Earlier this week, Pepsi (NASDAQ:PEP) announced that it had just signed a marketing sponsorship deal with the NBA as the league's exclusive beverage sponsor. Pepsi replaces Coca-Cola (KO) as the exclusive sponsor, a position that Coca-Cola has held for the last 28 years. The agreement marks a milestone for Pepsi, as the beverage and snack giant now holds sponsorship deals with all major US sports leagues. Of course, the announcement has reignited the age-old debate as to which is the better investment, Pepsi or Coca-Cola. It's a nice excuse to take a look at each company's performance over the last 12 months with a focus on some of the key statistics and fundamental factors that could underpin growth over the next year.
First, let's take a look at the numbers.
As far as growth is concerned during 2015, Pepsi just beat out Coke, barely. Pepsi reported 9% growth at constant currency adjusted earnings during the 12 months ended December 31, 2014, while Coke reported a nearly equivalent figure of 7.9%. Pepsi shares have risen from just under $84 12 months ago to $96.50, a gain of 15%, with 12 months highs at $100.40 reached in February. Coke started the last 12 months at $40.18, and now trades at $40.94, a 1% gain over the period.
One thing worth mentioning is that throughout this 12-month period Coca-Cola experienced a much higher rate of volatility than did Pepsi, with the former showing a beta of 0.84 versus a beta of 0.60 for the latter.
What about operational activity? Both companies spent the majority of 2014 and the first few months of this year as they had during 2013 - focusing on expansion in emerging markets (developed markets are beginning to stagnate) and a shift towards a consumer preference lead demand for healthier products - at least as far as beverages are concerned.
For Coca-Cola, at least, this was demonstrated by the 3% decline in unit case volume in Europe of sparkling beverages, and a 1% growth in the company in still beverage offering. In the company's latest 10Q, Coke attributes the sparkling beverage decline to the softness in the macroeconomic environment. However, it also notes that growth in juice drinks led growth in still beverages. This suggests that these shifts are reflective of a consumer shift towards what are at least perceived to be healthier products.
In North America, we saw the same shift, with a 1% growth in still beverages being offset by decline of 1% in sparkling beverages, and the still beverage growth being led by an 8% growth in packaged water. A look at Pepsi's latest 10Q reveals a similar pattern, with North American overall volume declining slightly, primarily driven by a 2% decline in carbonated soft drink volumes but offset by a 2% increase in non-carbonated beverage value - attributable to mid-single digit increases in its water portfolio.
One way that both Coke and Pepsi are responding to this shift in consumer preferences - and one major feature of discussion in investment circles throughout 2014 - was the introduction of stevia to a number of products. Stevia has been something of a buzzword over the last 12 months, and the two lead stevia products, Coca-Cola's Life and Pepsi's True are off to the races. Coke Life has 35% fewer calories than regular Coca-Cola, and is available nationally and in selected countries worldwide. Pepsi True has 40% fewer calories than regular Pepsi, and - aside from an online presence at Amazon and Walmart, is also being sold in three cities in the US. Neither Life nor True is 100% stevia sweetened as both companies struggle to mask stevia's aftertaste.
Meanwhile, other companies are also benefiting from this big brand adoption of stevia, one being PureCircle (OTCPK:PCRTF), which saw its sales rise to $43.2 million for the six-month period to December 31, 2014 - a 24% increase on the corresponding period a year earlier.
In terms of branding, here's a look at both companies' offerings. Both are using the green angle, with soft green packaging presumably to reflect the natural element of the beverages, and the naming echoes this sentiment - Life and True.
Image 1: Life and True
The real question is whether or not consumers will adopt these new "healthier" beverages, and in turn, whether this adoption can bolster both companies' bottom line and corresponding market valuation. Unfortunately, there are no concrete figures yet available for sales of either product, and stevia is only mentioned once in Coca-Cola's 10K relating to the availability of stevia not being a major risk factor for the production of Coca-Cola beverages. Coca-Cola Life has been on the market longer, and has experienced a global rollout, so it is safe to assume that Life has outsold True for now. Admittedly, that doesn't mean much. With Pepsi delayed in getting to market, the more accurate and representative statistics will only be available later on in the year.
In the end, until we see one company or the other pull away in the stevia market, if stevia makes it at all as a major force, Pepsi is likely the better choice going forward simply because its business is more diversified and includes other products than just beverages. Keep in mind that Coke's earnings have dramatically declined since peaking in 2010, while Pepsi's have only remained more or less stagnant. Soda is simply selling less than it once was due to health consciousness, but Pepsi has been faring better because a lower percentage of its overall revenues is based on soda sales.
Stevia could still surprise to Coke's side though, just as Diet Coke won the lion's share of the diet cola beverage market during the 80s and 90s. So, all things equal, Pepsi wins out for investment, with stevia as a wildcard that may give Coke an edge longer term. Remember that Diet Coke was the number two carbonated beverage product across the globe for a very long time, and only recently did we see Pepsi overtake Diet Coke to take the number two spot. It's a small possibility, but Coke Life has at least a minor chance of overtaking Pepsi for number 2 if stevia eventually becomes a mainstream sweetener. And if not that, then Diet Coke plus Coke Life sales have a decent chance of taking number two when combined.
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