PepsiCo, Inc. (NYSE:PEP) announced Q1 2018 earnings April 26 and they were better than expected pushing Pepsi stock higher on the news.
On the top line, revenues were $12.6 billion, $200 million higher than forecast, while on the bottom, core earnings per share were $0.96, three cents higher than analyst estimates.
Break open a can of Pepsi. The cola wars are back baby. Well, kind of.
Over at The Coca-Cola Co (NYSE:KO), Warren Buffett’s favorite, its first-quarter earnings were also better than expected.
On the top line, Coca-Cola’s revenue came in at $7.63 billion in the first quarter, significantly higher than the analyst estimate of $7.34 billion. On the bottom line, analysts were expecting earnings of $0.46 a share; KO delivered earnings that were a penny higher at $0.47 a share.
Naturally, with both companies beating estimates on both the top- and bottom-line, investors are wondering which of the two stocks is the better buy.
Here is my two cents worth.
What to Like About Pepsi Stock
The first thing that jumps out at me about Pepsi’s quarterly numbers is the healthy growth of its business outside North America.
Latin America led the charge with a 9% increase in revenue in the quarter followed by Europe Sub-Saharan Africa (ESSA) and Asia, Middle East and North Africa (AMENA) with 6% revenue growth in Q1 2018.
The same healthy increases dropped to the bottom line where Latin America, ESSA, and AMENA had operating profit growth of 17%, 9%, and 10% respectively.
Unfortunately, its business outside of North America accounts for just 31% of revenue and 32% of operating profits.
The other observation I have is that consumers continue to love their snack foods. Frito Lay North America (FLNA) increased revenue year over year by 3% to $3.6 billion.
Given FLNA accounts for 29% of its overall revenue and 69% of its operating profit, if Pepsi stock is to move higher, the snacks business, which includes Frito-Lay’s Poppables line of snacks launched in 2017, must continue to see healthy growth.
What to Like About Coke
Unit case volumes in the first quarter grew by 3% overall with all four of its operating regions showing growth. Its Asia-Pacific segment led the way with 5% growth followed closely by Europe, Middle East & Africa up 4%.
In terms of product performance, tea and coffee saw 5% growth in unit case volumes during the quarter followed by sparkling soft drinks up 4% with strong performances from both Coca-Cola Zero Sugar and Diet Coke.
The second observation I have about Coke’s quarter was the improvement in both gross and operating margins. In Q1 2018, gross margins were 64.0%, 270 basis points higher than a year earlier while operating margins were 30.7%, 600 basis points higher than a year earlier.
Bring it all together and Coke’s operating profit increased 3.8% in the quarter to $2.33 billion on $7.6 billion in revenue.
Which Is the Better Buy?
If the choice was between Frito-Lay North America and KO stock, it would be a very difficult decision because Pepsi’s snacks business continues to deliver the best margins of any of Pepsi’s operating segments, and almost identical to Coke’s margins.
Alas, that’s not the case.
Pepsi says it’s going to invest in its North American Beverages segment which is the company’s largest operating division in conjunction with further investments in faster-growing, smaller businesses in other categories.
Suffice to say, the beverage side of its business is going to need a lot of tender loving care to return it to growth.
Pepsistock is definitely the cheaper of the two and so it should be given the difference in margins.
Personally, I wouldn’t buy either stock, but if I had to pick one, I’d probably go with KO.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.