Pepsi vs. Coca-Cola – the never-ending battle between the two largest beverage companies in the world

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PepsiCo (PEP) vs. Coca-Cola (KO) – The Classic Battle for Fizzy Drinks

At least once in your life, you've likely had a can of Pepsi or Coca-Cola. While Coca-Cola's cola formula is unique, the two drinks taste almost identical. Which one do you prefer? I’m sure you have a favorite. I haven’t had a fizzy drink in a while, but back in the day, my favorite was Pepsi Twist (a lemon-flavored cola). However, PepsiCo and Coca-Cola are about much more than just their sodas. Let’s explore their product ranges.

What differentiate PepsiCo and Coca Cola?

PepsiCo offers a diverse range of products, from energy drinks, snacks, and crisps to coffee, juices, cereals, oatmeal, and more. Its portfolio includes some of the largest brands found in stores worldwide. These flagship brands include Lay’s, Cheetos, Doritos, Mountain Dew, Pepsi Max, Gatorade, Quaker (oatmeal), Rockstar (energy drinks), and many others. In 1994, Starbucks and PepsiCo formed a joint venture to create and distribute Starbucks-branded products, starting with the iconic Frappuccino bottled coffee drink.

Coca-Cola, on the other hand, focuses primarily on beverages. Its range of fizzy drinks includes Fanta, Sprite, and Schweppes. Coca-Cola’s juice and dairy drink offerings feature brands like Innocent, Fairlife, and Simply. In the water and hydration category, Coca-Cola’s brands include Powerade (the main competitor to Pepsi’s Gatorade), SmartWater, and VitaminWater. Coca-Cola also offers ready-to-drink alcoholic mixers and has partnered with Jack Daniel’s. In 2019, Coca-Cola acquired the British coffee shop chain Costa for $4.9 billion.

The primary difference between PepsiCo (PEP) and Coca-Cola (KO) is not in their product offerings, but in how they handle bottling.

Coca-Cola produces the cola concentrate, which is then sold to licensed Coca-Cola bottling companies. These bottlers operate under territorial contracts to produce Coca-Cola products. Coca-Cola partners with these companies, which manage the production, packaging, and distribution of the beverages. These bottlers are locally based, such as Coca-Cola HBC in Europe, and have the autonomy to make independent decisions for their operations.

In contrast, PepsiCo directly owns 75% of its bottling operations in North America. This gives PepsiCo more control and the ability to reduce costs. However, the bottling business requires significant resources, and the sector has seen declining demand for nearly 20 years.

Q2 Earnings and Guidance

Now let's look at the latest earnings for PepsiCo (PEP) and Coca-Cola (KO). PepsiCo reported a net revenue growth of 0.8%, reaching $22.50 billion. PEP experienced strong gross and operating margin expansion and posted double-digit EPS growth despite facing tough comparisons to last year. EPS for the second quarter was $2.23, a 12% increase from $1.99 in the previous year. Free cash flow stood at $1.269 billion, a decline of over 14% compared to last year’s $1.479 billion.

PepsiCo is now expect to deliver 4$ organic revenue growth and 8% constant currency growth for full-year 2024. Total cash returns to shareholders of approximately $8.2 billion, comprised of dividends of $7.2 billion and share repurchases of $1.0 billion for 2024.

Coca-Cola’s net revenue grew 3% to $12.4 billion. Operating margin, which includes items affecting comparability, was 21.3% versus 20.1% in the prior year. However, its EPS declined by 5%, down to $0.56. KO’s free cash flow was $3.163 billion, a decline of over 23% from last year’s $4.13 billion. Cash flow from operations was $4.1 billion, a decrease of $516 million compared to the prior year, largely due to higher tax payments and the cycling of working capital benefits from the previous year.

KO is now expected to deliver organic revenue growth of 9-10% for full-year 2024. The company expects to generate $9.2 billion cash from operating activities. Net revenue is expected to grow by 5-6%.

Valuation

We will examine four main ratios for PepsiCo (PEP) and Coca-Cola (KO): P/E, P/B, P/S, and P/FCF, and evaluate which company appears to be cheaper.

Price-to-Earnings (P/E): PEP has a P/E of 25.43, while KO has a P/E of 28.92. The consumer staples average is 30.32, which suggests that both PEP and KO are trading at a discount to their sector peers, with PEP being slightly cheaper than KO.

Price-to-Book (P/B): PEP’s P/B is 12.39, and KO’s is 11.96, indicating that KO is trading at a slightly lower valuation relative to its book value, making KO the cheaper option based on this metric.

At this point, it's 1 point for PEP and 1 point for KO. Let's continue.

Price-to-Sales (P/S): PEP has a P/S of 2.62, while KO’s P/S is 6.66, meaning PEP trades at a lower price relative to its sales. However, this could also indicate that PEP has thinner profit margins compared to KO.

Price-to-Free Cash Flow (P/FCF): PEP’s P/FCF is 34.22, and KO’s is 34.15. Although PEP is marginally better, the difference is negligible, so we won’t award points to either company. Both companies have high P/FCF ratios, reflecting investor expectations of future growth and higher cash flow generation.

Considering the consumer staples sector’s average P/FCF of 37.6, both PEP and KO are slightly undervalued. However, it’s important to note that PEP had negative free cash flow of -$1.655 billion in Q1 2024 due to increased capital expenditures, product recalls in the Quaker Foods North America segment, and higher production and operational investments.

Dividends

PepsiCO and Coca Cola are dividends kings. PEP has 52 years of dividend growth, with current growth rate of 8,49%. KO has 62 years of dividend growth, with current growth rate of 5,22%. PEP has dividend yield of 3,10% and 78,67% dividend payout ratio. KO has 2,72% dividend yield and 78,87% payout ratio. Both companies are providing similar shareholder yields - PEP has 3,31% and KO has 3,07%.

Wall Street Analyst Forecast

12 month average price target of Wall St analyst for PEP is $186, upside potential of 6,16% (as of today 19th, September). However, KO’s 12 month target price is $71,13, downside of just 0,86%.

The all-time high PepsiCo stock closing price was $187.56, a 6.50% shy of today price.

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The all-time high CocaCola stock closing price was $72.52, touched this month, just 2% shy of today price.

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Conclusion

At current valuations, PepsiCo appears to be the better choice. It is a strong dividend player and should be considered in any dividend investor’s portfolio. PepsiCo’s products are more diversified, spanning cereals and snacks, which offers it broader growth potential. Additionally, PEP has more upside potential than Coca-Cola and appears cheaper based on various valuation metrics.

Disclaimer: We are not financial advisors. We have experience working with a leading investment research platform with top asset and wealth managers. We do not own PEP or KO (yet). We are planning to add it to our portfolio this quarter.