PepsiCo, Inc. (PEP) and Coca-Cola Consolidated, Inc. (COKE) are two of the largest non-alcoholic beverage manufacturers, with a broad portfolio of soft drinks. PEP operates through – Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America, among other segments. COKE sells sparkling beverages, still beverages, including sports drinks, ready-to-drink coffee, and tea. Additionally, COKE distributes products for other beverage brands such as Dr. Pepper and Monster Energy.
With the onset of summer, the demand for beverages is on the rise. More than 50% of Americans are being vaccinated by now, outdoor recreation activities are gradually increasing. This in turn should drive the demand for energy drinks and soft drinks. Non-alcoholic beverage manufacturers have been focusing on expanding their presence and introducing customized products based on specific requirements of customers, to meet the increasing demand. Two leaders in this space – PEP and COKE – have been ramping up their production to capitalize on the summer trend. Given their continued innovation and business expansion, we believe both companies have plenty of room to grow.
Over the past year, PEP has gained 11.8%, while COKE has returned 64%. In terms of the past month’s performance, COKE is the clear winner with 36.3% gains versus PEP’s 4.3% returns. But which of these stocks is a better pick now? Let’s find out.
Latest Movements
On May 28, PEP and FAT Brands entered into an exclusive beverage partnership, under which FAT Brands will offer its customers a wide range of popular beverage choices from PEP’s portfolio of brands including Pepsi, Diet Pepsi, Tropicana Fruit Punch, and others, in most markets. This strategic collaboration will allow PEP to offer a diverse array of beverage choices to its customers and boost its brand name.
This month, the company launched Soulboost, a sparkling water beverage with real juice and functional ingredients, with two varieties. This latest innovative addition analyses insights to identify consumer trends and deliver products according to those needs.
In April, COKE opened the Whitestown Coca-Cola Consolidated distribution and automated 400,000 sq. foot warehouse facility. The facility will be able to distribute over 20 million cases each year, which should allow the company to cater to the needs of customers in central Indiana and the surrounding region.
Recent Financial Results
In the first quarter ended March 20, 2021, PEP’s net revenue increased 6.8% year-over-year to $14.82 billion. But its revenue under the Latin America segment declined 5.2% from the year-ago value to $1.24 billion. The company’s operating profit under the Latin America segment declined 5.6% from the prior-year quarter to $218 million, while that under the Europe segment declined 10.3% year-over-year to $131 million. Moreover, its cash and cash equivalents came in at $5.7 billion, a decrease of 49.2% from the prior year’s quarter.
COKE reported net sales of $1.27 billion, representing an increase of 8.3% year-over-year, in the first quarter ended April 2, 2021. Its gross profit rose 10.7% year-over-year to $448.7 million, while gross margin increased 70 basis points to 35.3%. Moreover, the company’s income from operations increased 187% from the year-ago value to $94.2 million. Its net income came in at $53.4 million, representing an increase of 242% from the prior year’s quarter.
Past and Expected Financial Performance
PEP’s revenue has increased at a CAGR of 3.7% over the past three years. In comparison, COKE’s revenue grew at an annualized rate of 4.4% over this period. And the CAGR of PEP’s net income has been 15.4% over the past three years. In comparison, COKE’s net income grew at a CAGR of 34.2% over the same period.
PEP’s consensus EPS estimate indicates a 15.2% increase in the current quarter and a 10.1% increase in the current year. In contrast, analysts expect COKE’s EPS to increase 10.7% in the current quarter ending June 2021 and 32.3% in 2021.
Profitability
PEP’s trailing-12-month revenue is nearly 14 times COKE’s. Also, PEP is more profitable with a gross profit margin of 54.7% versus COKE’s 35.6%.
However, COKE’s ROTC of 13.9% compares favorably with PEP’s 12.2%.
Valuation
In terms of trailing-12-month Price/Sales, PEP is currently trading at 2.87x, 287.8% higher than COKE, which is currently trading at 0.74x. Also, its trailing-12-month EV/EBITDA of 18.75x is 111.4% higher than COKE’s 8.87x.
PEP is also more expensive both in terms of trailing-12-month Price/Book (14.66x versus 6.71x) and trailing-12-month Price/Cash flow (19.20x versus 6.98x).
POWR Ratings
COKE has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. However, PEP has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Value Grade, COKE has a B, in sync with its lower-than-industry P/E ratio. In contrast, PEP has a Value grade of C.
Both PEP and COKE have a B grade in terms of Quality, which is consistent with their higher-than-industry ROE.
In terms of Growth grade, COKE has a B, consistent with its earnings and revenue growth. In comparison, PEP has a grade of C for Growth.
Of the 36 stocks in the C-rated Beverages industry, COKE is ranked #1 while PEP is ranked #11.
In addition to what we’ve highlighted, our POWR Ratings system has also rated both COKE and PEP for Momentum, Sentiment, and Stability. Get all COKE ratings here. Also, click here to see the additional POWR Ratings for PEP.
The Winner
While both PEP and COKE are good long-term investments, considering their market dominance and solid brand momentum, COKE appears to be a better buy based on the factors discussed here. Even though PEP has a diversified portfolio and strong business model, COKE’s top-line expansion in all market segments, strong operating results, and relative undervaluation makes it a better investment option.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Beverages industry.
PEP shares were trading at $148.27 per share on Wednesday afternoon, up $0.64 (+0.43%). Year-to-date, PEP has gained 0.78%, versus a 12.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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