Pick Pepsi Stock Over Coca-Cola?

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PEP: PepsiCo logo
PEP
PepsiCo

Given its better valuation, we believe PepsiCo stock (NYSE: PEP) is a better pick than its peer, Coca-Cola stock (NYSE: KO). PEP stock trades at 21x forward earnings, versus 25x for KO. Coca-Cola’s superior revenue growth and profitability largely explain this gap in valuation. Still, we think this gap will narrow in favor of PepsiCo in the coming years, given its more diversified product portfolio and pricing initiatives. There is more to the comparison, and in the sections below, we discuss why we think PEP will outperform KO in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Coca-Cola Stock Has Outperformed PepsiCo In The Last Three Years

PEP stock has witnessed gains of 15% from levels of $150 in early January 2021 to around $175 now, vs. an increase of 30% for KO stock. In comparison, the broader S&P500 saw around 50% gains over this roughly three-year period. However, the changes in these stocks have been far from consistent. Returns for PEP stock were 21% in 2021, 7% in 2022, and -3% in 2023, while for KO stock were 11%, 11%, and -4%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PEP and KO underperformed the S&P in 2021 and 2023.

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In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Coca-Cola’s Revenue Growth Is Better

PepsiCo saw its sales rise at an average annual rate of 9.2% from $70.4 billion in 2020 to $91.5 billion in 2023, while Coca-Cola’s sales grew at an average rate of 11.6% from $33 billion to $45.8 billion over the same period.

PepsiCo’s revenue growth has been driven by strong pricing trends. However, with weakening consumer spending lately, the volume growth has been tepid for PepsiCo in recent quarters. The company’s revenue of $22.5 billion in the last quarter reflected a 2% organic growth driven by a 5% rise in pricing, offsetting a 3% decline in volume. All but the Quaker Foods segment saw organic sales rise in Q2. Quaker Foods has its own issues. The U.S. FDA issued a recall of over three dozen Quaker Oats products late last year citing salmonella contamination concerns. The recall has significantly impacted the segment’s performance so far this year. Given the high inflation environment, PepsiCo focused on smaller packaging of its products, which has helped its sales. Looking forward, it expects a 4% rise in organic sales this year.

Coca-Cola’s revenue growth has been driven by both at-home and away-from-home channels. This can be attributed to solid pricing trends. North America and Latin America segments have been leading growth. Of late, the company is seeing more traction in the away-from-home business than at-home beverages. This can be attributed to higher inflation and a shift in consumer spending behavior. However, just focusing on pricing growth may not be enough for Coca-Cola. With high inflation, the consumer spending environment isn’t great. Consumers tend to shift to cheaper alternatives or reduce consumption. Still, Coca-Cola expects its 2024 sales to rise 9-10% on an organic basis, largely driven by strong pricing trends.

3. Coca-Cola Is More Profitable

PepsiCo’s operating margin of 14.1% in 2023 declined marginally from 14.4% in 2020, while Coca-Cola’s operating margin contracted from 29.5% to 28.6% over this period. Looking at the last twelve-month period, Coca-Cola’s operating margin of 26.3% fares better than 14.5% for PepsiCo. Despite the impact of the Quaker recall, PepsiCo’s consolidated operating profit rose 11% and the core operating margin expanded by 103 bps in the previous quarter. For Coca-Cola too operating margin expanded to 32.8%, versus 31.6% in the prior-year quarter. Strong pricing trends and refranchising of its bottling operations have aided Coca-Cola’s margin profile lately.

4. Coca-Cola Offers Lower Financial Risk

Looking at financial risk, Coca-Cola fares better than PepsiCo, with its 14% debt as a percentage of equity being lower than 19% for the latter. Moreover, its 19% cash as a percentage of assets is higher than 7% for PepsiCo, implying that Coca-Cola has a better debt position and more cash cushion.

5. The Net of It All

We see that Coca-Cola has demonstrated better revenue growth, is more profitable, and has a better financial position. But, all this appears to be priced in. KO stock already trades at 25x its expected earnings of $2.86 per share in 2024. The 25x figure is slightly higher than the 21x average P/E ratio for KO stock over the last five years. In comparison, PEP stock trades at 21x expected earnings of $8.15 in 2024. The 21x figure is lower than the average P/E ratio of 24x for PEP stock seen over the last five years.

Overall, we expect both companies to see a steady rise in sales. PepsiCo’s more diversified product portfolio, and its focus on smaller packaging, will likely bode well for its sales growth. For Coca-Cola, pricing actions and refranchising of bottling operations remain the key growth drivers in the near term. Still, if one has to choose between these two beverage stocks, we believe PepsiCo will fare better thanks to its better valuation.

While PEP stock may offer better returns over KO 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.

Returns Sep 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 PEP Return 0% 3% 99%
 KO Return 0% 24% 78%
 S&P 500 Return 0% 17% 150%
 Trefis Reinforced Value Portfolio 0% 7% 695%

[1] Returns as of 9/3/2024
[2] Cumulative total returns since the end of 2016

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