Battle Of The Brands Match-Up 1: Pepsi Vs. Coca-Cola

Includes: KO, PEP
by: Joseph Poma

During rough financial markets many investors tend to flock to the highest quality defensive stocks. Battle of the Brands will be a series of articles matching one company up to another in a battle to see who gets funded in the defensive portfolio and whose stock gets dropped by the wayside.

Coca-Cola (NYSE:KO) vs. Pepsi Co. (NYSE:PEP)
Symbol KO PEP
Forward P/E 16.47 12.48 Advantage: PEP
PEG 1.65 1.7 Advantage: EVEN
Debt / Equity 0.75 0.99 Advantage: KO
Dividend (Yield) $1.88 (2.66%) $2.06 (3.41%) Advantage: PEP
Cash / Share $6.10 $2.11 Advantage: KO
Price / Book Value 4.61 3.99 Advantage: PEP
Earnings Growth (5yr. Proj.) 8.00% 9.03% Advantage: PEP

A quick glance at the table above gives the initial overall advantage to Pepsi Co. Let's see how it breaks down:

Forward P/E: This is a simple evaluation tool used by many investors comparing a company's future (analyst estimates) earnings and the current stock price. Pepsi Co. is clearly undervalued using this measurement relative to its competitor Coca-Cola.

PEG: Price/Earnings to Growth is a measure that is used to help better understand the Price to Earnings ratio. It is used because those companies that exhibit greater growth in earnings are usually traded up to higher multiples. As a result, to "normalize" the P/E ratio, we divide by earnings growth so that companies across all sectors can be compared. In the instance here, both companies have very similar PEG ratios with Coca-Cola having a slight edge.

Debt / Equity: My personal favorite measure of a company's financial stability is the ratio of outstanding debt to equity. For long term investments I always prefer companies with no debt or very little. That being said we are in a very different environment. With interest rates so low, I don't mind when companies carry a debt load as long as management recognizes that debt can be a burden if not managed properly. Coca-Cola has less debt relative to its equity. Should Coca-Cola look to make an acquisition, the borrowing room is still there should an opportunity arise. Advantage Coca-Cola because they have a greater capability for borrowing when the time is right, and they aren't making the interest payments on borrowed money for the time being.

Dividend (Yield): Nothing is more important to me than a dividend payment every quarter. This plays a huge factor in which stock to choose because even stocks that may underperform the market with their price action, can offer solid total returns because they offer generous dividend payments. Dollar wise the payments are similar, but you get more bang for your buck with Pepsi Co.'s 3.41% dividend versus Coca-Cola's 2.66% yield. Not to be naive, we should not ignore the fact that dividend growth is also important. Coca-Cola's three year dividend growth rate is currently 8.97% while Pepsi Co. boasts a growth rate of 9.87%. Not only does Pepsi Co. have the better dividend yield, but they also have the dividend growth to go along. Advantage Pepsi Co.

Cash / Share: This is always a fun number to look at because it is a number that allows shareholders to dream, to an extent. Coca-Cola has $6.11/share in cash just sitting around waiting to be used. So companies use that cash to increase dividend payments, make a special dividend distribution, buyback shares, or even make acquisitions. As of now I have read about no rumors of Coca-Cola making any acquisitions or increasing the dividend. Pepsi Co. has made acquisitions into the snack food business in the mid-2000's and has continued to place its primary focus on beverages. With a dividend of $2.06/share and cash of $2.11/share, I don't see the company making any significant moves in the upcoming months. Advantage Coca-Cola for having additional free cash, but only if they make good use of it.

Price / Book Value: Book value is simply how much the company should be worth approximately if all assets were liquidated. Naturally you would prefer to purchase stocks that are trading close to, or under, book value. In this case, both companies seem to be trading at significant premiums relative to their book value with Pepsi Co. having the upper hand. I will give the advantage to the Pepsi Co. on the basis that relatively they are cheaper.

Earnings Growth (5 year projections): Finally, and most importantly, is the earnings growth rate as estimated by analysts. After all, the market only wants to invest in companies that make money, right? Advantage Pepsi Co. for having the greater earnings growth estimate over 5 years.

After breaking each category down and getting a feel for the direction each company is moving in my overall pick for the remainder of the 2011 year is ...


As much as I prefer Coca-Cola's soft drinks over Pepsi Co.'s, the fact of the matter remains that Pepsi Co. exhibits greater undervaluation and offers the greatest potential return to its shareholders. Pepsi Co. also offers shareholders greater diversification through its snack brands. In the past management has made all the right decisions to benefit shareholders, not to say that Coca-Cola hasn't, and I will look for that trend to continue.

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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