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.
The stock is up 24% year-to-date, up 24% from this time last year, and up only 18% from this time 2 years ago. The current estimate of annual EPS growth rate for the next five years is 9%, compared with an industry average of approximately 13.9% and a sector average of 14.3%.
The PEG ratio of 2.1 indicates that the PE is higher than the earnings growth rate, which means that the price may have gotten ahead of value. This is because the price and the PE have both risen significantly since last year, although 2013 earnings are not projected to come in that much higher than 2012.
The current analyst rating among the 17 professional analysts who cover Pepsi is a 2.2, up from a 2.3 last year, with a mean target price of $85.83. There are three Strong Buy recommendations, seven Buys, and seven Holds. In the Motley Fool Community, the stock is a four-star CAPs pick, with 4,393 Bulls and 155 Bears (97% positive sentiment).
TheStreet.com recently reiterated its Buy rating on PepsiCo, Inc. (NYSE:PEP) and assigned a score of A-, citing revenue growth, cash flow from operations, expanding profit margins and return on equity. The article also drew the following information from PepsiCo’s recent earnings release: net operating cash flow has significantly increased by 202% from the same quarter last year. Likewise, the gross profit margin is high, at 58%, also an increase from the same quarter last year.
The restructuring that PepsiCo management has undertaken over the past couple of years has started showing results, with the company predicting revenue growth of 3% to 4% over the 2013 to 2014 time period, while expecting earnings growth of 8% to 10% over the same time frame. Emerging markets, with a special focus on Russia, are being targeted to help drive profits.
Looking forward to the rest of 2013
Both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are trading at 52-week highs, and both are sporting similar PEs. Both stocks are up a similar amount year-to-date, which accounts for the majority of the stock’s move over the past twelve months.
Both sport similar analyst ratings, and Buy ratings from TheStreet.com. Both have PEG ratios that indicate the valuation may not be right.
Discounting both companies’ PEs a bit, I’m looking at 2013 year-end target prices of $44 for The Coca-Cola Company (NYSE:KO) and $88 for PepsiCo. I think that the recent price moves have pretty much, for me, accounted for its projected earnings for the year.
I may end up being wrong on both companies this time around – but that doesn’t change my mind. Very little gain to be had from these companies at this time.
The article Coke vs Pepsi: The Cola Wars Rematch originally appeared on Fool.com and is written by Karin Hernandez.
Karin Hernandez has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Karin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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