Running the Numbers - Coca-Cola vs. Pepsi

 |  Includes: KO, PEP
by: Valuecruncher

Coca-Cola (NYSE:KO) is an interesting company to look at from a business-cycle and valuation perspective. KO is currently trading toward the top of its 52-week range at US$49.04.

Valuecruncher Interactive Analysts Report For Coca-Cola ($KO)

The key comparator is PepsiCo (NYSE:PEP). You can change the generated peer companies on the site.

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$51.86 for KO - 4.9% above the current share price. We see KO broadly correctly valued at the moment. But how about compared to a peer group?

Comparison Analysis

I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. That is less important in this case as KO and PEP have broadly similar capital structures.

EV/Revenue shows how a dollar of revenues is being valued by the market against the comparator set. On an EV/Revenue basis KO is trading at 3.7x (KO is being valued at 3.7x last year’s revenues). This compares to PEP at 2.2x. KO’s profit margins (at the EBITDA line) are 31.4% of revenues - against 20.7% at PEP. A dollar of KO revenues is being valued at 170% of a dollar of PEP revenues - this is broadly in-line with the difference in profit margins in the business. This is what we would expect.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis KO is trading at 11.9x (KO is being valued at 11.9x last year’s profit at the EBITDA line). PEP is trading at 10.6x. This difference will represent the different profit margins and growth prospects between the two businesses. There is a difference - but it isn’t material. Again this is what we would expect. Nothing in the comparator analysis looks out of line - and thus a buying opportunity.


Based on our DCF valuation - KO looks correctly valued. Looking at some comparators - the market is valuing KO in line with the key peer company (PEP).

Disclosure: no positions.

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