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Where To Invest: The Coca-Cola Company (KO), PepsiCo, Inc. (PEP) or Dr Pepper Snapple Group Inc. (DPS)?

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The Coca-Cola Company (NYSE:KO) has been responsible for producing some of the best returns for shareholders in the market over the past 100 years, but will the company continue to do so? Could it be time to consider investing in another beverage company?

Well, Coke’s closest competitor is obviously PepsiCo, Inc. (NYSE:PEP), followed by Dr Pepper Snapple Group Inc. (NYSE:DPS). Both Dr Pepper and Pepsi have always been thought of as under-performers when compared to Coke. However, with Coke reporting slower sales in the last quarter of 2012, is it time to consider selling Coke and buying in to one these competitors?

Overview

The Coca-Cola Company (NYSE:KO)

  • 3500 products world wide
  • 15 brands worth more than $1 billion
  • 200+ countries
  • 270 bottling plants
  • $48 billion revenue 2012
  • Coca-Cola is the third biggest brand by value in the world – measured by net margins, average revenue per customer, advertising spend, brand affection and loyalty.

PepsiCo, Inc. (NYSE:PEP)

  • 200+ countries
  • 22 brands with revenue of more than $1B
  • 360 products spread across five main brands
  • $65 billion revenue in 2012
  • Ranked 38 in the top 500 Global brands for 2012

Dr Pepper Snapple Group Inc. (NYSE:DPS)

  • Operations limited to north America and the Caribbean
  • More than 50 brands on offer
  • $6 billion revenue in 2012

So, a quick overview highlights the size and strengths of each company. Coke is the biggest by exposure, although, as I will show below, Pepsi’s larger range of products produces a higher revenue than Coke’s. Dr Pepper is by far the smallest company; in fact, Dr Pepper’s revenues are only 10% of Pepsi’s.

Revenue

PepsiCo Coca-Cola Dr Pepper Snapple
$US Millions 2011 2012 2011 2012 2011 2012
Revenue 66,504 65,500 46,766 48,000 5,903 6,000
Growth 15.00% -1.51% 33.10% 2.64% 4.70% 1.64%
Gross profit 37,505 34,080 28,600 28,964 3,535 3,370
Margin 56.40% 52.03% 65.30% 60.34% 59.90% 56.17%

Pepsi has the largest revenue. That said, Coke has the best gross profit margin of 60% in 2012 compared to Pepsi’s 52%.

Dr Pepper has the smallest revenue in the group, but the company does have the second strongest gross margins. Gross margins were 56% in 2012, down from 59% in 2011 – still higher than Pepsi’s.

If revenue growth is taken into account, Dr Pepper has achieved the most steady revenue growth. Pepsi and Coke had high double-digit growth rates in 2011, but growth fell to more believable numbers in 2012.

So far, Coke is the biggest company, while Pepsi has the largest revenue, and despite its size Dr Pepper is highly efficient.

The Bottom Line

Pepsi Co Coca-Cola Dr Pepper Snapple
$US Millions 2011 2012 2011 2012 2011 2012
Pre-tax profit 8,834 8,300 10,627 11,810 925 978
Margin 13.30% 12.67% 22.70% 24.60% 15.70% 16.30%
Net profit 6,462 6,180 8,634 9,000 606 629
Margin 9.70% 9.44% 18.50% 18.75% 10.30% 10.48%

A company’s bottom line is very important, as it can be an indicator of how much cash the company will be able to return to shareholders. Despite Pepsi’s larger revenues, the company is not able to transform this into profits. The company has the smallest net profit margin in the group; Pepsi only receives 9.4 cents for every $1 in revenue.

In comparison, Coke has a net margin of nearly 19%; more than double that of Pepsi. Dr Pepper is the middle again; the company produces a net margin of just over 10%.

Presented in graph form, the difference in margins is staggering. Coke is obviously the most efficient company, and is almost twice as efficient as Pepsi.

So, how effective are these companies at translating profit into shareholder returns?

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