With The Market Fall, Is Coca-Cola A Better Bet Compared To PepsiCo?

by Trefis Team
+5.01%
Upside
134
Market
141
Trefis
PEP
PepsiCo
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Food and Beverages stocks have been particularly badly impacted by the ongoing Coronavirus/oil price crisis, as F&B companies are expected to face very low demand due to the slowdown in economic activity and shutdowns, which has led to a drop in consumer demand and spending. PepsiCo‘s (NASDAQ: PEP) stock is down by about 11% since early February, while its rival Coca-Cola has seen its stock drop over 22% over the same period. PepsiCo has fallen by about 9% since March 8th, as oil prices tumbled and U.S. cases accelerated, while Coca-Cola has declined by about 18%.

Our analysis Is PepsiCo Expensive Or Cheap After A -11.1% Move vs The Coca-Cola Company? compares the stock price performance and fundamentals of PepsiCo and Coca-Cola over the last few years.

Reasons For Difference In Performance

  • Both companies have seen contrasting trends in revenues over the last few years, with PepsiCo’s revenue continuously rising while Coca-Cola’s revenue base has been steadily shrinking until 2018 (due to refranchising of its high-revenue-low-margin bottling business), however, in 2019 KO saw a much healthier revenue growth with most of the refranchising already done.
  • Also, over the last 5 years, Coca-Cola’s earnings have increased at 5.2% vs. 3.9% for PepsiCo, as Coca-Cola has successfully reduced cost by refranchising its bottling plants.
  • In contrast, P/E multiple for PEP has been largely higher than KO, reflecting better geographic and product diversification for PepsiCo. PepsiCo’s 2019 trailing P/E ratio of 26.0 is 1.0x that of the 2019 Coca-Cola Company P/E ratio of 26.3x, whereas both companies have seen a drop in their P/E ratios for 2020, though PEP’s current multiple is higher than KO’s, indicating that the entire effect of coronavirus might not be reflected in PEP’s current stock price.
  • PepsiCo Total Debt has decreased from $37 billion to $32 billion between 2016 and 2019. In comparison, Total Debt for The Coca-Cola Company has decreased at a much lower rate from $33 billion to $32 billion during the same period.
  • However, PepsiCo’s debt-to-equity ratio of 2.2x was still much higher compared to Coca-Cola’s 1.5x at the end of 2019. Additionally, Coca-Cola’s cash from operations ($10.5 billion) was also higher than PepsiCo’s ($9.6 billion) in 2019.

Conclusion

While the outlook for both companies remains tough, as consumer demand and spending is expected to remain low due to the current pandemic, at least until the time there is confirmation of containment of the virus, PepsiCo’s relatively higher exposure to North America (which is currently severely affected by the virus) along with a much higher debt burden (long-term debt to equity of 2.2x vs about 1.5x for Coca-Cola in 2019) is a concern, whereas Coca-Cola’s improving revenue along with higher earnings and cash flow from operations compared to PepsiCo, makes PepsiCo’s stock relatively expensive in comparison to Coca-Cola.

 

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