Coke Vs.

Pepsi: The Winner Revealed - Seeking Alpha

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Coke Vs. Pepsi: The Winner Revealed

September 28, 2012 | 14 comments by: Samuel Ferrati | includes: KO, PEP Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KO over the next 72 hours. (More...) The Coca-Cola Company (KO) and PepsiCo Inc. (PEP) are wonderful businesses that have generated attractive returns for investors over the years. For example, during the last decade, both companies had an ROE average of about 30 percent. And I sure enjoy drinking the soda from both companies, but if I had

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Coke Vs. Pepsi: The Winner Revealed - Seeking Alpha

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to choose one stock to invest in, which one would it be? Let's find out. Valuation My first observation is that Coke's market cap is $60B higher than Pepsi and while Coke has a PEG ratio of 2.57, Pepsi's is 48% higher, at 3.81. I think Pepsi's PEG is too high for now, primarily because the market expects a lower earnings growth rate relative to Coke. Specifically, over the next five years, the market expects earnings per share to grow 7.77 percent for Coke and 4.86 percent for Pepsi. Since Coke is expected to grow its earnings at a higher rate, the market is awarding the company with higher trading multiples. For example, for each $1 Coke generates in revenue, the market awards it with $3.90 in enterprise value, while Pepsi is awarded only $2.01 in enterprise value for each $1 of revenue it generates. From a valuation standpoint alone, in my opinion, Coke looks more attractive because of the following two reasons: 1. A higher earnings per share growth potential 2. Solid bullish sentiment from investors who are willing to pay a higher premium for Coca-Cola relative to Pepsi Financial Strength As far as financial strength goes, in fiscal year 2011 Coke had $14B in cash and cash equivalents and $13.6B in long-term debt, giving the company $1.03 in cash for every $1 in long-term debt. Its working capital for the same period was $1.2B. With further analysis, I calculated Coke's working capital per share to be $0.27, thus the stock is currently trading at about 142x its working capital per share. For fiscal year 2011, Pepsi had a negative working capital of $713M, which means that first, it had insufficient funds to meet its short-term liabilities, and second, its working capital per share was negative $0.46, while Coke's was a positive $0.27 as calculated earlier. If a company's current liabilities exceed its current assets, then it may run into trouble paying back short-term creditors. I went back as far as fiscal year ending 2008 for Pepsi's financials and 2011 was the only year it accumulated a negative working capital during that four-year period. Could this signal red flag for Pepsi? We would have to wait for fiscal year ending 2012 results to make a better forecast. As of the last annual report, Coke has a quick ratio of 0.92, which means the company does not have enough cash to cover current liabilities since it owns $0.92 in assets the company can turn in to cash almost immediately for every $1 it owes in current liabilities. Pepsi, on the other hand, has a quick ratio of 0.75. Please note that because inventory may take months to sale and turn into cash it was excluded from the quick ratio calculation. Regarding inventory turnover, Pepsi is much more efficient as it clears its inventory about every 21 days, while it takes 24 days for Coke. Pepsi and Coke collect their receivables every 36.3 and 36.7 days, respectively. Although the companies clear their inventory every 21 or 24 days, they collect their receivables every 36 days, which indicates there is still room for improvement to collect cash at a faster rate. As of my most recent quarter analysis, Pepsi's debt to equity ratio is about 37 percent higher than Coke, 1.37 versus .99, which means investors are taking a higher risk when investing in Pepsi. If these stocks were to be evaluated exclusively on the debt to equity ratio, it would not be a concern because both earn high returns on equity. However, in this case, Coke's debt to equity ratio is less risky.
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Coke Vs. Pepsi: The Winner Revealed - Seeking Alpha

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Final Thoughts Analyzing historical data, Pepsi tends to announce stock splits within a few months after Coca-Cola's stock splits, with the exception of 1992. Therefore, it may be possible the company will announce a stock split in the next couple of months. Back to my original question; if I had the option to invest in only one of the two companies, I would select Coke for the previously stated reasons. Which one would you choose and why? 11,951 people decided to get KO articles by email alert Get email alerts on KO About this article Emailed to: 174,293 people who get Investing Ideas daily. Author payment: $0.01 per page view, with minimum guarantee of $100 for Pro articles and $500 for Alpha-Rich Pro articles plus free access to Seeking Alpha Pro. Become a contributor Tagged: Investing Ideas, Quick Picks & Lists, Consumer Goods Problem with this article? Please tell us. Disagree with this article? Submit your own. More articles by Samuel Ferrati The Truth About Ralph Lauren Wed, Oct 31 Copper And Gold Are Telling The Truth Wed, Oct 3 Facebook: 955M Monthly Active Users Is An Overestimate Tue, Sep 25 Zynga: Finally Feeling A Bit Lucky? Tue, Sep 18
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Mee Comments (22) Are you seriously favoring buying KO because it's MORE expensive than PEP? That makes less sense than anything I've ever read. It's just plain nuts. As for current ratios, when looking at companies of this size and power, they mean nothing. Either of these juggernauts generates so much cash that paying its bills is just not a concern, and no one on the planet would ever get frisky of slow payment of payables anyway. They'd be foolish to risk losing the business of the 800 pound gorilla. PEP is also actively trying to lower its capex and squeeze its working capital down to wring cash out of the sheet and raise its ROIC. So, deviations from historical norms are to be expected. I'm not saying that PEP is a better buy than KO, but your reasoning is poor. 28 Sep, 08:57 AMReplyLike0

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cpa28761 Comments (2017) >>>Are you seriously favoring buying KO because it's MORE expensive than PEP?<<< Actually, the author is saying: "...Coke has a PEG ratio of 2.57, Pepsi's is 48% higher, at 3.81. I think Pepsi's PEG is too high for now..." This makes PEP more expensive than KO. I agree with you, Mee, that this was superficial in many ways. You (Mee) are correct about working capital. It is irrelevant. Both companies pay their suppliers when it suits them. No supplier can enforce payment terms. My thoughts are that PEP should be compared to grocery products companies such as GIS and CAG. That's what their business model has become. Long: GIS, KO, PEP 28 Sep, 09:15 AMReplyLike0

Mee Comments (22) You wrote: Actually, the author is saying: "...Coke has a PEG ratio of 2.57, Pepsi's is 48% higher, at 3.81. I think Pepsi's PEG is too high for now..." *************** Yeah. And then he continues: "the market is awarding the company with higher trading multiples. For example, for each $1 Coke generates in revenue, the market awards it with $3.90 in enterprise value, while Pepsi is awarded only $2.01 in enterprise value for each $1 of revenue it generates." and... "Coke looks more attractive because of the following two reasons: 1. A higher earnings per share growth potential 2. Solid bullish sentiment from investors who are willing to pay a higher premium for Coca-Cola relative to Pepsi" I'm not sure what value the PEG data is. The only thing it says is that both are solidly overvalued. That's justified for either though. Both will be growing for decades longer than most companies, since they're best in breed. Buying these two is not about next year's growth. It's about the next 25 years' growth.

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Coke Vs. Pepsi: The Winner Revealed - Seeking Alpha

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"My thoughts are that PEP should be compared to grocery products companies such as GIS and CAG. That's what their business model has become." I'm with you on this one. PepsiCo is just as much about Frito Lay as it is Pepsi. That makes comps to KO less straightforward. Both are great companies. 28 Sep, 10:21 AMReplyLike0

PSalerno Comments (1071) PEG is not a good criterium for valuation as the growth extimate can be incorrect. We know that KO is growing faster and deserves an higher multiplum, but it is not less expensive. 28 Sep, 10:31 AMReplyLike0

cpa28761 Comments (2017) >>>I'm not sure what value the PEG data is. The only thing it says is that both are solidly overvalued. That's justified for either though. Both will be growing for decades longer than most companies, since they're best in breed. Buying these two is not about next year's growth. It's about the next 25 years' growth.<<< Mee, we're approaching agreement. I've drawn my conclusions from analytical data provided by Fidelity, rather than from this author. I'm not sure about 25 years, but I'll go with a 3-5 year horizon. Over the past 5 years, KO has shown 11% EPS growth to PEP's 4%. The analysts Fidelity surveyed predict Forward EPS Long Term Growth (3-5 Yrs) of 7.38% for KO and 4.55% for PEP. >>>I'm with you on this one. PepsiCo is just as much about Frito Lay as it is Pepsi. That makes comps to KO less straightforward. Both are great companies.<<< When we cross this threshold, the universe expands. PEP is also Quaker Oats. PEP has entered the international yogurt business. PEP is a great company, but, by a small margin, second best-of-breed. GIS has shown 5-year historic growth of 8% to PEP's 4%. The survey of Fidelity's analysts shows Forward EPS Long Term Growth (3-5 Yrs) for GIS at 7.08% to PEP's 4.55%. GIS has a better dividend yield on a lower payout. GIS has a better EBITD margin. This did not cause me to abandon PEP totally, but I did reallocate funds to where my position in GIS is greater than my position in PEP. 28 Sep, 12:59 PMReplyLike1

cpa28761 Comments (2017) p, aren't your two sentences inconsistent with one another? OK the measurements of growth may not be precise, but the concept of paying more for the faster growing company is a valid and well-recognized concept. 28 Sep, 01:02 PMReplyLike0 PSalerno Comments (1071)

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Yes, I agree that an higher multiple for KO is justified, for the higher growth showed in the PAST, but I am skittish about the PEG valuation. 28 Sep, 02:21 PMReplyLike0 PSalerno Comments (1071) I like both, PEP is more diversified, and KO is the leader in his own business. 28 Sep, 09:10 AMReplyLike0

cpa28761 Comments (2017) >>>I like both, PEP is more diversified, and KO is the leader in his own business.<<< I like both, too. However, as a diversified grocery products company, I think I like GIS a bit better than PEP. They compete in many of the same milieus. It's interesting that both got out of the restaurant business. 28 Sep, 01:05 PMReplyLike0

subboy686 Comments (4) In a lot of ways, comparing apples and oranges. I purchased PEP many years ago and have DRIP'd along the way as well as dollar cost averaged in large part because of the food side of PEP, particularly the "salt" aspect of PEP's food offerings. Look how far back in history man seeks salt to flavor his food. May sound crazy, but Mother Nature has a way of making her presence known. 28 Sep, 09:51 AMReplyLike0 mdpath Comments (322) Just own them both and you don't have to decide which is a "better" investment. 28 Sep, 10:32 AMReplyLike0

splinter46 Comments (30) Agree, hard to go wrong with either. Long on KO and PEP. 28 Sep, 04:48 PMReplyLike0

stall Comments (34) I'm happy with significant positions in both KO and PEP. It's my belief that owning the top-two companies in a sector usually pays off; this is especially true if they have positive dividend positions. It is perhaps the competion factor that keeps both sharp.

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I've also been happy in PM & Mo---VS and T---ABT and PFE and SO and DUK. Look at the histories of these pairings; I think pretty good. 28 Sep, 11:27 AMReplyLike0

SNAKINGONMY BUTT Comment (1) You wrote: Actually, the author is saying: "...Coke has a PEG ratio of 2.57, Pepsi's is 48% higher, at 3.81. I think Pepsi's PEG is too high for now..." *************** Yeah. And then he continues: "the market is awarding the company with higher trading multiples. For example, for each $1 Coke generates in revenue, the market awards it with $3.90 in enterprise value, while Pepsi is awarded only $2.01 in enterprise value for each $1 of revenue it generates." and... "Coke looks more attractive because of the following two reasons: 1. A higher earnings per share growth potential 2. Solid bullish sentiment from investors who are willing to pay a higher premium for Coca-Cola relative to Pepsi" I'm not sure what value the PEG data is. The only thing it says is that both are solidly overvalued. That's justified for either though. Both will be growing for decades longer than most companies, since they're best in breed. Buying these two is not about next year's growth. It's about the next 25 years' growth. "My thoughts are that PEP should be compared to grocery products companies such as GIS and CAG. That's what their business model has become." I'm with you on this one. PepsiCo is just as much about Frito Lay as it is Pepsi.That makes KO less straightforward both are great companies.When we cross this threshold, the universe expands. PEP is also Quaker Oats. PEP has entered the international yogurt business. PEP is a great company, but, by a small margin, second best-of-breed. GIS has shown 5-year historic growth of 8% to PEP's 4%. The survey of Fidelity's analysts shows Forward EPS Long Term Growth (3-5 Yrs) for GIS at 7.08% to PEP's 4.55%. GIS has a better dividend yield on a lower payout. GIS has a better EBITD margin. This did not cause me to abandon PEP totally, but I did reallocate funds to where my position in GIS is greater than my position in PEP. 24 Dec, 08:24 AMReplyLike0

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