Coke-Monster Is Bad News for Pepsi

by Jonathan Berr | May 1, 2012 10:09 am

PepsiCo (NYSE:PEP[1]) has won a few skirmishes in the Cola Wars lately, but Coca-Cola (NYSE:KO[2]) is poised to bolster its stranglehold on the market’s leadership through its reported plans to partner[3] with Monster Beverage  (NASDAQ:MNST[4]), the leading provider of non-carbonated energy drinks.

Reuters has reported that the two companies are in talks to determine “the best ways to maximize the value of our relationship.” Earlier, The Wall Street Journal reported that Coca-Cola is in talks to acquire its smaller rival. That report was refuted, though Reuters noted that the two companies had takeover discussions late last year. Investors needn’t get hung up on semantics — the takeaway is that a Coke-Monster acquisition or partnership is bad news for PepsiCo. The timing couldn’t be worse.

PepsiCo CEO Indra Nooyi is in the midst of a turnaround plan for the drinks-and-snacks maker that includes slashing 8,700 jobs, increasing marketing spending by $600 million in 2012 and adding new products in emerging markets. Investor patience with Nooyi, however, is running thin.

Nooyi has struggled to jump-start growth in PepsiCo’s food-and-beverage businesses in North America. Coca-Cola remains a Wall Street favorite, gaining more than 9% this year, while PepsiCo shares have barely budged.

Monster Beverage, based in Corona, Calif., is on a roll. The company, whose brands include Java Monster, Monster Rehab and Hansen’s natural sodas, recently reported record fourth-quarter and 2011 profits. It already has distribution deals with Coca-Cola and Anheuser-Busch Inbev (NYSE:BUD[5]).

Beverage Digest estimates that the Monster brand had a leading 34.8% share of the U.S. energy drinks market on a volume basis in 2011, versus Coke’s 5.4% share and PepsiCo’s 4.6%. Overall, the energy-drink category grew by 16.6%. Monster’s volume in the category rose 17.9%, while Coca-Cola fell 0.6.% and PepsiCo slumped 13.4%. Beverage Digest estimates the retail value of the market at about $8.9 billion, up from $7.7 billion in 2010.

Both Coca-Cola and PepsiCo have been trying for years to reverse the decline in soft-drink consumption by spending heavily on advertising. It doesn’t seem to be doing much good. On average, Americans drank 44.6 gallons of carbonated soft drinks last year, the lowest level since 1987, the trade publication says.

Both companies have sought growth through acquisitions. Coca-Cola, whose brands include Minute Maid juices and Fuse ice tea, went into the movie business in 1982 when it purchased Columbia Pictures for $692 million. It sold the studio seven years later to Sony (NYSE:SNE[6]) for $1.5 billion. Buying Monster would be Coca-Cola’s largest-ever brand acquisition, according to The Wall Street Journal.

Nooyi has tried to diversify PepsiCo, which is based in Purchase, N.Y. On her watch, PepsiCo divested its restaurant business, now called Yum Brands (NYSE:YUM[7]). PepsiCo acquired Tropicana in 1998 for $3.3 billion and Quaker Oats in 2001 for $13.4 billion.

Wall Street continues to believe that Coca-Cola is the real thing for investors. Its revenue is expected to rise 4.4%, to $48.6 billion, while PepsiCo is forecast to gain 2.5%, to $67.5 billion.

Still, PepsiCo looks appealing. The average one-year price target for PepsiCo is $69.75, about 6% above where it recently traded. That’s slightly better than Coca-Cola, whose $79.83 price target implies about a 5% upside. PepsiCo is tops in dividends, too, yielding 3% to Coca-Cola’s. 2.7%

PepsiCo has recently taken business from Coca-Cola at Papa John’s and Baskin-Robbins. That’s good news.

But Coca-Cola is so far ahead of PepsiCo in the Cola Wars that it can lose a few customers without breaking into a sweat.

As of this writing, Jonathan Berr was long KO.

Endnotes:
  1. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  2. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  3. reported plans to partner: http://investorplace.com/2012/05/monster-beverage-options-spike-on-takeover-buzz/
  4. MNST: http://studio-5.financialcontent.com/investplace/quote?Symbol=MNSTR
  5. BUD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BUD
  6. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  7. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM

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