Coca-Cola's New Spotify Deal, Global Dominance Will Make You Money Now

| About: The Coca-Cola (KO)

It's a battle that's raged for a generation - the two titans of the soft drink industry, Pepsi (NYSE:PEP) and Coca-Cola (NYSE:KO) have been locked in competition for over 30 years. Recently, the two companies' stock has traded places as its value has fizzed up and down. With both sets of stock rallying in recent months, which is the tastier investment, and whose value is set to fall flat?

I'll start with the traditional front runner in this two horse race. Coca-Cola, a brand so entrenched in U.S. culture that even Santa wears its red and white colors, still could not escape the dramatic stock slump in late 2008. Coke's stock plunged at the same pace as Pepsi's, but the pattern of recovery has been very different. Initially, both companies' stock rose and fell in the turbulent early months following the onset of recession.

Pepsi's stock held a higher value than Coke's for a short time, but in the last two years, Coca-Cola's value has increased by 40%. In the same period, Pepsi's stock has merely stayed steady. The reason for this is a simple one. Coca-Cola has regained investors' trust with a series of acquisitions, share issues and, most crucially, strong quarterly figures. Its first-quarter 2012 figures have led Goldman Sachs to improve its stock forecast for the company.

Coca-Cola has also continued to flex its impressive advertising muscle, signing a promotional deal with Spotify. With recent crackdowns on online music piracy, the subscription-based music player could be set for a surge in popularity, so Coke appears to have timed this move perfectly. There are also the upcoming Olympic Games in London to consider. Along with fellow food giant McDonald's (NYSE:MCD), Coca-Cola will see its brand plastered across a sporting event set to be watched by billions. Exclusive sales privileges in the Olympic village won't do any harm for sales, either.

Pepsi's stock has gained little value in the past 12 months, but it hasn't flat lined - far from it. Pepsi's current price is $66.63, keeping pace with Coca-Cola at $74.13. Pepsi's stock has climbed in recent days, jumping by a point after the appointment of a new Communications EVP this week.

I would expect this to lead to an increased profile for the company in the coming months, and it looks like investors see things the same way. It is Coca-Cola's stronger marketing strategy that has given it the edge, but the gap could quickly close if Pepsi go searching for some new lucrative tie-ins.

Potential health warning for soft drinks stock

On the other side of the world from Wall Street, however, comes tragic news, which potentially raises concerns for both companies - though it will be of greater concern to Coca-Cola. A New Zealand woman's recent death has been linked to her excessive consumption of Coca-Cola's flagship fizzy drink - up to eight litres a day. A pathologist has suggested that the woman's poor diet and heavy consumption of Coke may have caused her to have a heart attack. Coca-Cola's PR team has played a straight bat so far, claiming that even water can be deadly when people drink it to such extremes.

Its point is a valid one, but this sad story is hardly the kind of press Coca-Cola would want in what has been a strong period for it on the markets. Its brand being associated with health risks could spell trouble for stock - some investors may sell, feeling the news could stall the company's recent strong showing. In fairness, the story is hardly great news for its biggest rivals.

Pepsi will also be concerned if cola gains a reputation as being unhealthy - it's a disadvantage that it is in direct competition with a company whose product is so similar. On this front, bad news for its competitor means bad news for it.

So, what happens next? The story coming out of New Zealand is a one-off, and will not shake the confidence of consumers or investors in either company in the short term. Any more scare stories, however, and sales could suffer. A company's sales are the bottom line when it comes to stock value, so the natural effect of slow sales isn't hard to predict. Pepsi may try and gain an advantage following its rivals' PR disaster, and may be well placed with a new man in the boardroom overseeing communications. There seems little chance of a smaller company coming close to challenging this duopoly. Other soda companies like Jones Soda (NASDAQ:JSDA), Soda Stream (NASDAQ:SODA) and Britvic don't have nearly the same global scale of operations.

It is probably safe to say that the recent upward momentum for both companies in the market may tail off, with investors likely to hold or sell shares. Those thinking of investing in upwardly mobile stock like that of Coca-Cola in recent weeks, will in all likelihood exercise caution in the wake of a globally reported story with such negative connotations. If you have either Coca-Cola or Pepsi in your portfolio, and have earned a profit, there could be worse times to cash in your chips.

Long term, there is little to suggest this latest story will cause any more than a ripple to share price, and will probably harm Coca-Cola more in the short term. In terms of a future investment, it's still hard to pick Pepsi over its better selling, more illustrious rival. Recent years have shown that Coca-Cola has thought smarter in terms of gaining an advantage, using its marketing and creating new business connections to give investors something to get excited about. If I had to pick one set of stock to invest it, to turn a profit in a year's time, it would still be Coca-Cola, despite the troubling news from Down Under this week.

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

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