This Beverage Giant Seems Better Placed Compared To PepsiCo

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PEP: PepsiCo logo
PEP
PepsiCo

The shares of PepsiCo (NASDAQ: PEP) currently trade at $174 per share, which is 22% above its pre-Covid levels. On the other hand, shares of Keurig Dr Pepper (NYSE: KDP) trade at $37 per share currently, which is 29% above its pre-Covid level. Does that make PEP a better stock pick compared to KDP? Both the companies belong to the food and beverage industry – providing packaged beverages, concentrates, etc. In addition to beverages, PepsiCo also provides food and snack products. Though PepsiCo as a company is much bigger and geographically more diversified, Keurig Dr Pepper’s higher valuation (P/S multiple) reflects a much better revenue growth and product mix. The trend of more people moving away from carbonated drinks due to health concerns is benefiting KDP as most of its sales come from brewing systems and bottled beverages. This puts it at an advantageous position compared to PepsiCo. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, PepsiCo vs. Keurig Dr Pepper: Industry Peers, But Keurig Dr Pepper Is A Better Bet.

Revenue Growth

  • Keurig Dr Pepper’s revenue growth has been stronger than PepsiCo over recent years, with KDP revenues expanding more than 40% in the last three years, compared to a rise of only 3.5% in PepsiCo revenues. Such a sharp rise in KDP’s revenue was mainly driven by the acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper. If you look at the revenue growth over the last twelve months (LTM), PEP’s revenue growth has been slightly higher due to the acquisition of SodaStream and new product launches. However, KDP also saw impressive LTM revenue growth without any acquisition as KDP did not see any major impact of the pandemic on its sales, as at-home demand for K-Cups increased.
  • KDP’s four operating segments – the company derives 44% of its revenue from bottled beverages (ending up in grocery and convenience stores) and 38% of sales from Keurig brewing systems and K-Cups, benefiting directly from the sudden surge in at-home consumption. Hardly 13% of KDP’s total revenues comes from concentrates (which are sold to affiliates that manufacture syrups used in fountain drinks), with its only international division – Latin America – making up only 5% of revenue.
  • PepsiCo generates 55% of its revenue from food/snacks and 45% from beverages

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Returns (Profits)

  • Though both companies have seen an improvement in margins over recent years, KDP’s LTM operating margin is 5.6%, much lower than PEP’s 15.2%.
  • The rise in PEP’s margins recently was the result of higher revenues and cost savings from its productivity plan.
  • KDP’s top line growth and acquisition synergies, along with at-home demand for its products, will lead to margin growth in the coming quarters.

Risk

  • With respect to financial leverage, KDP is in a better position with debt as a percentage of total liabilities and shareholders’ equity standing at 25%. The metric is 44% in the case of PepsiCo.
  • However, PEP has managed its cash in a better way. Its cash as a percentage of assets stands at over 7% compared to KDP’s 0.4%.

Net of it all

Though PepsiCo seems to have better profitability, KDP is likely to exhibit strong revenue growth and better debt management going forward. What benefits Keurig Dr Pepper is also its product mix. KDP continues to have an edge over rivals Coca-Cola and PepsiCo, as its coffee segment continues to see growth with people moving away from carbonated drinks and replacing the same with beverages like coffee. This growth is set to continue as working at home by millions of people is benefiting the company’s direct and licensed K-Cup coffee sales.

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