes to PepsiCo. However, PepsiCo owns and operates a large variety of snack food brands in addition to its beverage brands. So rather than comparing it to other beverage companies, how about we compare it to another snack food company?
Mondelez International, Inc. (MDLZ) the snack food spin-off of Kraft Foods (KRFT) is a more suitable comparison. Coca-Cola is a beverage company but PepsiCo and Mondelez are both beverage and snack food companies.
PepsiCo
- Price: $82.63
- Market Cap: $127.78 Billion
- EPS: $3.90
- Dividend (Yield): $2.27 (2.7%)
Mondelez
- Price: $31.00
- Market Cap: $55.33 Billion
- EPS : $1.55
- Dividend (Yield): $0.52 (1.7%)
Graham Number
At first glance we see that PepsiCo is over twice as big as Mondelez and pays a considerably higher dividend. Simply because a company is larger does not make it a better investment. A quick valuation is running the Graham Number for both companies. If you are not aware, we can easily calculate it by punching in the numbers of the companies into this equation.
- Square Root of (22.50 x Book Value x EPS)
For PepsiCo we get the following:
- Square Root of (22.50 x 14.55 x $3.90)
The Graham Number for PepsiCo is $35.73. Now we do the same for Mondelez.
- Square Root of (22.50 x 17.86 x $1.55)
The Graham Number for Mondelez is $24.96
We see that PepsiCo is priced at 231% of its Graham Number while Mondelez is priced at 124% of its Graham Number. From this quick calculation Mondelez is better valued than PepsiCo.
Seven Year Average
Benjamin Graham also suggested that no investor should pay more than a PE of 25 based on the seven year EPS average. Let's compare and see where both sit.
PEP | FY2012 | FY2011 | FY2010 | FY2009 | FY2008 | FY2007 | FY2006 | AVG | 25 P/E | |
EPS | $3.92 | $4.03 | $3.92 | $3.77 | $3.21 | $3.43 | $3.34 | $3.66 | $91.50 |
MDLZ | FY2012 | FY2011 | FY2010 | FY2009 | FY2008 | FY2007 | FY2006 | AVG | 25 P/E | |
EPS | $0.86 | $0.97 | $0.41 | $1.89 | $1.10 | $1.56 | $1.71 | $1.21 | $30.25 |
From this calculation we can see that PepsiCo's earnings are considerably more stable than Mondelez. Also from this calculation PepsiCo is more undervalued than Mondelez. It all depends on how you view the numbers.
Conclusions
I like things simple, by looking at an indicator such as current earnings and earnings over the past couple of years we can see how a company looks. However, once we start looking at other companies in the same industry that compete against each other we get a clearer picture of how well the company is doing. The indicators I used are considered conservative and are only a small part of a larger stock picking strategy.
Each investor has to decide for themselves how they want to value a company and decide if they want to continue their research or look for another candidate. We can easily save time by crunching a few simple numbers to see if the company is at a price we are not only willing to pay, but should safely pay.
Disclosure: I am long IBM, KO, MPC, WMT. 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.
