Coke vs. Pepsi - Cramer's Mad Money (8/19/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Tuesday, August 19.

Coke (NYSE:KO) vs. Pepsi (NYSE:PEP)

Since a sector accounts for 50% of a stock’s performance, Cramer gives up to five points on his 10-point scale for companies operating in good industries.

  • Normally in these conditions Coke and Pepsi would be the perfect plays, but Coke admitted to feeling some economic pressure recently. So Cramer’s only willing to give that company four points, and Pepsi 4.5. Score: 4.5-4, Pepsi.
  • Then we have to look at growth. Coke already gets 81% of its operating profit from overseas, while Pepsi gets only 29%. So there’s still plenty of room to grow for PEP. Score one point for this company, bringing the total up to 5.5 to 4.
  • When it comes to strategy, Pepsi might have won out again. Figuring being a beverage-only company was a dead-strategy, the company moved into snack food. As Cramer pointed out, it’s much easier to take market share from Rold Gold, Herr’s and UTZ than it is from Coke. So that’s where Pepsi’s been focusing on innovation. Granted, Coke gets kudos for Coke Zero, but the winner here is Pepsi. One point for Pep and a half point for Coke. Score: 6.5-4.5, Pepsi.
  • Now take a look at management. Coke’s got a first-year CEO in Muhtar Kent, and Cramer’s always said that you never invest with rookies. They make too many mistakes. But since Warren Buffett’s Berkshire Hathaway owns 200 million shares of Coke, Cramer’s willing to break the rules a bit. Pepsi has solid leadership in Indra Nooyi. A half point for each. Score: 7-5, Pepsi.
  • Both companies get a point each for their dividends. Coke’s is higher at 2.8% versus Pepsi’s 2.4%, but the latter has a better record of increases. Score: 8-6, Pepsi.
  • Lastly, we figure in raw costs. Not too long ago when oil and grain prices were up, Coke, with its locked-in costs, was the better play. But as commodity inflation comes down, Pepsi’s the better play, Cramer said, even with its expensive ingredients and transportation costs (Frito-Lay chips need to be shipped more often than beverages). Cramer gave the companies a half point each. Final score: 8.5-6.5, Pepsi.

Pepsi wins on points, but it also wins on valuation. Both companies trade at about the same multiple versus next year’s earnings estimates even though Pepsi’s growing at 11% to Coke’s 9%. Pepsi deserves a higher multiple, Cramer said, and therefore a higher price.

Portfolio Tune-up Part 1 - O’Reilly Automotive (NASDAQ:ORLY), General Motors (NYSE:GM), Ford (NYSE:F), JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), CSK Auto (CAO)

U.S. car owners are driving their vehicles a longer than they used to. Cramer said aftermarket parts-seller O’Reilly Automotive is a play on this trend. Cars are better built these days, so consumers are getting more mileage out of them. Here’s some proof: 41.3% of all cars were 11 years or older, a consulting firm reported last February, compared to 40.9% last year. And the median age for a passenger car is now 9.2 years versus 8.3 back in 1998. That means the need for repairs, tune-ups and replacement parts is growing. This bad market, with its less available credit, isn’t putting a hurt on the auto dealers. People aren’t buying new cars or leasing them. In fact, companies like General Motors, Ford and lenders like JP Morgan Chase and Wells Fargo are either increasing their lease payments or turning their back on the business altogether. But the bottom line here is that a company like O’Reilly is in a good position to capitalize on budget-conscious consumers and their well-made cars. (Note: Auto-parts sellers that deal with manufacturers are toxic, Cramer said. Don’t confuse O’Reilly’s business with them.) “There’s about $60 billion of unperformed auto maintenance waiting to be earned,” Cramer said. This industry is consolidating, and O’Reilly has made a buy that should add a lot of growth to the company. O’Reilly picked up CSK Auto making the combined company the third-largest auto parts retailer. And the deal is expected to save O’Reilly as much as $100 million. Then there’s the regional growth CSK offers. O’Reilly’s base in the Midwest and Southeast now expands into the West, home of CSK. And O’Reilly can start to sell its parts to professional mechanics instead of just the do-it-yourself crowd that CSK caters to. O’Reilly cut guidance after the latest quarter, but the stock rallied anyway. Apparently, the Street was expecting worse. Regardless, trading at 14 times earnings with a 16% long-term growth rate, O’Reilly is the cheapest stock in its sector based on growth, Cramer said. He thinks the stock could go to $35 from $28.

Portfolio Tune-up Part 2 – Midas (NYSE:MDS), Monro (NASDAQ:MNRO)

Monro Muffler is another great way to play the growing trend in longer term American car ownership, Cramer said. There are only two pure-play auto mechanics: Midas and Munro Muffler But despite what you may think, Cramer said, its Monro that has the golden touch here. Cramer attributed it largely to geography. Monro has a stronger base in the Northeast, which has been coping with the market slump better than Midas’ Western and Southeastern customers. Midas even mentioned on their quarterly conference call that the Northeast garages they had were outperforming those in other locations. But Monro’s executes well, too. The company reported an earnings beat last quarter and exceeded the 3% to 5% guidance they offered for their comps, or same-store sales, growing 5.6%. And despite raising prices, traffic at Monro grew 2.5%. This just strengthens Cramer’s thesis that people are spending more to keep their cars running longer, he said. Another thing worth noting here is that Monro upped its comp guidance from 2.4% to the 3% to 4% range even though comps to date as of July 24 were 8%. Cramer’s betting this is a classic case of underpromise, overdeliver. “An earnings blowout is not out of the question next time around,” he said. Much in the way O’Reilly Automotive is making acquisitions, Monro is as well. In fact, this company’s made nine in the last six years. The latest, Procare, has been integrated well and is outperforming, and there’s talk of another purchase on the way. Best of all for Monro investors is the scarcity value. Cramer’s thesis on auto-parts sellers isn’t a secret on Wall Street and big money managers are going to be looking for places to put their money. Since there are only two plays, Midas and Monro, this bodes well for the latter. These managers won’t be afraid to pay up for the better stock, Cramer said. A word of caution: Monro Muffler is a very small company, with a market cap of only $375 million. The stock dropped $1.20, or 5.6%, to $20.14 on Tuesday, but you need to be careful. Use limit orders, buy in small increments. You know the usual Mad Money approach. Ignore these rules and you could miss any gains Monro has to offer.

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