Coke vs. Pepsi: An RBP Perspective

I’ve long argued that one of the best applications of RBP Probability is in the comparison of alternative or substitute investments. For example, when making a decision on a single stock, it is helpful to compare that stock’s RBP Probability with the median RBP Probability within its industry. Today I am looking at the classic one-two market: Coca-Cola versus PepsiCo.

In recent years PepsiCo has come to be assumed by many investors to be the better growth company of the pair. Coca-Cola’s stock, despite its endorsement from Warren Buffett as one of his “permanent holdings,” has been stagnant for well over ten years now. Meanwhile PEP is up a respectable 76% in the last ten years leaving some to wonder if Buffett has gotten it all wrong.

More recently, though, the growth in revenue of the two companies has been very similar – in fact, almost identical:

Shouldn’t KO be catching up? Indeed, over the last one-, three- and five-year periods KO has outperformed PEP handily. But what about the future? With both stocks having comparable operating and stock price growth, where must each go from here? Perhaps not surprisingly, the Required Business Performance of the two companies is very similar. Pepsi must bring in $43.8 billion in revenue in the next twelve months, equating to 2.5% growth, while Coke must post revenue growth of 3.4% resulting in $32 billion in revenue.

However it looks far more probable that Pepsi will be able to reach its 2.5% revenue growth requirement . Its current RBP Probability is 63% (See PEP’s RBP Snapshot as of Sep 11), while that of Coca-Cola is merely 42.6%. (See KO’s RBP Snapshot as of Sep 11) Neither is particularly high or low, but PEP is clearly superior to KO. Thus, RBP Probability sheds quite a bit of light on the decision between two stocks that otherwise look to make similarly good investments.