By Artur Widak Contributor Trefis Team
EDMONTON, CANADA – FEBRUARY 15: A Coca-Cola advertisement board with the slogan ‘Enjoy! Coca-Cola’ … More stands outside a restaurant in Edmonton, Alberta, Canada, on February 15, 2025. (Photo by Artur Widak/NurPhoto via Getty Images)
NurPhoto via Getty Images
PepsiCo’s stock (NASDAQ:PEP) has significantly lagged this year, recording a 10% decrease, while its competitor, Coca-Cola stock (NYSE:KO), has experienced a 16% rise. This contrast is mainly attributed to the sluggish North American operations for PepsiCo. The company has encountered a decline in consumer interest for its Frito-Lay snack sector and has dealt with a substantial recall in its Quaker Foods North America branch (oatmeal). These challenges have adversely affected organic sales, prompting PepsiCo to lower its full-year forecast. They now expect core constant-currency EPS to remain flat year-over-year, a notable drop from the earlier anticipated mid-single-digit increase, and foresee only low single-digit growth in organic revenue. This cautious outlook has understandably shaken investor confidence.
In spite of these recent difficulties, our analysis indicates that PepsiCo offers a more attractive investment opportunity than Coca-Cola over the coming years. This belief is rooted in a thorough assessment of historical revenue trends, investment returns, and comparative valuation metrics. The subsequent sections will elaborate on the rationale behind this viewpoint. That said, if you’re seeking a potential upside with a more stable experience than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, delivering >91% returns since its launch. Separately, see – SOFI Stock To $30?
How Are Coca-Cola and PepsiCo’s Sales Trending?
Coca-Cola has achieved a 7% average annual revenue growth from 2021 to 2024, rising from $38.7 billion to $47.1 billion. This slightly exceeds PepsiCo’s 5% average annual growth, which saw its revenue increase from $79.5 billion to $91.9 billion during the same timeframe.
Coca-Cola’s revenue growth is driven by strong performance in both its at-home and away-from-home channels. This growth is largely fueled by effective pricing strategies that have enabled the company to handle inflationary pressures. Regionally, North America and Latin America have been the main contributors to this growth, reflecting a strong demand for Coca-Cola’s diverse beverage range.
PepsiCo’s revenue growth from 2021 to 2024 was propelled by strategic pricing moves and robust performance in its beverage and snack sectors, although growth encountered significant challenges due to operational difficulties. The company benefitted from heightened interest in zero-sugar varieties of Pepsi, and it retained market share advancements in Gatorade. However, PepsiCo’s growth path was heavily impacted by the Quaker Oats recall issue, which commenced in late 2023 due to salmonella contamination. The recall was triggered by salmonella that persisted at a PepsiCo facility for up to four years, ultimately resulting in the permanent closure of the Illinois Quaker Oats factory. Despite these obstacles, PepsiCo achieved annual revenue growth, showcasing the strength of its core beverage and Frito-Lay divisions in counterbalancing the notable decline in the Quaker sector.
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What About Profitability?
From 2021 to 2024, Coca-Cola experienced a slight decline in its net margin, decreasing from 25.3% to 22.6%. This is associated with rising mixed costs, product mix, and increased marketing expenses. See – Coca-Cola’s Net Margin Comparison – for further details.
On the other hand, PepsiCo’s net margin increased from 9.6% to 10.4%. While the increase was modest, PepsiCo benefitted from productivity initiatives and effective pricing for its products.
Financial Risk Analysis
In assessing financial risk, Coca-Cola performs slightly better than PepsiCo. Coca-Cola’s debt-to-equity ratio of 16% is more advantageous than PepsiCo’s 27%. Moreover, its cash-to-assets ratio of 14% surpasses PepsiCo’s 8%. In essence, Coca-Cola showcases a stronger debt profile while maintaining a more stable cash position.
KO and PEP: Comparing 4-Year Stock Returns Against the S&P 500
Since early January 2021, Coca-Cola’s stock has experienced solid growth, rising approximately 40% from around $50 to its current price of about $70. In contrast, PepsiCo’s stock has shown minimal movement, creeping up only about 4% from $130 to $135 during the same timeframe. This underperformance by both beverage giants is particularly noticeable when juxtaposed with the S&P 500, which has surged by roughly 65% since the beginning of 2021.
However, a detailed examination of the annual returns paints a more intricate picture of volatility for both KO and PEP:
KO’s annual returns were 11% in 2021, followed by another 11% in 2022. It then witnessed a slight decline of -4% in 2023 before bouncing back with a 9% increase in 2024.
PEP’s annual returns were stronger initially, at 21% in 2021, then 7% in 2022. However, it experienced a mild decline of -3% in 2023 and a more pronounced drop of -8% in 2024.
When compared to the S&P 500’s performance (27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024), it’s evident that both Coca-Cola and PepsiCo underperformed relative to the broader market in 2021, 2023, and 2024. While KO has shown more consistent positive returns throughout the entire period, PEP’s recent challenges have affected its overall long-term performance.
PEP Stock: The Superior Beverage Investment Choice?
We contend that PepsiCo (PEP) currently provides a more appealing investment opportunity than Coca-Cola (KO), largely due to its advantageous valuation.
PEP stock trades at merely 17 times its trailing adjusted earnings of $8.03 per share. This is significantly lower than its four-year average price-to-earnings (P/E) ratio of 22 times, indicating it is undervalued relative to its historical performance.
Conversely, KO stock is trading at 25 times its trailing adjusted earnings of $2.89 per share. This valuation is above its own four-year average P/E of 22 times.
Although PepsiCo has faced recent challenges, particularly due to the Quaker issue affecting North American sales, we expect a recovery in this area in the upcoming quarters. Although PepsiCo’s revenues are anticipated to remain flat this year, we predict they will return to mid-single-digit growth starting next year. This expected rebound, alongside its current discounted valuation, positions PepsiCo favorably compared to the two beverage giants.
For investors aiming to reduce the inherent volatility linked to individual stocks like KO and PEP, alternate investment strategies are accessible. The Trefis RV strategy, celebrated for its track record of outperforming its all-cap stock benchmark, provides a diversified route to potentially secure robust returns. Likewise, the High Quality portfolio has shown superior performance compared to the S&P 500, yielding returns in excess of 91% since its inception, thus providing potential upside with reduced stock-specific risk.
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