Financial Management Comparison: Pepsi vs. Coke

Coca-Cola had strong sales in the fourth quarter of 2009 reporting at $7.51 billion, compared with the $7.13 billion the previous year. The most recent quarterly numbers met analyst estimates for 2009 put earnings of 66 cents a share, placing a high margin of revenue which will beat expectations for sales of $7.2 billion (MSN Money, 2009).

Coca-Cola’s overseas growth was the true driver of in the quarter. The company’s unit case volume — a metric of all the company’s soft drink distribution with worldwide sales– climbing 5%, and separate gains of 8% in Brazil, 20% in India with a notable posting of 29% in China. International sales have earned Coca-Cola $1.54 billion. This sales volume has propelled stock prices 66 cents a share, to close out the last quarter of the year in 2009 where Coca-Cola reported an impressive fourth-quarter gain in profits. The gain in net income was due largely to a 55% increase in sales over 2008. A consolidated year ending 2007 boosted stock prices 43 cents a share, the soft-drink maker earned of $995 million before taxes in the final quarter of 2008 (MSN Money, 2009). However, Coca-Cola’s earnings fell short of Pepsi’s in the fourth quarter on the strength of PepsiCo’s increasing market share. Pepsi’Co posted earnings that set the earnings bar even higher doubling of its fourth-quarter profit (MSN Money, 2009). .

On Feb. 11, PepsiCo reported higher than expected sales in overseas markets. For the quarter, the company reported that it earned $1.43 billion, or 90 cents a share. This earning figure compared favorably with $719 million, or 46 cents a share, the previous year. Given that though, the number was in line with Wall Street’s analyst earnings expectations.

PepsiCo also had revenue growth, for the final three months of the year which gained 4.5%, to $13.3 billion, rising from $12.74 billion the previous year. This top-line number beat the consensus forecast for revenue of $13.26 billion (MSN Money, 2009).

PepsiCo also saw its revenue grow, as sales for the final three months of the year rose about 4.5%, to $13.3 billion, from $12.74 billion the previous year. This top-line number bested the consensus forecast for revenue of $13.26 billion (MSN Money, 2009).

Coca-Cola shares were trading at a at a P/E ratio of 18.35, while PepsiCo shares traded at a P/E of 17.50. This means Pepsi shares are a little cheaper to purchase for the average investor. Coca-Cola shares paid a dividend yield of 3.2%, while Pepsi’s dividend yield came in slightly under, at 2.7%. This is the amount the money that is paid out from earnings for holding the stock — and an extra half-percentage-point return is a generous increase in payout for a dividend per share (MSN Money, 2009).

Noteworthy soft-drink sales

Name

Sales (most recent year)

Price-earnings ratio

Recent share price

Coca-Cola (KO, news, msgs)

$30.99 billion

18.35

$53.76

PepsiCo (PEP, news, msgs)

$43.23 billion

17.50

$65.97

Dr Pepper Snapple (DPS, news, msgs)

$5.53 billion

16.19

$35.22

Cott (COT, news, msgs)

$1.60 billion

7.43

$8.05

Hansen Natural (HANS, news, msgs)

$1.14 billion

19.20

$42.46

Table provided by MSN Money Central

In terms of profits and fiscal fitness, the companies run about neck and neck. What about the performance of their shares?

Positioning Strategy

Coke uses a product differentiation strategy to expand market share. The main approaches to create price competitiveness with its major rival Pepsi to ensure comparable margins. The advantage is that Coca-Cola wields a brand-name image which positions Pepsi as a late market entrant in the Coca-Cola imitator. The Coke brand once the consumer to think of soda as a Coke, which is why many restaurant patrons are corrected to say Coke instead of Pepsi if it does not carry Pepsi. Coca-Cola also creates high-value relationships and marketing presence through close ties with its bottlers. Although Pepsi carries it soda as well as many different snack brand names, heavily relies on its soda product to carry the business. This is why the Coca-Cola Company are very guarded of its name. However for both companies domestic consumption is declining, but international markets are where the growth is at and is where both companies are targeting growing market shares.

Getting technical

Both companies are currently pretty similar from a valuation standpoint. But historically, Coke has dropped to a 20 year low on a P/E basis (Alpha, 2010). Pepsi, on the other hand, has just begun to approach these levels. Coke seems to be the better choice based on the historical P/E data. The strong revenue margins and solid sales in a weak economy have helped protect Coke products from the recent downturn better than Pepsi (Alpha, 2010). Pepsi will need to make international sales a stronger contributor of their revenue stream in order to improve margins (some indications that stronger brand recognition and competitive pricing will play a factor). On an earnings ratio basis, Coke is the better choice. However, both Pepsi and Coke offer consistent advantages for investors with an eye towards earning consistent profits and dividend growth (Alpha, 2010). As a matter of preference, it really depends upon which one brand one leans towards, as always. The author’s preference is for Coca-Cola.

The key to growth

From an investor point both of the financials of Coke and Pepsi present a fairly even comparison. One could maintain it Pepsi had a faster growth rate because it was playing catch-up to Coca-Cola in the years after it was introduced, and consequently has more market growth in which it to expand. Coca-Cola stock has gained about 20% in S&P 500 for five years running, and Pepsi has increased in growth by 25% over the last 5 years (MSN Money, 2009).

Coca-Cola’s international sales generates three quarters of its sales in contrast Pepsi’s international sales constitute only about half of its revenue. Pepsi is entered the overseas market about 10 years ago, but still falls considerably behind Coca-Cola in that arena. Some analyst thinks because Pepsi has not broken into an expanding market (MSN Money, 2009), however, is a writers opinion that early market entry and high-profile brand name recognition keeps Coca-Cola sales at a high level (Cola Wars, 2009).

As mentioned previously, Pepsi not only markets the beverage side. With alternate sodas like Sun Drop and noncarbonated sodas like Gatorade, it also markets the snack side. Coca-Cola has stuck to its core business of beverage has not diversified into the snack arena. These factors as well as a cheaper stock price makes Pepsi a goodbye for a new investor, however, long-term, Coke’s consistent earnings and low debt-to-equity ratios make it a strong candidate for institutional buyers (Cola Wars, 2009).

On the precipitous 2009 conference call, Pepsi announced the fact that it would be cutting costs by saving over $1.2 billion over the next three years. Pepsi cans use these funds to revitalize and recaptures a large portion of the North American business which has been lost in the recession (Property, 2011). Coca-Cola has seen its North American beverage business client about 2%. In response it is diversifying some of its product lines into healthier choices to include Coke light. Pepsi revenue declines and even then larger, around 3% to 4%, but it’s reinvestment initiative in North America will concentrate on growing volume sales to food outlets for its beverage and Frito-Lay, Quaker, Tropicana, product lines.

Coke’s gross profit margin is 65% compared to Pepsi’s whose is about 56%. Pepsi will plans to consolidate bottling plants operations in order to cut costs and take on new initiatives to improve the efficiency of the plants.

Another major play was a $1 billion investment in China in response to Coca-Cola’s aggressive market action in the Asian arena (Cola Wars, 2009). Pepsi board members were taken aback when Coca-Cola announced a acquisition of the largest Chinese beverage producer, Huiyan Juice company. Chinese marketers know, it takes good connections Chinese industry to break into new market territories. Also in the recent announcement, Pepsi stated that it is spending $3 billion in Mexico on both their beverage and snack product lines. Pepsi strategy is to limit acquisitions in its distribution network, and increase its brand recognition in major markets simulating customer loyalty in its international markets (Cola Wars, 2009). On the surface, it seems as though Pepsi is investing in areas that Coke Cola takes for granted, however, any change of tide could occur if Coca-Cola becomes complacent.

References

Coke or Pepsi? – Seeking Alpha (2009). (n.d.). Retrieved from http://seekingalpha.com /article/107813- coke-or-pepsi

Investing in Coca-Cola or Pepsi for stock gains – MSN Money.(2009) (n.d.). Retrieved from http://articles.moneycentral.msn.com/learn-how-to-invest/coke-or-pepsi-which-stock-to-buy.aspx

Property on the move… (2011)|. (n.d.). Retrieved from http://advertisercomment. wordpress.com/2009/05/29/property-on-the-move/

The week in preview: Coke versus Pepsi (2009) – Blogging Stocks. (n.d.). Retrieved from http://www.bloggingstocks.com/2009/02/08/the-week-in-preview-coke-versus- pepsi/?icid=sphere_wsj_teaser

Report Cola Wars Continue (2009): Coke and Pepsi. (n.d.). Retrieved from http://www.scribd.com/doc /17929837/Report-Cola-Wars-Continue-Coke-and-Pepsi

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About Tommorrow's News, Today

Began career at the Pentagon as a Communications Specialist. Has been involved with commercial aerospace defense projects since 1984 with firms like TRW, Lockheed Martin, Boeing. Served in Iraq from 2003 to 2005 with Army Corps of Engineers supporting IED/Mine clearing operations and destroying Iraqi weapons stockpiles. Born in Bangkok, Thailand, adopted son of a career U.S. Foreign Service Officer. Current interests include democratic process reform, Nation / State Building, Technology Trends and Environmental Studies.
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