Is Coca-Cola Stock A Better Pick Than Its Sector Peer?

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

We believe Coca-Cola stock (NYSE: KO) is currently a better pick than Procter & Gamble stock  (NYSE: PG), given its better prospects. Although Coca-Cola is trading at a comparatively higher valuation of 6.4x trailing revenues vs. 4.5x for P&G, this gap in the valuation is largely justified, given its superior profitability, as discussed below.

If we look at stock returns, KO, with a 4% rise in the last twelve months, has outperformed PG, down 5%, and the broader S&P 500 index, down 17%. There is more to the comparison, and in the sections below, we discuss why we believe KO stock will offer better returns than PG 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. Procter & GambleWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. P&G’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 4% for P&G.
  • However, if we look at a longer time frame, P&G fares better, at an average annual growth rate of 5.8% to $80.2 billion in fiscal 2022 (fiscal ends in June), compared to $67.7 billion in 2019, 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 is expected to weigh on the company’s top-line growth rate in the near term.
  • P&G’s largest segment is Fabric & Home Care, contributing around 35% of the company’s revenues. It has also seen a steady rise in sales over recent years. In fiscal 2022, the company reported a 5% rise in total sales, driven by a 2% growth in unit volume.
  • Our  Coca-Cola Revenue Comparison and Procter & Gamble Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, both companies are expected to post similar revenue growth 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 1.6% for Coca-Cola, compared to a 1.7% CAGR for P&G, 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 22.5% for P&G.
  • The operating margin has been better for Coca-Cola over recent years.
  • This compares with 32.4% and 22.7% in 2019 and fiscal 2020, respectively.
  • Coca-Cola’s free cash flow margin of 27.1% is also better than 20.1% for P&G.
  • Our Coca-Cola Operating Income Comparison and Procter & Gamble Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. While Coca-Cola’s 14.5% debt as a percentage of equity is higher than 8.9% for P&G, its 14.3% cash as a percentage of assets is higher than the 5.8% for the latter, implying that P&G has a better debt position, and Coca-Cola has more cash cushion.

3. The Net of It All

  • We see that Coca-Cola is more profitable and has more cash cushion.  On the other hand, P&G has seen better revenue growth over recent years, has a better debt position, 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 Coca-Cola 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 -2% for P&G over this period and a 3% expected return for Coca-Cola stock, implying that investors will likely be better off buying KO over PG, based on Trefis Machine Learning analysis – Coca-Cola vs. Procter & Gamble – which also provides more details on how we arrive at these numbers.

While KO stock can offer better returns over PG, 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 Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
KO Return -2% -2% 51%
PG Return 0% 0% 81%
S&P 500 Return 1% 1% 74%
Trefis Multi-Strategy Portfolio 3% 3% 224%

[1] Month-to-date and year-to-date as of 1/10/2023
[2] Cumulative total returns since the end of 2016

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