This Restaurant Is Likely A Better Pick Over Coca-Cola Stock

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KO: The Coca-Cola Company logo
KO
The Coca-Cola Company

We believe Wendy’s stock  (NASDAQ: WEN) is currently a better pick than Coca-Cola stock (NYSE: KO), given its better prospects. Although Wendy’s is trading at a comparatively lower valuation of 2.2x trailing revenues vs. 6.4x for Coca-Cola, this gap in the valuation is justified mainly given the latter’s superior profitability and lower financial risk, as discussed below.

If we look at stock returns, KO, with a 6% rise this year, has outperformed WEN, down 6%, and the broader S&P 500 index, down 16%. There is more to the comparison, and in the sections below, we discuss why we believe WEN stock will offer better returns than KO stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Coca-Cola vs. Wendy’sWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Wendy’s Revenue Growth Has Been Better Over The Recent Years

  • Both companies posted sales growth over the last twelve months. Still, Coca-Cola’s revenue growth of 12% is higher than 5% for Wendy’s.
  • Looking at a longer time frame, Wendy’s fared slightly better, with its sales rising at an average growth rate of 6.1% to $1.9 billion in 2021, compared to $1.6 billion in 2018, while Coca-Cola’s sales grew at an average rate of 4.8% to $38.7 billion in 2021, vs. $34.3 billion in 2018.
  • For Coca-Cola, both at-home and away-from-home channels have seen growth.
  • Strong pricing trends have led Coca-Cola’s revenue growth over the recent quarters.
  • After Covid-19 induced lockdowns, the recovery has been swift for the beverage giant, with more people venturing out to attend events, travel, and dine.
  • Looking forward, a challenging macroeconomic environment and a strengthening dollar will likely weigh on the company’s top-line growth rate in the near term.
  • Wendy’s revenue growth over the recent quarters has been driven by same-restaurant sales growth. The company benefited from a higher average check, partly offset by a decline in customer count.
  • Although Wendy’s was investigated by CDC after an E. coli outbreak in three states a few months back, the specific outbreak source was not confirmed.
  • Our  Coca-Cola Revenue Comparison and Wendy’s Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Wendy’s revenue is expected to grow faster than Coca-Cola’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 5% for Wendy’s, compared to a 2% CAGR for Coca-Cola, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Coca-Cola Is More Profitable

  • Coca-Cola’s operating margin of 31.3% over the last twelve-month period is better than 22.3% for Wendy’s.
  • The operating margin has been better for Coca-Cola over recent years.
  • The figures stood at 32.4% and 21.7% in 2019, before the pandemic, respectively.
  • Coca-Cola’s free cash flow margin of 27.1% is also better than 14.5% for Wendy’s.
  • Our Coca-Cola Operating Income Comparison and Wendy’s Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Coca-Cola fares much better. Its 14.5% debt as a percentage of equity is much lower than 61.0% for Wendy’s, while its 14.3% cash as a percentage of assets is higher than the 12.7% for the latter, implying that Coca-Cola has a better debt position and also has more cash cushion.

3. The Net of It All

  • We see that Coca-Cola is more profitable and offers lower financial risk with a better debt position and more cash cushion.  On the other hand, Wendy’s has seen better revenue growth over recent years and is available at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Wendy’s is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 11% for Wendy’s over this period and a 2% expected return for Coca-Cola stock, implying that investors will likely be better off buying WEN over KO, based on Trefis Machine Learning analysis – Coca-Cola vs. Wendy’s – which also provides more details on how we arrive at these numbers.

While WEN stock looks like it can offer better returns over KO, it is helpful to see how Coca-Cola’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Coca-Cola vs. Footlocker.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Nov 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
KO Return 5% 6% 51%
WEN Return 8% -6% 66%
S&P 500 Return 4% -16% 80%
Trefis Multi-Strategy Portfolio 4% -19% 221%

[1] Month-to-date and year-to-date as of 11/28/2022
[2] Cumulative total returns since the end of 2016

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