Common Size Comparisons: Coke vs. Pepsi

At a certain point in time, you may come to believe in the future prosperity of a certain industry. You may wish to compare various companies within that industry in order to handpick a few select companies that meet your criteria. However, companies come in various shapes and sizes, so what's the best way to compare their income statements? One helpful method is to create a common size income statement, which states each item as a percentage of revenue.

For the most part Coke (KO) and Pepsi (PEP) are in the same industry. However, with their differing sizes, it's difficult to make a meaningful side-by-side comparison of their income statements. Depicted below, however, is a common size statement for each of these companies from 2007, with each item representing a percentage of each company's respective revenue:

We clearly see that Coke can charge a premium for its products as compared to Pepsi, as its cost of goods sold is only 36% as compared to Pepsi's 46%. We also see that for every $1 of revenue Coke makes, $0.21 is pure profit, compared to only $0.14 for Pepsi. At the same time, Coke has higher operating expenses. We can't tell why from this statement, as I chose to bundle expenses into major categories, but one could easily break down the income statement into smaller categories to get a better idea of which company is investing a bigger share of its dollars in advertising or R&D for example. If one company is under-investing in a category you deem to be important, it will show up here!

Of course, this is only the income statement. One could also construct a common size balance sheet in order to compare each company's relative assets. And of course this wouldn't be a post on Barel Karsan if we didn't remind you to also read the notes to the financial statements, not just the financial statements themselves, as you can find all sorts of useful info there from things like corporate airplanes to disclosures on outstanding stock options, which can at times be punitively high.

Disclosure: None

Comments

[yofluke:]

This article is misleading because Coke is almost a pure beverage company while Pepsi has a large snack food division. There is no analysis as to the effect that those differences have.

2008 Oct 03 09:36 AM

[Pj568:]

Misleading is too kind. Also when comparing beverage co's you have to ascertain whether they've retained bottling operations or have spun then off into controlled but minority owned (non consolidated) subsidiaries as Coke and Pepsi have.

2008 Oct 03 10:31 AM

[Saj Karsan:]

You guys are correct. My intention was to illustrate to my blog readers how common sized analysis works. This should not be looked at as an actual comparison between Pepsi and Coke, but yes the seeking alpha title is misleading; I apologize.

2008 Oct 03 02:09 PM

[mbahelp:]

Hi Saj,

I need a little help as i am in the midst of my MBA and am trying to do a financial comparison between coke and pepsi for the last 2 years. Hitting a sort of stumbling block so was wondering if u might be interested in helping out.. do let me know if i can email u.

Rgds

On Oct 03 02:09 PM Saj Karsan wrote:

> You guys are correct. My intention was to illustrate to my blog readers
> how common sized analysis works. This should not be looked at as
> an actual comparison between Pepsi and Coke, but yes the seeking
> alpha title is misleading; I apologize.

Feb 10 09:13 AM

[Saj Karsan:]

Sure, shoot me an e-mail and I'll do what I can.

Feb 11 01:26 AM