PepsiCo (PEP) and Coca-Cola (KO): Forecasting the Path Forward for Beverage Giants

Despite economic challenges, the beverage industry is well-positioned for strong growth due to rising disposable income and changing consumer preferences for ready-to-drink beverages. While it could be wise to buy PepsiCo, Inc. (PEP), The Coca-Cola Company (KO) might be best watched for a better entry point.

Before diving deeper into their fundamentals, let’s discuss why the beverages industry is well-positioned for long-term growth.

The beverage market is mainly driven by increasing product demand among the elderly. Additionally, evolving consumer preferences and growing awareness of the importance of nutrition and overall well-being are boosting market growth.

According to Statista, in 2023, the U.S. beverages market revenue is projected at $126.80 billion, with an expected annual growth rate of 14.5%, reaching a market volume of $249.30 billion by 2028.

Furthermore, the industry’s growth is driven by increased promotional efforts. The global beverages market is expected to reach $4.39 trillion by 2028 with a 4.3% CAGR. Simultaneously, heightened health concerns and rising demand for vegan options propel the plant-based beverage market, projected to reach $22.45 billion by 2026 at a 6.7% CAGR.

Considering these conducive trends, let’s look at the fundamentals of the above-mentioned Beverages stocks.

Stock to Buy:

PepsiCo, Inc. (PEP)

PEP manufactures, markets, distributes, and sells beverages and convenient foods worldwide. It has seven operating segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia, and New Zealand; and China Region.

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.

In terms of the trailing-12-month EBIT margin, PEP’s 14.59% is 82.4% higher than the 8% industry average. Likewise, its 17.60% trailing-12-month EBITDA margin is 56.3% higher than the 11.26% industry average.

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.

For the quarter ending December 31, 2023, PEP’s EPS and revenue are expected to increase 3% and 1.5% year-over-year to $1.72 and $28.40 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 4.9% to close the last trading session at $167.77.

PEP’s POWR Ratings reflect its solid prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Quality. It is ranked #11 out of 34 in the B-rated Beverages industry. To see PEP’s Growth, Value, Momentum, Stability, and Sentiment ratings, click here.

Stock to Watch:

The Coca-Cola Company (KO)

KO manufactures, markets, and sells various non-alcoholic beverages worldwide. The company provides sparkling soft drinks, sparkling flavors; water, sports, coffee, and tea; juice, value-added dairy, and plant-based beverages; and other beverages.

On October 16, 2023, KO and Pernod Ricard announced plans to launch Absolut Vodka & Sprite as a ready-to-drink cocktail in 2024. The pre-mixed cocktail, featuring Absolut Vodka and Sprite, will debut in select European countries in early 2024, including the United Kingdom, the Netherlands, Spain, and Germany.

In terms of the trailing-12-month net income margin, KO’s 23.92% is 451% higher than the 4.34% industry average. Likewise, its 31.46% trailing-12-month EBITDA margin is 179.4% higher than the 11.26% industry average. However, its 0.47x trailing-12-month asset turnover ratio is 45.3% higher than the 0.87x industry average. 

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 gross profit rose 10.2% over the prior-year quarter to $7.20 billion. The company’s non-GAAP operating income increased 8.5% year-over-year to $3.54 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.

Street expects KO’s EPS and revenue for the quarter ending December 31, 2023, to increase 7.5% and 3.9% year-over-year to $0.48 and $10.59 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has declined 11.2% to close the last trading session at $56.93.

KO’s POWR Ratings are consistent with this outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.

It has a C grade for Growth and Momentum. It is ranked #13 in the same industry. Beyond what we stated above, we also have given KO grades for Value, Stability, Sentiment, and Quality. Get all KO ratings here.

What To Do Next?

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KO shares were trading at $56.94 per share on Tuesday afternoon, up $0.01 (+0.02%). Year-to-date, KO has declined -8.39%, versus a 18.51% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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