The long-standing taste test between beverage giants The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) that has spanned multiple decades may never be solved. It’s like debating what smartphones are better — those made by Apple Inc. (NASDAQ:AAPL) on its iOS platform, or those that use Android from Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL)?
To each his or her own.
But when it comes to the stock test, there’s been no debate. PepsiCo stock has been the clear winner in the past three years, posting gains of 47%, compared to just 7% gains for Coca-Cola stock.
And for investors looking to make money on either stock in the future, little evidence suggests KO will outperform PEP.
Bet You Can’t Eat Just One
Why has PepsiCo stock done so well? For starters, the company has figured out how to thrive where Coca-Cola has failed. While PEP does have a solid beverage business of its own, unlike its bigger rival KO, it has been able to offset slumping global soda consumption by growing its snack foods business.
PepsiCo’s Frito-Lay potato chips wages, “Bet you can’t eat just one.” This has and continues to be a key differentiator from Coca-Cola. PepsiCo’s other brands like Lipton, Doritos, Quaker, Gatorade and Tostitos, among others, have become significant contributors to revenue and profits.
This advantage showed again Thursday as PepsiCo delivered first-quarter adjusted earnings per share of 83 cents that beat estimates by 4 cents. Revenue of $12.22 billion, while down 3% year-over-year, also topped Wall Street estimates by some $40 million. Of that revenue total, Pepsico’s snack/food business accounted for 42%.
And here’s the thing: The snack/food segment also accounted for almost 70% of first-quarter operating profits.
Coca-Cola, The Venture Capitalist
It would seem Coca-Cola has prioritized acquisitions ahead of innovation.
The company has taken large stakes in fast-growing beverage names like Monster Beverage Corp (NASDAQ:MNST) and Keurig Green Mountain Inc (NASDAQ:GMCR). While these acquisitions have paid off for Coca-Cola, given that both MNST stock and GMCR stock are up 106% and 16%, respectively, in the past year, KO must to respond more effectively to slumping soda consumption. It’s the only way for Coke stock to climb organically.
The question, then, is what can Coca-Cola do to reverse the trend?
It’s a question that needs answering. Not only has KO stock underperformed its smaller rivals, KO stock has lagged the broader indices in the past three years, two years and 12 months. And realistically, past a nice dividend of 3.2%, how much value does KO stock offer to investors who want to place a bet today?
However, Coca-Cola’s first-quarter results failed to provide an answer.
Sure, the company’s first-quarter results Wednesday beat on both top and bottom lines. Q1 EPS of 48 cents topped estimated by 6 cents. Likewise, the 410.7 billion in revenue exceeded Wall Street projections by around $40 million.
But expectations were already low. And besides, given the struggles Coca-Cola has suffered in the past couple of years, the company was working with much easier comparisons.
That Coke’s soda business still accounts for the bulk of its revenue and profits is a threat to KO stock, given the rate at which soda is being vilified for its ties to obesity.
By contrast, PepsiCo’s food segment account for 52% of its annual revenue, and it has become the company’s fastest-growing business, even though PepsiCo recently raised snack/food prices by an average of 1%.
The Choice of This Investment Generation
Despite Coke stock having underperformed PepsiCo stock in the past three years, PEP still presents the better value. Not only is PepsiCo projected to grow profits at an annual rate of 7% over the next five years, PEP stock is still cheaper at just 22 times earnings.
By contrast, Coca-Cola is projected to grow earnings in the next five years by 5% annually, or 3 percentage points slower than PepsiCo. But here’s the thing: Coca-Cola stock is priced at a P/E of 26, reflecting a meaningful premium to PepsiCo stock. This means, assuming PEP traded on par with KO, it would trade today around $115, not $97 — or around 20% higher.
What’s more, on a forward-looking basis, PepsiCo is projected to grow earnings next year by 8.3%, based on full-year EPS estimates of $5.04. That’s almost 2 percentage points higher than KO, which is projected to grow full-year 2016 earnings by 6.5%, based on estimates of $2.11 per share.
The 130-year old Coca-Cola isn’t going anywhere, and it’s one of the top-paying dividend stocks in the Dow Jones Industrial Average.
But in terms of value, there’s no debate — PepsiCo stock is the choice this investment generation.
As of this writing, Richard Saintvilus was long AAPL.
