Which One Is Better The Coca-Cola Co (KO) Or PepsiCo, Inc. (PEP)?

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The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are the two big food and beverages firm that are struggling for YOY revenue growth. Both companies are trying to convince investors by buying back their shares to boost EPS. The two companies also have positives and negatives. For instance, Pepsi sells more and seems to have allocated capital better than its peers. However, Coca-Cola’s ability to generate free cash flow appears to be superior to the other giant. While earnings-related valuations might look equal, valuations based on free cash flow might reflect a different story.

Comparative Return On Equity

The Coca- Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are compared regularly though some of the businesses are not operated by both. For instance, Pepsi manages a snack-related business. Currently, the market values the two companies at the same levels. They were trailing approximately 22 times of earnings while it was 18 – 19 times of forward earnings. Significantly, it was clear that while one company was gaining, the other one was on a losing streak.

In the last five-year period, the return on equity for The Coca-Cola Co (NYSE:KO) has been falling while PepsiCo, Inc. (NYSE:PEP) has been witnessing an uptrend in the same period. It was the same in the case of return on invested capital, as well as, the return on assets. Coca-Cola’s ROE in 2010 was 42.32% compared to Pepsi’s 33.36%. In the next year, it dropped to 27.37% and 30.92% for both of them respectively.

Financial Leverage

That was because of the magnified financial leverage. Pepsi’s equity multiplier was approximately four, which was a five-year high, while Coke’s was approximately three. On the other hand, Coke uses less financial leverage to deliver higher margins. That was the reason it was able to deliver better gross, operating, and net margins for the trailing twelve-month period of 61%, 19.7%, and 16.51% respectively. Pepsi, on the other hand, delivered 54.1%, 14.7%, and 10% respectively.

While there is every possibility that ROE might have some financial distortion, the return on invested capital might provide a little more insight into the performance. The ROIC was 26.69% in 2010 in respect of Coke while it was 19.71% in the case of Pepsi. That has slowly and steadily dipped to 9.86% in 2014 for Coca-Cola. The situation was not different for Pepsi too, which witnessed a drop to 14.24% from 19.71%. However, the drop is more in respect of the Coca-Cola.

Return On Assets

As far as ROA concerned, The Coca-Cola Co (NYSE:KO) has been witnessing a fall to 7.8% in 2014 from 19.4% in 2010. Similarly, PepsiCo, Inc. (NYSE:PEP)’s ROA also fell to 8.8% from 11.7% during the same period. Based on the cash conversion cycles rate, it appears that Pepsi is strong with only 12.05 days of cash conversion cycles while it was 61.08 days for Coke. That is not the only case. While the two companies sales outstanding remained more or less same, inventory in respect of The Coca-Cola Co (NYSE:KO) was nearly double than PepsiCo, Inc. (NYSE:PEP).

The two companies’ valuations appear to be similar based on earnings though it presents a different picture if free cash flow is taken into consideration. For instance, Pepsi trades at approximately 17.3 times trailing twelve-month free cash flow while it was 19.3 times in respect of the Coca-Cola. While The Coca-Cola Co (NYSE:KO) enjoy an edge in some parameters, PepsiCo, Inc. (NYSE:PEP) has advantages in other parameters.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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