Pepsi Has More Profit Potential Than Coca-Cola

Includes: KO, PEP
by: Vatalyst

PepsiCo (NYSE:PEP) is a company that touches people’s lives almost constantly and subconsciously.

Today, for instance, I started out by taking on board a healthy portion of Quaker oats. Quaker is the division of PEP that just announced a partnership with the National Dairy Council to promote access to breakfast in schools.

During my break for lunch, I visited Jersey Mike’s for a Philly sub and a Mountain Dew (another PEP product). PEP has just negotiated an exclusive multi-year pouring rights deal with Jersey Mike’s Subs that will see only PEP’s drinks products continue to stock the shelves of 500 stores across 30 states (a similar deal to the one struck with Burger King in April).

After work, and before returning home to the wife and kids, I visited the gym for a workout. It’s important to take on fluid when exercising, and at my local gym the sports drink of choice is Gatorade. You got it, another PEP product. I understand that Gatorade went through a real rough patch a couple of years back with the recession. Now the company is diversifying and spreading its wings to offer more sports nutrition products rather than just the traditional Gatorade drink: entry into a market that is valued at $20 billion a year.

When I got home, the kids decided they wanted to go out for dinner. Their choice, Burger King -- here we come! We enjoy cups of Pepsi, advertising a competition for X-Factor. At the end of the day we have family time in front of the TV, watching The X Factor, a favorite show all over the country, and sponsored by PEP. Consider that this exposure is limited mostly to Europe, Israel, and North America, but is currently making its way to all emerging markets.

With all these PEP products swirling around, I thought I’d take a look at the shares.

PEP shares are currently trading around $64, and the mean 12-month price target from analysts researching the stock is $69.75 (9% upside potential). This stock is trading between its 50-day exponential moving average of $62.83 and its 200-day exponential moving average of $64.31. A break above the 200-day EMA seems highly likely, and this would be bullish for the shares indicating a possible move toward the 52-week high of $71.89.

The stock has traded negatively when compared to both the S&P 500 and shares of its main traditional rival, The Coca-Cola Co. (NYSE:KO). However, I would expect such fortunes to reverse in the coming months as PEP’s continuing business review continuing business review takes shape and produces results.

Earnings per share for the last 12 months are $3.99, and these are expected to reach to $4.63 in its next fiscal year (ending Dec 2012). These numbers place the shares on a trailing price to earnings ratio of 16.07, and a forward multiple of 13.84. This trailing price to earnings ratio is near the sector average of 15.67, though above KO’s number of 12.29 (it should be noted that KO’s forward price to earnings ratio is 16.06).

PEP pays a great dividend, too. Its current yield on its shares is 3.20%. It has also just announced its latest quarterly dividend: at $0.515 per share an increase of 7% over the same quarter last year. KO’s dividend for the last year was $1.88, a yield of 2.8%.

Current operating margin at PEP is 15.66%, and profit margin is 9.91%, with a return on assets of 8.89% and a return on equity of 29.03%. PEP’s last quarterly report showed revenue growth of 13.30% over the same period last year, and it has $3.54billion of cash, whilst debts stand at just $26.85 billion. Its debt/ equity ratio of 111.87 is manageable with operating cash flow of $8.49 billion. On these metrics, KO looks a better play. Its operating margin is 21.99%, and profit margin 27.59%. The company’s return on equity is 41.31%, and its debt to equity ratio of 87.13 is lower, and managed by operating cash flow of $9.11 billion. However, earnings at KO are expected to dip to $4.16 per share in its next full year (ending Dec 2012).

Overall, I like the numbers and prospects at PEP. The management is flexible and analytical, with the business under constant review. I see this as a big positive in what may be a difficult trading market to come. The company has negotiated several exclusive stocking deals with major companies, and puts its name to popular and cult-like television programming.

Its also moving away from the perception of sugar-loaded products, and entering new, and lucrative, markets in a responsible manner, leveraging off its brand names. The chart pattern looks positive, and I see the shares pushing ahead and closing the performance gap with those of KO.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.