In the consumer defensive space, Coca-Cola Co. (KO, Financial) and PepsiCo Inc. (PEP, Financial) have bubbled to the top as two of the biggest brands globally. Their storied rivalry has played out in television commercials, celebrity endorsements and even in blind taste tests. But away from the froth of advertising campaigns and pop culture, another contest brews, one that intrigues investors: Which of these soda giants is the better buy?
Historically, market watchers and investors have oscillated between these two stocks, gauging them based on factors that extend beyond taste. As Warren Buffett (Trades, Portfolio), a significant stakeholder in Coca-Cola, aptly put it: "Price is what you pay. Value is what you get." So which of these companies offers the most value to its shareholders?
In this analysis, I will dive deep into their financials, growth strategies and market valuations in an attempt to uncap the mystery. Is Coca-Cola truly the more attractively valued stock with better growth prospects as some suggest? Or does Pepsi have some fizz left to surprise its investors?
Second-quarter earnings showdown
Diving right in, let's unpack the second-quarter earnings of the two beverage giants. These companies, with their rich histories and vast product portfolios, frequently butt heads in the market. And, as with any clash of titans, one emerged with a slight edge this quarter.
Both companies have undoubtedly had their moments of triumph. PepsiCo, for instance, showcased impressive financial muscle, reporting revenue of $22.32 billion, comfortably surpassing the projections of $21.73 billion. Coca-Cola was not far behind, registering adjusted revenue of $11.97 billion, which exceeded expectations of $11.75 billion.
PepsiCo’s challenges arose from its decision to increase product prices, which contributed to a 3% volume drop in food divisions and a 1% dip in beverages. Meanwhile, Coca-Cola navigated its own challenges, with a mere 1% decline in U.S. volume. Still, both giants showcased commendable resilience in their strategies. PepsiCo's CEO, Ramon Laguarta, highlighted the company's agility in a dynamic global environment. Conversely, Coca-Col CEO James Quincey acknowledged shifts in consumer preferences, particularly toward cheaper alternatives, yet remained cautiously optimistic.
When the dust settles and we are pressed to define a "winner" for the quarter, PepsiCo might just have the edge, chiefly due to its robust financial performance and slightly more optimistic full-year outlook. PepsiCo has adjusted its forecast to 10% organic revenue growth, up from a prior 8%. Meanwhile, Coca-Cola, though certainly holding its own with revised expectations of 5% to 6% growth in adjusted earnings per share and an 8% to 9% increase in organic revenue, did not quite match PepsiCo's fervor.
The future strategies of both PepsiCo and Coca-Cola, especially around pricing, will be crucial determinants in the coming quarters.
Financial overview
Coca-Cola's financial framework in 2023 reflects a robust and resilient company. The Atlanta-based behemoth’s financial strength rating stands at 6 out of 10. Key metrics reveal a cash-to-debt ratio of 0.38 and a debt-to-Ebitda ratio of 2.72, underscoring its aptitude in managing financial leverage while ensuring liquidity. The equity-to-asset ratio is pegged at 0.26, while the Piotroski F-Score is a strong 8 out of 9, showcasing the company’s financial health. The Altman Z-Score of 3.91 places Coca-Cola in the safe zone, further alleviating concerns over financial distress.
On the profitability side, Coca-Cola boasts a gross margin of 58.52%, translating to a net margin of 23.81%. The brand's power shines through its ability to maintain a return on equity of 43.38% and an impressive return on invested capital of 13.72%. Consistent with its historical performance, Coca-Cola has remained profitable for the past decade. The growth department reveals a three-year revenue growth rate of 4.6% and a future three to five-year total revenue growth rate of 5.35%.
Valuation-wise, Coca-Cola's price-to-earnings ratio stands at 21.50 with a forward price-to-earnings of 18.46. The company's GF Value is estimated at $67.50, suggesting a modest undervaluation. Coca-Cola continues to reward its shareholders with a healthy dividend yield of 3.48% and has a payout ratio of 0.75.
PepsiCo has a financial strength rating of 5 out of 10. The company's cash-to-debt ratio is lower at 0.15, while its debt-to-equity ratio stands higher at 2.47. However, the company also has a reassuring Altman Z-Score of 3.95. In the profitability arena, it reveals a gross margin of 53.58%, culminating in a net margin of 8.76%. The company's return on equity is slightly higher at 44.18%. It also has a return on invested capital of 12.82%.
The company's growth has outpaced Coca-Cola in the past three years with a revenue growth rate of 9.3%. Its future three to five-year total revenue growth rate is projected to be 5.63%.
As for valuation, PepsiCo's price-earnings ratio is higher at 27.92 with a forward price-earnings ratio of 19.66. Its GF Value stands at $192.64, indicating a modest undervaluation. Shareholders of Pepsi enjoy a dividend yield of 3.02% with a slightly higher payout ratio of 0.83.
Both companies remain solid in their financial performance, but Coca-Cola is leading in profitability margins and liquidity, while PepsiCo has had faster near-term growth.
Cash flow dynamics
When we delve deep into the financial tapestry of Coca-Cola and Pepsi, a fascinating narrative emerges. Coca-Cola, with its free cash flow for December 2022 standing at a robust $9.53 billion, seems to be enjoying a comfortable position. A quick calculation reveals that an impressive 22.17% of its revenue is converted into free cash flow for the said year. This, in the grand scheme of things, paints a picture of efficiency and possibly a commanding brand presence that ensures consistent cash inflows.
Contrast this with PepsiCo, which recorded $5.60 billion in free cash flow for December 2022. Yet, when this figure is juxtaposed against the company's revenue, a mere 6.48% conversion emerges. It is a stark difference, especially when you consider that, in absolute terms, Pepsi's revenue dwarfs that of Coca-Cola. What this suggests is that while Pepsi might be raking in more money, its ability to transform that revenue into free cash flow, essentially the lifeblood of any business, is markedly lower than Coca-Cola's.
Now, let's talk capital expenditure, a realm that often provides insight into a company's future ambitions. The data at hand does not spell out capital expenditure figures, but we can draw some inferences from the Ebitda and Ebitd values. If we consider the difference between these numbers as a proxy for depreciation and amortization (a reflection of past capital expenditures), Pepsi's figure overshadows Coca-Cola's. While it is not a direct measure, this could hint at Pepsi historically shelling out more in capital expenditures.
Pepsi, with its sprawling revenue base, paints a more complex picture. Its conversion to free cash flow is notably more conservative than Coca-Cola's. Coupled with potentially heavier capital expenditures, it gives an impression of a brand investing aggressively to sustain or expand its operations.
While revenue figures and growth rates provide a foundational understanding, it is the cash flow narrative that often reveals the true financial vitality of a company. In this scenario, Coca-Cola seems to be operating with a surgical efficiency, whereas Pepsi appears to be in the throes of aggressive expansion and investment.
We have a winner
In the arena of carbonated beverages, the financial bout between Coca-Cola and Pepsi has long been the subject of investors' scrutiny. Delving into the presented data, Coca-Cola shows superior prowess in its efficient conversion of revenue into free cash flow, a critical indicator of financial health and operational efficiency. As Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." In this context, Coca-Cola's financial metrics paint the picture of a more "wonderful" company from a cash flow standpoint.
On the other hand, PepsiCo, while boasting higher revenue, trails in converting it into tangible free cash. This suggests a potentially aggressive expansion strategy, but at the cost of immediate cash efficiency. Peter Lynch's adage, "Know what you own, and know why you own it," becomes pertinent here. PepsiCo's broader strategy may appeal to some, but its financial efficiency, as of the current data, seems to lag behind Coca-Cola's.
In summary, after scrutinizing the financial indicators and overarching narratives, Coca-Cola emerges superior in this head-to-head analysis. While both Coca-Cola and Pepsi are commendable entities that I would be keen to invest in at a favorable price, they both stay on my radar for potential acquisition during market dips. From a branding and operational perspective, Coca-Cola takes the lead between the two.
