Operating in over 200 countries, PepsiCo, Inc. (PEP) is a food and beverage company. The U.S.-based company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, South Asia; and Asia Pacific, Australia and New Zealand and China Region. On the other hand, Switzerland-based Nestlé S.A. (NSRGY) is one of the world’s top food and drink processing conglomerates. The company offers a broad array of food and beverages, including chocolates, bottled water, coffee, milk, confectionery, and pet foods.

Consumer spending increased significantly in the first half of 2021, powered by continued economic recovery and an improved job market. Consumer spending, also known as personal consumption expenditures (PCE), increased 12% in the second quarter of 2021, following an 11.4% increase in the first quarter. As the spending trends continue, the consumer goods industry should keep benefiting. Moreover, given the relatively inelastic demand for these products, the industry should remain unaffected from any potential economic changes in the near term. Given this backdrop, both PEP and NSRGY should keep benefiting.

PEP has gained 7.9% over the past six months, while NSRGY has returned 5.9%. In terms of the past year’s performance, PEP is the winner with 14.2% gains versus NSRGY’s 2.9%. Furthermore, PEP’s 4.5% gains year-to-date compares with NSRGY’s 2.8% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

In August, NSRGY announced the acquisition of the core brands of The Bountiful Company, including Nature’s Bounty®, Solgar®, Osteo Bi-Flex®, Puritan’s Pride®, Ester-C®, and Sundown®. The Bountiful Company is a pure-play branded leader in global nutrition. This should enable NSRGY to expand its product portfolio and explore new sales channels globally.

Also, in August, PEP announced its agreement with PAI Partners (PAI) to sell Tropicana, Naked, and other select juice brands across North America, and an irrevocable option to sell certain juice businesses in Europe. "This joint venture with PAI enables us to realize significant upfront value while providing the focus and resources necessary to drive additional long-term growth for these beloved brands," said PepsiCo Chairman and CEO Ramon Laguarta.

Recent Financial Results

PEP’s net revenues increased 11.6% year-over-year to $20.19 billion in its fiscal third quarter ended September 4. Its operating profit grew 4.9% from its year-ago value to $3.16 billion. Net Income Attributable to PEP came in at $2.22 billion, indicating a 2.9% decline year-over-year. The company’s EPS decreased 3% year-over-year to $1.60.

For the six months ended June 30, NSRGY’s sales increased 1.5% year-over-year to CHF 41.76 billion ($45.13 billion). Profit for the period and trading operating profit improved marginally from the same period last year to CHF 6.05 billion ($6.54 billion) and CHF 6.99 billion ($7.55 billion), respectively. The company’s EPS improved 3.4% year-over-year to CHF 2.12.

Past and Expected Financial Performance

PEP’s net income and EPS grew at CAGRs of 21.3% and 22.6% over the past three years, respectively. Analysts expect PEP’s revenue to increase 11% in the current year and 4% in the following year. The company’s EPS is expected to grow 12.9% in the current year and 7.4% next year. Moreover, its EPS is expected to grow 9.8% per annum over the next five years.

On the other hand, NSRGY’s net income and EPS grew at CAGRs of 15% and 18.2% over the past three years, respectively. Analysts expect the company’s revenue to decline 1.7% in the current year but increase 4.9% in the following year. The company’s EPS is expected to grow 3.3% in the current year and 8.2% in the next year. Moreover, NSRGY’s EPS is expected to grow 7.8% per annum over the next five years.

Profitability

NSRGY is more profitable with a net income margin and EBITDA margin of 14.41% and 19.71%, compared to PEP’s 11.01% and 18.37%, respectively.

However, PEP’s ROE, ROA, and ROTC of 59.04%, 8.03%, and 12.68% compare with NSRGY’s 27.11%, 7.27%, and 10.24%, respectively.

Valuation

In terms of forward EV/Sales, NSRGY is currently trading at 4.05x, 22.5% higher than PEP, which is currently trading at 3.14x. Also, NSRGY’s forward EV/EBITDA ratio of 18.81 is 9.2% higher than PEP’s 17.08.

Thus, PEP is relatively affordable here.

POWR Ratings

Both the stocks have an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both the stocks have a Growth grade of C, consistent with their recent mixed financials.

Both the stocks have a Stability grade of B, owing to their less than one beta. PEP has a beta of 0.62, while NSRGY has a beta of 0.23.

Of the 38 stocks in the Beverages industry, PEP is ranked #13. Among the 84 stocks in the Food Makers industry, NSRGY is ranked #32.

Beyond what we’ve stated above, we have also rated the stocks for Sentiment, Momentum, Value, and Quality. Click here to view PEP ratings. Also, get all NSRGY ratings here.

The Winner

Both PEP and NSRGY are well-known names globally. However, none of them appear to be a good bet now, given their weaker-than-industry financials. Thus, it could be wise to wait for better entry points.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Beverages industry here. Also, here to view the top-rated stocks in the Food Makers industry.

NSRGY shares were trading at $121.50 per share on Thursday afternoon, up $0.03 (+0.02%). Year-to-date, NSRGY has gained 5.38%, versus a 19.14% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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