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KO vs. PEP: Why Coca-Cola Stock Looks Tastier
Stock Analysis & Ideas

KO vs. PEP: Why Coca-Cola Stock Looks Tastier

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By some measures, choosing between Coca-Cola and PepsiCo may seem too close to call. In fact, dividend investors might want to own both. However, for fundamentally focused investors, there is one critical difference that may make all the difference in a severe recession.

Investors and traders have been in recession mode for much of this year, leading to debates about which industries can be classified as recession-resistant. For some consumers, beverages and snacks straddle the line between discretionary and staples, making this industry a bit challenging for investors to classify. In this piece, we compared KO and PEP, the two leading soda stocks. When analyzing the two, KO stock came out slightly ahead.

Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) are both up 9% to 7.5% year to date, demonstrating that they hold up better than most of the broader market. Although these companies have gone head-to-head for decades, they utilize slightly different strategies, as clearly seen in the types of brands they own.

Coca-Cola (KO)

A key difference between Coca-Cola Co. and PepsiCo, Inc. is that the former owns a wide array of beverage brands, while the latter also owns Frito Lay and many other snack brands. Both companies have pricing power due to the strength of their brands, but Coca-Cola is significantly more profitable, and its P/E multiple is slightly less volatile. Thus, a bullish view appears appropriate.

While PepsiCo and Coca-Cola are both stalwarts in the food and beverage industry, one thing that makes Coca-Cola more attractive is its profitability. Its gross margin is stable, hovering around 60% annually compared to PepsiCo’s 55% margin. However, a deeper dive reveals just how much more profitable Coca-Cola is.

The company experienced a hiccup during the pandemic, as its sales fell from $37.3 billion in 2019 to $33 billion in 2020, probably due to lost sales from shuttered restaurants. However, Coca-Cola recovered quickly, reaching $38.7 billion in sales in 2021 and $42.3 billion in the last 12 months.

Meanwhile, the beverage maker’s net income rose from a pre-pandemic $9 billion in 2019 to $9.8 billion in 2021 and $10 billion over the last 12 months. PepsiCo’s numbers are below, but Coca-Cola is significantly more profitable despite its smaller overall size.

At around 27.5 times, Coca-Cola’s P/E ratio has been relatively stable since December 2020, having fallen back down to earth in early 2019 after irrational exuberance drove its P/E ratio to well over 100 times. There could be more upside for Coca-Cola from current levels, but what makes this stock so attractive is its stability and solid dividend yield of 2.8%, compared to the sector average of 2.1%.

What is the Price Target for KO Stock?

Coca-Cola has a Strong Buy consensus rating based on 10 Buys, two Holds, and zero Sell ratings over the last three months. At $65.58, the average price target for Coca-Cola implies upside potential of 3%.

PepsiCo (PEP)

Dividend investors can’t go wrong with Coca-Cola or PepsiCo, but PepsiCo’s lower profitability, more volatile P/E multiple, and lower dividend yield are enough reasons to favor Coca-Cola — albeit only slightly. A neutral view generally looks appropriate for PepsiCo, although dividend investors might still want to hold it.

On the plus side, PepsiCo’s revenues grew steadily, even during the pandemic, jumping significantly from $67.2 billion in 2019 to $70.4 billion in 2020 and $79.5 billion in 2021. PepsiCo’s net income rose from $7.4 billion in 2019 to $7.7 billion in 2021. For the last 12 months, the beverage maker recorded $83.6 billion in sales and $9.7 billion in net income. However, it is significantly less profitable than Coca-Cola.

PepsiCo’s yield of 2.5% is attractive for dividend investors, but its P/E ratio has been volatile, dropping from about 31 times earlier this year to about 26 times. The company’s P/E plunged from about 33 times to 15 times in 2019, although it looks fairly valued now since Coca-Cola deserves a bit of a premium due to its higher profitability.

What is the Price Target for PEP Stock?

PepsiCo has a Moderate Buy consensus rating based on seven Buys, five Holds, and one Sell rating assigned over the last three months. At $181, the average price target for PepsiCo implies downside potential of 1.1%.

Conclusion: Bullish on Coca-Cola, Neutral on PepsiCo

Ultimately, Coca-Cola and PepsiCo both look like solid long-term plays, especially for dividend investors during periods of economic uncertainty. While Coca-Cola looks slightly better due to its higher profitability and more stable valuation, both are attractive due to their dividend yields and stability during recessions.

Both are dividend kings, meaning they’ve boosted their dividends annually for at least the last 50 years, and they’re both “value stocks,” which typically do better in a recession. In short, investors who already own PepsiCo might not want to sell it, and either way, dividend investors might still want to own the shares. However, those who can pick only one may prefer Coca-Cola.

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