PepsiCo, Inc. (PEP) and Keurig Dr Pepper Inc. (KDP) are two prominent players in the non-alcoholic beverage industry. PEP operates food, beverage, and snack businesses worldwide. It markets its products through a network of direct-store-delivery, customer warehouse, distributor networks, and e-commerce platforms and retailers. On the other hand, KDP manufactures and distributes soft drinks, juices, teas, mixers, water, and other beverages to retailers, bottlers and distributors, restaurants, hotel chains, office coffee distributors, and end-use consumers.
Beverage companies are working toward introducing new products to meet the growing demand for healthy, refreshing, and ready-to-drink beverages. The non-alcoholic beverages market is expected to grow at an 8.2% CAGR and reach $1.73 trillion by 2028. Moreover, renowned beverage stocks are likely to witness increasing investor attention amid the immense volatility in the markets. So, both PEP and KDP are expected to benefit.
While KDP gained marginally over the past month, PEP has surged 5.2%. PEP is a clear winner with 28.2% gains versus KDP’s 4.7% in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let us find out.
Latest Developments
On October 7, 2021, PEP’s Frito-Lay division announced 2021 site investments to further enable the snack leader’s ability to meet strong consumer demand by funding new manufacturing lines, warehouse expansions, and improving its distribution network. This further allows Frito-Lay to expand the market reach of its products.
On July 27, 2021, KDP introduced BrewID, a next-generation technology platform designed to give consumers a perfectly customized, rich, full-flavored coffee just the way they like it. Being launched with KDP’s K-Supreme Plus SMART brewer, BrewID technology recognizes the specific brand and roast of the K-Cup pod and automatically customizes the brew settings. KDP expects to witness high demand for this product in the upcoming months.
Recent Financial Results
PEP’s revenues for its fiscal third quarter ended September 4, 2021, increased 11.6% year-over-year to $20.19 billion. The company’s non-GAAP gross profit came in at $10.82 billion, representing a 9.2% rise from the prior-year period. Its non-GAAP operating profit came in at $3.24 billion, up 6.5% from the prior-year period. PEP’s non-GAAP net income came in at $2.48 billion, indicating a 7.4% year-over-year improvement. Its non-GAAP EPS increased 7.8% year-over-year to $1.79. The company had $6.51 billion in cash and cash equivalents as of September 4, 2021.
For its fiscal third quarter, ended September 30, 2021, PEP’s total revenue increased 1.3% year-over-year to $460 million. The company’s adjusted gross profit came in at $1.83 billion, up 8.6% from the prior-year period. Its adjusted income from operations came in at $931 million, indicating a 6.5% rise from the year-ago period. KDP’s adjusted net income came in at $631 million for the quarter, representing a 13.3% year-over-year improvement. Its adjusted EPS increased 12.8% year-over-year to $0.44. The company had $200 million in cash and equivalents as of September 30, 2021.
Past and Expected Financial Performance
PEP’s total assets and net income have grown at CAGRs of 8.2% and 18%, respectively, over the past three years. The company’s EPS has grown at a 19.2% CAGR over the past three years.
Analysts expect PEP’s EPS to rise 13% year-over-year in the current year and 8% next year. Its revenue is expected to grow 11.2% year-over-year in the current year and 4% next year. The stock’s EPS is expected to increase at a 9.8% rate per annum over the next five years.
In comparison, KDP’s EPS and net income have declined at CAGRs of 23.1% and 11.9%, respectively, over the past three years. The company’s total assets have grown at a marginal CAGR over the past three years.
KDP’s EPS is expected to rise 14.3% year-over-year in the current year and 6.2% next year. The stock’s revenue is expected to increase 8.4% year-over-year in the current year and 4.6% next year. Analysts expect the company’s EPS to grow at a rate of 9.5% per annum over the next five years.
Valuation
In terms of non-GAAP forward P/E, PEP is currently trading at 27.53x, which is 23.5% higher than KDP’s 22.30x. In terms of non-GAAP forward PEG, KDP’s 2.32x compares with PEP’s 2.93x.
Profitability
PEP’s trailing-12-month revenue is almost 6.2 times KDP’s. PEP is more profitable with a 55.4% return on equity versus KDP’s 7.3%.
Furthermore, PEP’s ROA and ROTC of 8% and 12.8% compare favorably with KDP’s 4% and 5.2%, respectively.
POWR Ratings
While PEP has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, KDP has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both PEP and KDP have a B grade for Stability, which is in sync with their lower volatility compared to the broader market. PEP has a 0.65 beta, while KDP has a 0.64 beta.
PEP has a B grade for Quality, consistent with its higher-than-industry profitability ratios. PEP’s 12.8% trailing-12-month return on total capital is 87.7% higher than the 6.8% industry average. In comparison, KDP’s C grade for Quality reflects its slightly lower-than-industry profit margins. KDP has a 5.2% trailing-12-month return on total capital, 23.2% lower than the industry average of 6.8%.
Of the 35 stocks in the B-rated Beverages industry, PEP is ranked #11, while KDP is ranked #15.
Beyond what we have stated above, our POWR Ratings system has also rated PEP and KDP for Growth, Value, Sentiment, and Momentum. Get all PEP ratings here. Also, click here to see the additional POWR Ratings for KDP.
The Winner
Given their global brand recognition and rising consumer spending ahead of the holiday season, both PEP and KDP are well-positioned to benefit substantially. However, higher profit margins make PEP a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Storage industry.
PEP shares were trading at $169.72 per share on Friday afternoon, down $2.10 (-1.22%). Year-to-date, PEP has gained 17.79%, versus a 24.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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