Coca Cola Vs Pepsi

Coca-Cola Vs. PepsiCo: The Same Taste For The Stock Market Too?

Feb 18 2013, 02:44 | 7 comments | about: KO, PEP

Introduction

While there are industries which provide a wide spectrum of companies that fashion distinct results and possibilities, the carbonated and soft drinks industry has been dominated by two companies for a long time. PepsiCo Inc. (PEP) and Coca-Cola Co. (KO) are two of the most recognizable brands across the globe and have spread their operations across continents. Naturally, it is a fair question to evaluate the better investment for one's portfolio. By the end of this analysis, I aim to have tangible justification for choosing one over the other - but don't be surprised to see that even the second best in this analysis is way ahead of the rest.

Financial Standing

There is a marked distinction between the two companies to start with. While Coca-Cola completely operates in beverages e.g. Coke, Sprite, Minute Maid, Dasani, PepsiCo is more diversified in its products on sale. PepsiCo has not restricted its brands from being beverage-only as is suggested by Doritos, Frito-Lays and Quaker. Undoubtedly, the company's strongest and most identifiable brand is indeed Pepsi but it has a certain advantage over Coca-Cola since it has a diversified product risk. The two companies also fall in the 1-100 category of the Fortune 500 list. +1 Pepsi

Coca-Cola on the other hand, has a second-to-none global supply chain system which provides its products to more than 200 countries worldwide - making it almost impossible to have its retail strength and brand identity replicated by a new firm. Furthermore, global diversification and being one of the most valuable brands in the world only helps to make the case for Coca-Cola. +1 Coca

Indicator PepsiCo Coca-Cola

Market Cap $114.0 bil $167.8 bil

Price/Earnings ttm 19.65 19.49

Price/Book 5.2 5.0

EPS Growth

(3 Yr Avg) 7.9 14.0

Dividend Yield, % 2.89 2.73

Debt/Equity 1.1 0.5

Return on Equity 26.4 26.5

Current Price $73.69 $37.42

Estimated Fair Value Range

$54-$68 $28-$35

Current Stock Valuation Overvalued Overvalued

Premium over the Fair Stock Value 7% 5%

Data from Morningstar as of February 17, 2013

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the two competitors, suggests that currently both stocks are slightly overvalued. In addition, EFS' fair stock price valuation indicates that currently, PepsiCo and Coca-Cola are trading at least 7% and 5% premium over their fair value, respectively.

From the outset, Coca-Cola has an advantage over its rival because of the stock price it is being traded on. Coca-Cola will cost an investor half of what PepsiCo costs. (+1 coca) However, unless Coca-Cola can provide enough to match its rival's results, quarter after quarter, it will not become a preferred brand despite having the upper hand when it comes to pricing. (giá rẻ) The valuation of the two companies is more or less the same, with PepsiCo taking the lead by just 0.1 point. Both companies have a very close ROE and continue to have high operating margins; Coca-Cola's TTM operating margin is 22.1% while PepsiCo stood at 13.9%. This is a testament to the different models adopted by the two companies.

On the profitability front, Coca-Cola has outperformed PepsiCo continuously over the past years as the associated growth with its EPS has been phenomenal. For the year 2011 and 2012, Coca-Cola's earnings per share have a combined three year average of 14.0% whereas PepsiCo only manages a combined average of 7.9%. Coca-Cola and Pepsi-Co have been paying a dividend since

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