Coca-Cola Or PepsiCo?

by Trefis Team
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Upside
48.05
Market
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Trefis
KO
Coca Cola
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Coca-Cola’s stock (NYSE: KO) price has increased by about 24% in a little over last three years, when the stock price increased from $37 at the end of 2016 to $46 as on 15th June 2020. That’s a positive for Coca-Cola. But wait a minute, PepsiCo’s stock (NASDAQ: PEP) price has seen a much better growth at 37% during the same period. This is despite the fact that KO’s net income margins have consistently gone up between 2017 and 2019 while PepsiCo’s margins have seen a lot of volatility. Does the stock price movement then make sense? We believe it does and our dashboard Coca-Cola vs. PepsiCo: Does The Stock Price Movement Make Sense? has the underlying numbers.

Sure, Coca-Cola’s net income margin has increased consistently over recent years, but the one key element is the revenue. PepsiCo’s revenue base has been almost double that of Coca-Cola. Additionally, while PepsiCo’s revenues have steadily increased during the 2016-2019 period, Coca-Cola’s revenues have declined during this period due to refranchising of its bottling operations (franchise owners record revenues from bottling plants they own, while Coca-Cola earns fees from franchisees), with some revenue growth coming only in FY2019 with most refranchising already done. Also, PepsiCo’s current P/E multiple is higher at 24.9x vs. Coca-Cola’s 22.2x based on its current market price and FY2019 EPS. So, what along with revenue is driving the difference in price rise? It’s the revenue mix.

How Do Core Businesses Of Coca-Cola and PepsiCo Compare?

Let’s have a closer look at the core business prospects. Both companies are mostly known as beverage giants competing with each other. But what remains key is the revenue mix of these two companies. Coca-Cola is wholly into beverages ranging from carbonated soft drinks, coffee, juices, etc. PepsiCo, along with beverages, has a much more diversified business with almost half of its revenues coming from snacks and food products. As people become more health conscious and move away from carbonated drinks, Coca-Cola is likely to feel the brunt of this much more as PepsiCo’s food and snacks division will help it buffer the changing consumer preferences. Additionally, Coca-Cola has gone for refranchising of its bottling plants (high-revenue, low-margin business), a strategy which has led to a drop in revenues while profits have gone up. In contrast, PepsiCo has been going in for acquisitions (eg: SodaStream) to increase its revenue base, while existing brands such as Frito-Lay remain the biggest revenue and margin earner for the company.

Though Coca-Cola is expected to narrow its revenue gap with PepsiCo in the medium term, Pepsi is likely to still be bigger in size and more diversified. The lock downs driven by the current crisis has taken a toll on both companies in the form of lower demand and supply bottlenecks. We believe that as the lock downs are eased and there are signs of abatement of the crisis by the time of Q2 2020 results announcement, both companies could see an upside in their stock prices. Trefis has a price estimate of $141 for PepsiCo’s stock which is higher than its current market price. Similarly, Coca-Cola’s valuation gives a fair price estimate of $50 per share, higher that its current market price.

For further insight into the food and beverage industry, find out how Keurig Dr Pepper stands in comparison to Coca-Cola.

 

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