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The Coca-Cola Company (KO) vs PepsiCo, Inc. (PEP): The Cola Wars Rematch

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The Coca-Cola Company (NYSE:KO)About a year ago, I examined the pairing of The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) to determine which I thought was the better investment. Today I am revisiting them to evaluate how well my prediction worked out, and whether or not I will change my opinion at this time.

A year ago, I suggested that both companies held opportunity for investment, but Coca-Cola offered the greater potential gain. At that time, The Coca-Cola Company (NYSE:KO) was trading at $76 per share, and PepsiCo, Inc. (NYSE:PEP) at $68. I opined that I thought The Coca-Cola Company (NYSE:KO) could rise to $92 by year-end 2013, and PepsiCo to $74.

Coca-Cola actually split two-for-one in August and ended 2012 at $35.99 per share, for a loss of 5% from when I examined it. It is trading now at $43 per share, which is which is only 6% short of my year-end prediction.

PepsiCo, Inc. (NYSE:PEP) ended 2012 at $67.94, exactly where it traded when I examined it, and now trades at $84 per share, 14% higher than my 2013 year-end prediction.

So The Coca-Cola Company (NYSE:KO) has done fairly well, and may still hit my $46 target price by year-end, but PepsiCo has greatly exceeded my prediction. In other words, I was backwards in my selection of the better opportunity.

So the next question is, where do the companies stand now, and how do I feel about their prospects for the next 12 months?

In my analysis, I tend to rely heavily on analyst opinion and estimates. I figure they have been studying the stock for a while and probably have a better handle on the numbers than I do. I do look at current news as well, but I like to lean more on the numbers to provide an objective recommendation.

Coca-Cola looking good, if perhaps overvalued

Coca-Cola is trading at approximately $43 per share, right at its 52-week high. It has a PE of 22.5 (up from last year) and pays a dividend of 2.7% (also up from last year).

The Coca-Cola Company (NYSE:KO)’s full-year consensus earnings estimate for 2013 is $2.10, 7% higher than actual 2012 earnings. Its estimate for year-end 2014 is $2.34, 9% higher than year-end 2013.

The stock is up 19% since the beginning of 2013, down 5% from a year ago, and up 26% in the past two years. Current five-year annual EPS growth is estimated at 8.9% vs the S&P 500 at approximately 9.4%.

The PEG ratio of 2.2 indicates that the PE is higher than the earnings growth rate, which means that the price may have gotten ahead of value. With Coca-Cola’s PE increasing versus last year and the estimated earnings growth rate quite low in comparison, I am inclined to agree that the stock may be overvalued.

Coca-Cola’s PE is actually at the top of its five-year range, and it has generally traded closer to a PE of 20.

Currently the 19 analysts who cover the company rate it a 2.1 (1.0 = Strong Buy, 5.0 = Sell), down from a 1.9 last year (six Strong Buys, six Buys, seven Holds) with a mean target price of $46.00. In the Motley Fool Community, the stock is a five-star CAPs pick, with 6,406 Bulls and 321 Bears (95% positive sentiment).

TheStreet.com recently reiterated its Buy recommendation for Coca-Cola, with a score of A+, citing return on equity, improving profit margins, and the excellent stock price appreciation over the past 12 months. The article notes that Coca-Cola’s gross profit margin is high at 65.1%, an increase from the same quarter last year.

The Coca-Cola Company (NYSE:KO) has done a terrific job of diversifying its brand portfolio, and it has made strong inroads into the trendy new drink markets like Vitamin Water. According to the company’s recent earnings release, emerging markets, such as Thailand and India, are contributing well to overall revenue offsetting disappointing sales in China, Japan and Brazil. But even Jim Cramer said this week that he sees little upside for the company.

PepsiCo has done even better

PepsiCo, Inc. (NYSE:PEP) is currently trading at about $84, also at its 52-week high. It has a PE of 21.6 (up significantly from 16.6 last year) and pays a 2.7% dividend (down from 3.2% last year).

PepsiCo, Inc. (NYSE:PEP)’s full-year 2013 consensus estimated earnings is $4.40, which is 7% higher than the actual 2012 earnings of $4.10. The estimate for year-end 2014 is $4.77, 8% higher than year-end 2013.

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