KO vs. PEP: Which is a Better Soft Drink Stock Pre Earnings?

Consumers’ tastes are rapidly shifting from carbonated soft drinks (CSDs) to non-carbonated beverages. Hence, sluggish CSD volumes are a concern for beverage giants like The Coca-Cola Company KO and PepsiCo, Inc. PEP. Despite these challenges, the two cola behemoths are major players of the food and beverage industry.

In this context, Coca-Cola and PepsiCo, which are scheduled to report earnings on Apr 24 and Apr 26, respectively, assume greater significance. Both soft drink giants carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other major stocks reporting earnings from Apr 23 to Apr 27 include Alphabet Inc. GOOGL and Verizon Communications Inc. VZ.

Price Performance

PepsiCo has lost 6.9% in the past year, in contrast to the broader industry’s gain of 2.4% during the same period.

In comparison, Coca-Cola has outperformed the broader industry as well as its rival, gaining 2.9% over the same time frame.

Valuation

The price to sales (P/S) ratio is particularly relevant in a consumer focused industry whose fortunes are dictated by the ebb and flow of sales. This ratio indicates that market value of each of the company’s sales dollars in the industry. The industry has an average trailing 12-month P/S ratio of 4.79.

While coming to the two stocks under consideration, with a P/S ratio of 2.22 PepsiCo is undervalued than the broader industry. Meanwhile, Coca-Colawith a P/S ratio of 5.73 is obviously pricier.

Net Margin

Profitability ratios acquire greater importance in an industry characterized by high margins. Net margin is a good metric to compare the profitability of companies within the same industry, since they are bound by the same business constraints.

With a net margin value of 11.84%, PepsiCois well behind the industry average of 18.47%. With respect to profitability, Coca-Cola, with net margin of 23.37%, is clearly better placed than both PepsiCo and the industry.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio is a good indicator of the financial well-being of a company and is a good proxy for its debt servicing capacity. In the context of the soft drinks industry, it is an indicator of the company’s long-term sustainability.

PepsiCo’s debt-to-equity ratio of 307.77 is alarmingly high, compared to the industry’s D/E ratio of 187.73.  With a D/E ratio of 181.69, Coca-Cola evidently has a better leverage position.

Dividend Yield

Coca-Cola’s and PepsiCo’s dividend yields over the last year is 3.52% and 3.05%, respectively. Although, both cola giants offer better dividend than the broader industry’s figure of 2.77%, it is clear that Coca-Cola holds a clear edge over its immediate competitor.

Earnings History and ESP

Considering a more comprehensive earnings history, Coca-Cola has delivered positive surprises in three of the prior four quarters, with an average earnings surprise of 1.5%. On the other hand, PepsiCo has delivered positive surprises in all the prior four quarters, with an average earnings surprise of 4.1%.

However, a more detailed analysis of the both the soft drinks companies’ performance in the last four quarters shows a different story. In 2017, after missing the earnings estimate in the first quarter, Coca-Cola continued to beat the earnings estimate in the remaining three quarters significantly. While, PepsiCo after posting steady earnings beat in the first three quarters of 2017, managed to surpass the earnings estimate marginally after the company’s CSD volumes fell 5% last year.

When considering Earnings ESP, Coca-Cola and PepsiCo have ESP values of -0.34% and -0.97%, respectively. Moreover, Coca-Cola’s earnings estimates for the current year have increased by 2% over the last 60 days, while the same metric for PepsiCo has advanced by only 0.4%. 

Conclusion

Our comparative analysis showed that Coca-Cola is overvalued compared with PepsiCo. However, Coca-Cola undoubtedly holds an edge over PepsiCo, when considering price performance and dividend yield. Additionally, when we take a more comprehensive look at the companies’ previous earnings performance and estimate revisions, Coca-Cola is the better stock.

Moreover, despite the fact that both the soft drinks giants have a negative ESP, Coca-Cola is better off given that it is expected to incur a lower level of loss. Additionally, when considering net margin and debt-to-equity ratio, Coca-Cola holds an edge over PepsiCo. This is why it may be a good idea to bet on Coca-Cola over PepsiCo as both prepare to report earnings next week.

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