How Does PepsiCo Compare With Coca-Cola?

PepsiCo’s stock (NASDAQ:PEP) has notably underperformed this year, experiencing a 10% decline, while its rival, Coca-Cola stock (NYSE:KO), has seen a 16% increase. This disparity is primarily due to soft North American operations for PepsiCo. The company has faced a slowdown in consumer demand for its Frito-Lay snack division and a significant recall in its Quaker Foods North America segment (oatmeal). These issues have negatively impacted organic sales, leading PepsiCo to revise its full-year guidance downward. They now project core constant-currency EPS to be flat year-over-year, a significant drop from the previously expected mid-single-digit rise, and anticipate only low single-digit growth in organic revenue. This cautious outlook has understandably dampened investor confidence.

Despite these recent challenges, our analysis suggests that PepsiCo presents a more compelling investment opportunity than Coca-Cola over the next few years. This conviction is based on a comprehensive evaluation of historical revenue performance, investment returns, and comparative valuation metrics. The following sections will detail the reasoning behind this perspective. That said, if you’re seeking an upside with a steadier experience than an individual stock, consider the High Quality portfolio, which has exceeded the S&P, achieving >91% returns since its inception. Separately, see – SOFI Stock To $30?

Image by moja moco from Pixabay

How Are Coca-Cola and PepsiCo’s Sales Trending?

Coca-Cola has recorded a 7% average annual revenue growth from 2021 to 2024, increasing from $38.7 billion to $47.1 billion. This slightly surpasses PepsiCo’s 5% average annual growth, which saw its revenue grow from $79.5 billion to $91.9 billion during the same period.

Coca-Cola’s revenue growth is fueled by strong performance in both its at-home and away-from-home channels. This growth is largely attributable to solid pricing trends that have allowed the company to effectively manage inflationary pressures. Geographically, North America and Latin America have been the primary drivers of this expansion, showcasing robust demand for Coca-Cola’s diverse beverage portfolio.

PepsiCo’s revenue growth between 2021 and 2024 was driven by strategic pricing adjustments and strong performance in its beverage and snack divisions, though growth faced significant headwinds from operational challenges. The company benefited from increased demand for zero-sugar varieties of Pepsi, and it maintained market share gains in Gatorade. However, PepsiCo’s growth trajectory was substantially impacted by the Quaker Oats recall crisis, which began in late 2023 due to salmonella contamination. The recall was sparked by salmonella that festered at a PepsiCo factory for as long as four years, ultimately leading to the permanent closure of the Illinois Quaker Oats facility. Despite these setbacks, PepsiCo managed annual revenue growth, demonstrating the resilience of its core beverage and Frito-Lay businesses in offsetting the Quaker division’s significant decline.

What About Profitability?

From 2021 to 2024, Coca-Cola saw a slight decline in its net margin, falling from 25.3% to 22.6%. This is linked to higher mixed costs, product mix, and higher marketing expenses. See – Coca-Cola’s Net Margin Comparison – for more details.

Conversely, PepsiCo saw its net margin increase from 9.6% to 10.4%. While the rise was modest, PepsiCo benefited from productivity initiatives and effecting pricing for its products.

Financial Risk Analysis

When evaluating financial risk, Coca-Cola fares slightly better than PepsiCo. Coca-Cola’s debt-to-equity ratio of 16% is more favorable than PepsiCo’s 27%. Furthermore, its cash-to-assets ratio of 14% exceeds PepsiCo’s 8%. Essentially, Coca-Cola illustrates a stronger debt profile while maintaining a more solid cash position.

KO and PEP: Comparing 4-Year Stock Returns Against the S&P 500

Since early January 2021, Coca-Cola’s stock has delivered strong gains, climbing roughly 40% from around $50 to its current level of about $70. In contrast, PepsiCo’s stock has seen minimal movement, inching up only about 4% from $130 to $135 over the same period. This underperformance by both beverage giants is notable when compared to the S&P 500, which has surged approximately 65% since early 2021.

However, a closer look at the annual returns reveals a more complex picture of volatility for both KO and PEP:

• KO’s annual returns were 11% in 2021, followed by another 11% in 2022. It then experienced a slight dip of -4% in 2023 before rebounding with a 9% gain in 2024.
• PEP’s annual returns were stronger initially, at 21% in 2021, then 7% in 2022. However, it saw a modest decline of -3% in 2023 and a more significant drop of -8% in 2024.

Comparing these to the S&P 500’s performance (27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024), it’s clear that both Coca-Cola and PepsiCo underperformed the broader market in 2021, 2023, and 2024. While KO has shown more consistent positive gains over the entire period, PEP’s recent struggles have impacted its overall long-term performance.

PEP Stock: The Superior Beverage Investment Choice?

We believe PepsiCo (PEP) currently offers a more attractive investment opportunity than Coca-Cola (KO), largely due to its favorable valuation.

PEP stock trades at just 17 times its trailing adjusted earnings of $8.03 per share. This is notably below its four-year average price-to-earnings (P/E) ratio of 22 times, suggesting it’s undervalued compared to its historical performance.

In contrast, KO stock is trading at 25 times its trailing adjusted earnings of $2.89 per share. This valuation is higher than its own four-year average P/E of 22 times.

While PepsiCo has faced recent headwinds, particularly from the Quaker incident impacting North American sales, we anticipate a rebound in this segment in the coming quarters. Although PepsiCo’s revenues are projected to remain flat this year, we expect them to return to mid-single-digit growth starting next year. This anticipated recovery, combined with its current discounted valuation, positions PepsiCo as a more favorable choice between the two beverage giants.