Saturday, February 22, 2014

Coke versus Pepsi

The bull market continues to rage along, but while its certainly not leaving bargains lying around, there are some quality companies that have not fully participated in the upside. For different reasons, there could be something resembling a fair price for Coke (emerging markets plus slowdown in US) and Pepsi (market ignoring Frito-Lay).

But which is the better buy today?

Without further ado, let's try to answer one of life's most pressing questions "Coke or Pepsi?" by the numbers.

What price would you pay to own Coke or Pepsi?

Coca Cola Pepsi
P/E 19 18
P/CF 16 12

Advantage - Pepsi, cheaper both on earnings and cash flow basis. 

Of course, price matters but so does quality.


TTM Coca Cola Pepsi
Operating margins %  22 15
Net margins %  19 10
ROE % 27 29

Advantage - Coca Cola. A step behind on ROE, but margins much more impressive


Coca Cola Pepsi
Fwd Yield %  3.3 2.9
1 yr  Div growth %   8.5 5.3
5 yr Div growth %  8.5 6.3

Advantage goes to Coca Cola although its closer than it appears, because the Morningstar data that I am using does not have Pepsi's latest 15% dividend hike factored in.


Coca Cola Pepsi
Debt/Equity  0.4 1.0
Payout ratio %  57 52
Cash flow coverage%  1.68 1.97

This is too close to call, Coca Cola wins on its Balance Sheet, but Pepsi is is ahead on coverage, and so you can see why Pepsi was able to raise their dividend in the double digits. Tie.

Neither is a screaming buy, but they are not wildly expensive either. Quality at a reasonable price. Pepsi looks cheaper and potentially better able to grow its dividend. On the other hand Coca Cola wins on overall quality. Investors in either should have a fair shot at doubling their money in the next 5-10 years but Coca Cola looks like the better buy.

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