Coca-Cola Vs Pepsi

Both Coke and Pepsi are beasts of the beverage and snacks industries, they are often compared to each other; despite only Pepsi selling food. They both have strong worldwide brand recognition which goes back a long time, Coke since 1892 and Pepsi since 1898.

Coke (KO) is obviously famous for its Coca-Cola brand of drinks which has grown to many different flavours worldwide. But the company owns over 200 brands you wouldn’t necessarily know belonged to KO. Such bands include Smartwater, innocent smoothies, and for those in the UK, Costa Coffee. Pepsi (PEP) is almost 50/50 a food and drinks producer with some very well known household names such as Lipton ice tea, Quaker Oats and Walkers Crisps. These are in addition to the flagship Pepsi drinks.

But which one should you buy, should you only buy one? These are questions that will hopefully be answered in this post. Comment below if you own either company or both.

Fundamentals Comparison

Market Cap$243bn$215bn
Revenue 2020$33.01bn$70. 37bn
Revenue 2017$36.21bn$63.52bn
Net Income 2020$7.74bn$38.57bn
Net Income 2017$1.24bn$34.72bn
Shares Outstanding 20204.30bn1.39bn
Shares Outstanding 20174.25bn1.42bn
Current Ratio1.310.98
Free Cash Flow 2020$9.84bn$10.61bn
Free Cash Flow 2017$7.04bn$10.03bn
Price / Free Cash Flow24.4720.26

To start with, I am going to go ahead and say that both KO and PEP are considered overvalued at the present time. That is not to say that they are bad companies, just that I wouldn’t start a new position in either at this time. If you already have open positions in either, you could consider cost averaging, but be mindful that they are overvalued and you should look at other companies in your portfolio.

Typically, I prefer to see a price to free cash flow below 20, with a price to earnings ratio below the market average. KO has a P/FCF of 24.47 and PEP is at 20.26, and the current average P/E of the S&P500 is 34.41 which both KO and PEP are below, but with P/FCF being above 20 both fail my valuation test.

PEP has seen very steady revenue growth which has translated into free cash flow growth, while KO has been slightly different. KO’s revenue has decreased while its net income has grown massively, and free cash flow has also grown. This is a clear indicator that KO has sold or wound down some of its business which has resulted in a more efficient revenue.

Both companies are buying back shares which is great to see. This is important as investors will over time own a larger portion of the company, which should also be reflected in the share price appreciation over time. With regards to balance sheet, KO has a healthy 1.31 current ratio; but PEP lets the side down at 0.98. This means that PEP’s current assets do not adequately cover its current liabilities due within the next 12 months.

From a fundamental stand point I would consider both KO and PEP to be generally healthy companies, the only thing that lets them down is their valuation.

Graphs (5yr and YTD)

Over the last five years the KO share price has increased 30.6%, and is up 8% year to date. KO is currently not too far off its all time high of $60.13 which was reached on 21st February 2020. So probably not a great time to start a position. Over time KO has shown steady share price growth only minor fluctuations, the pandemic being a one time thing.

KO 5 year

The PEP share price has increased 44.3% over the last five years, and is up 8.9% year to date. It is however at a current all time high of $157.18. PEP has shown more steady and rapid growth in share price than KO but with it posting a new all time high currently I would be hesitant to get in now, rather wait for valuations to cool off slightly.

PEP 5 year

I would give KO a far value of $196.8bn based off current cash flows, compared to a current valuation of $243bn. Therefore, a fair value share price of around $45.76. With a rebound in sales expected as economies reopen revenue will increase, therefore my target entry point to KO would be anything below the $50 mark.

PEP, based off current cash flows, has a fair value of $200bn. Compared to the current $215bn it is only just over valued. This gives a fair value share price of around $144.31. PEP has seen a rebound in sales which has pushed it to all time highs. I would wait for a small pull back to around $149 per share as a good entry point.

Final thoughts

This quick review of KO and PEP is from a fundamental and technical standpoint only and should not be a substitute for proper due diligence. I currently own shares of KO which I will not be adding to at current valuations, while PEP is on my watch list with a price alert at $149.50. Both are very strong companies with good balance sheets and will be around for decades to come.

The impression I often see at the moment is that valuations don’t matter, they do. While many probably disagree with me saying that PEP is over valued, since I don’t perceive it to be fair value I won’t buy it. That said, while we are in an overvalued market currently there is still good value to be found, both PEP and KO will be fair value one day and on that day I will buy.

None of the content in this article should be considered financial advice, I am not a financial adviser and you should always do your own research prior to investing. These are my opinions only.

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