In this article, I evaluated two beverage stocks, The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP), to determine the right pick for 2024. After thoroughly evaluating these stocks, I think PEP might be a superior choice for the reasons discussed in this article.
Due to increasing disposable income and shifting consumer preferences towards ready-to-drink beverages, particularly in developing and emerging economies, the market is anticipated to grow at a fair rate. Furthermore, rising per capita consumption of alcoholic beverages and consumer preferences for premium products are likely to fuel market expansion.
The global beverage market is expected to grow at a CAGR of 3.5% until 2028.
In addition, the U.S. non-alcoholic beverages market is projected to grow at a CAGR of 4.9% until 2030. The market witnessed significant growth as consumers, especially the young population, are becoming increasingly concerned about maintaining their physical fitness. They are also gaining awareness regarding the health benefits of functional beverages.
KO gained 2% over the past month compared to PEP’s 2.5% gain. The stock has gained 7.8% over the past three months compared to PEP’s 2.2% gain.
However, here are the reasons why I think PEP might perform better in the near term:
Recent Developments
On October 26, 2023, KO announced that all its 500mL sparkling beverage bottles in Canada would be made with 100% recycled plastic (excluding caps and labels) by early 2024. This marks the first time 500mL sparkling beverages will be sold in bottles made from 100% recycled plastic in Canada.
Conversely, On October 30, 2023, PEP announced a collaboration between Lay’s and “Vanderpump Rules” stars Ariana Madix and Katie Maloney to launch a limited-edition chip flavor, Lay’s Grilled Cheese & Tomato Soup, at BravoCon 2023. The flavor, with exclusive packaging inspired by the duo’s sandwich shop, Something About Her, will be available for a limited time.
Recent Financial Results
KO’s net operating revenues for the third quarter ended September 29, 2023, increased 7.8% year-over-year to $11.91 billion. Its non-GAAP net income for the same quarter increased 6.6% year-over-year to $3.21 billion. In addition, its non-GAAP EPS came in at $0.74, representing an increase of 7.2% over the prior-year quarter. However, Selling, general and administrative expenses increased 11.9% year-over-year to $3.67 billion.
On the contrary, PEP’s net revenue for the fiscal third quarter that ended September 9, 2023, increased 6.7% year-over-year to $23.45 billion. Its non-GAAP gross profit rose 8.8% over the prior-year quarter to $12.77 billion, while its non-GAAP operating profit increased 12.1% year-over-year to $4.03 billion. For the same quarter, its non-GAAP attributable net income came in at $3.11 billion and $2.25 per share, representing increases of 13.7% and 14.2% year-over-year, respectively.
Past And Expected Financial Performance
Over the past three years, KO’s revenue increased at a 10.4% CAGR. Analysts expect KO’s revenue to increase by 5.5% in the year ended December 2023 and 3.9% in the fourth quarter ended December 2023. Its EPS is expected to increase 8.2% in the year ended December 2023 and 7.6%% over the fiscal fourth quarter (ended December 2023).
Conversely, PEP’s revenue has increased at a CAGR of 10.2% over the past three years. Its revenue is expected to increase 6.7% in the fiscal year ended December 2023 and 1.5% in the fiscal fourth quarter ended December 2023. Its EPS is expected to rise 11.3% in the year ended December 2023, 3.1% in the fiscal fourth quarter ended December 2023.
Valuation
KO’s forward EV/EBITDA multiple of 19.7 is higher than PEP’s 16.53. KO’s forward EV/Sales multiple of 6.31x is higher than KO’s 2.99x.
Thus, PEP is more affordable.
Profitability
KO’s trailing-12-month ROTC of 12% is lower than PEP’s 13.68%. In addition, KO’s trailing-12-month asset turnover ratio of 0.47x is lower than PEP’s 0.94x.
Thus, PEP is more profitable.
POWR Ratings
KO has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, PEP has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KO has a D grade in Value. Its forward EV/Sales of 6.31x is 273.6% higher than the industry average of 1.69x. Its forward EV/EBIT multiple of 21.62 is 43.1% higher than the industry average of 15.11x.
On the other hand, PEP has a C grade in Value. Its forward EV/Sales of 2.99x is 76.7% higher than the industry average of 1.69x. Its forward EV/EBIT multiple of 19.94 is 31.9% higher than the industry average of 15.11x.
Moreover, KO has B grade in Quality. Its trailing-12-month gross profit margin and trailing-12-month EBIT margin of 59.14% and 28.9% are 74.5% and 242.6% higher than the industry averages of 33.89% and 8.43%.
On the other hand, PEP has an A grade in Quality. Its trailing-12-month gross profit margin and trailing-12-month EBIT margin of 54.03% and 14.59% are 59.2% and 73.1% higher than the industry averages of 33.89% and 8.43%.
Among the 33 stocks in the in the Beverages industry, KO is ranked #14, while PEP is ranked #11.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Momentum, Growth, and Sentiment. Get all KO ratings here. Click here to view PEP ratings.
The Winner
The beverage industry is seeing growth due to rising disposable income and changing consumer preferences towards ready-to-drink beverages. Industry players such as KO and PEP are well-positioned to benefit from these industry tailwinds.
However, PEP’s higher profitability and lower valuation multiples makes it the better buy here.
Our research shows that the 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.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PEP shares were trading at $173.35 per share on Wednesday afternoon, up $0.44 (+0.25%). Year-to-date, PEP has gained 2.07%, versus a -1.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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