We believe that PepsiCo stock (NYSE: PEP) is a better pick over Cisco stock (NASDAQ: CSCO), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar market capitalization of $230 billion to $250 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.
Interestingly, PepsiCo and Cisco both have had a Sharpe Ratio of 0.4 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Looking at stock returns, CSCO has fared much better with 20% gains this year than a 2% decline for PEP stock. The broader S&P500 index is up 17%. There is more to the comparison, and in the sections below, we discuss why we believe PEP will offer better returns over CSCO in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in this analysis.
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1. PepsiCo’s Revenue Growth Is Better
- PepsiCo’s revenue growth has been better, with an 8.8% average annual growth rate in the last three years, compared to -0.2% for Cisco.
- Strong pricing trends have led PepsiCo’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 of homes while at-home demand has also been strong.
- Cisco’s fiscal 2022 revenues were up 3%, as a 6% rise in product revenue was partially offset by a 2% decline in service revenue.
- Cisco is seeing growth in its core networking business partly due to easing supply chain constraints, which are helping the company to clear its backlog. This also means that orders are now declining.
- Cisco’s Internet for the Future segment, which includes optical networking, 5G, silicon, and optics solutions, saw its sales rise 17% y-o-y in fiscal 2022.
- Our PepsiCo Revenue Comparison and Cisco Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, PepsiCo is expected to see slightly better sales growth in the coming years. Cisco will likely see tepid growth due to order declines after improved component availability, resulting in faster deliveries. Cisco has projected 1% sales growth in 2024.
2. Cisco Is More Profitable And Comes With Lower Financial Risk
- PepsiCo’s reported operating margin slid from 15.3% in 2019 to 13.5% in 2022, while Cisco’s operating margin expanded from 16.5% to 25.3% over this period.
- Looking at the last twelve-month period, Cisco’s operating margin of 25.9% is better than 11.7% for PepsiCo.
- Our PepsiCo Operating Income Comparison and Cisco Operating Income Comparison dashboards have more details.
- Looking at financial risk, Cisco fares better. Its 4% debt as a percentage of equity is lower than 18% for PepsiCo, while its 24% cash as a percentage of assets is higher than 7% for the latter, implying that Cisco has a better debt position and more cash cushion.
3. The Net of It All
- We see that PepsiCo has demonstrated better revenue growth and trades at a comparatively lower valuation multiple of 2.7x revenues vs. 4.3x for Cisco. On the other hand, Cisco is more profitable and has a better financial position.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe PepsiCo is a better pick.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 7% for PepsiCo over this period vs. a -2% expected return for Cisco, based on Trefis Machine Learning analysis – PepsiCo vs. Cisco– which also provides more details on how we arrive at these numbers.
- If we compare the current valuation multiple to the historical average, PepsiCo fares slightly better. Pepsi stock trades at 2.7x revenues, compared to its last five-year average of 3.0x, while Cisco stock trades at 4.3x trailing revenues vs. the last five-year average of 4.0x.
- Our PepsiCo (PEP) Valuation Ratios Comparison and Cisco (CSCO) Valuation Ratios Comparison have more details.
- While we believe PepsiCo is a better pick over Cisco, we acknowledge that 7% returns for PEP isn’t great. There are better opportunities over PEP stock. Our Better Bets Than PEP Stock dashboard details S&P500 stocks that can offer better returns in the next three years.
While PEP stock may offer better returns over CSCO in the next three years, it is helpful to see how PepsiCo Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||0%||17%||101%|
|Trefis Reinforced Value Portfolio||0%||31%||575%|
 Month-to-date and year-to-date as of 9/1/2023
 Cumulative total returns since the end of 2016