PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): Here’s How This Beverage Giant Is Here For Good

PepsiCo, Inc. (NYSE:PEP)Headquartered in Atlanta, Georgia, the American beverage corporation, The Coca-Cola Company (NYSE:KO), has more than 500 brands across 200 countries. On April 16, the company released its earnings for the first quarter of 2013. As the company beat its estimates, its share price jumped by more than 5%. Now, the question is, will the company keep on doing wonders in the future as well?

Quarterly earnings

In 1Q13, Coca-Cola posted earnings of $0.46 per share, compared to analysts’ estimates of $0.44 per share. However, net income went down to $1.75 billion, or $0.39 per share, versus $2.05 billion or $0.45 per share in the same quarter last year. This was expected as 1Q13 had two fewer selling days in it.

Sales volume grew 3% for The Coca-Cola Company (NYSE:KO) in the Americas and 5% in for Coca-Cola internationally. The company reported 3% growth in Germany, 1% in North America and Japan. Europe remained flat, but improved substantially from the fourth quarter of 2012. As far as emerging markets were concerned, Coca-Cola was up 18% in Thailand, 8% in India and Russia, and 3% in Brazil and Mexico. Chinese business grew 1% for the quarter.

Sparkling beverages

The Coca-Cola Company (NYSE:KO)’s sparkling beverages’ volume grew 3% in the first quarter. The new marketing campaign “Crazy for Good” showed a lot of promise around the world by enhancing Coke’s brand image. Global brand Coca-Cola grew 3% for the quarter, fueled by 38% growth in Thailand and 30% in India. Fanta was up 6%, whereas Sprite’s volume increased by 5%.

Still beverages

In the case of still beverages, the company’s volume grew 6% in the quarter, helped by ready-to-drink tea, juices, energy drinks, sports drinks and packaged water. Ready-to-drink tea volume rose double digits, a result of high sales volume for brands like Gold Peak, Honest Tea, Ayataka green tea, and Fuze tea. Juices and energy drinks were up 9% for the quarter, while packaged water showed a growth of 1%.

Valuation

The Coca-Cola Company (NYSE:KO) is trading at a forward P/E (1yr) of 18.26 times, and has a PEG of 2.14. Adding a dividend yield of 2.60% in its PEG gives us a PEGY of 1.7. Using industry’s forward P/E (1yr) of 17.4, I can value Coca-Cola. However, as the company is all set to outperform its peers this year, I would value it using a premium of 20%. Hence, a forward P/E (1yr) of 20.8 times would be used for its valuation.

PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): Here's How This Beverage Giant Is Here For Good

According to high estimates, Coca-Cola’s target price comes out to be $46. This means that it is undervalued by almost 10%. Adding a dividend yield of 2.60% gives a total return of more than 12%. This makes Coca-Cola Company (NYSE:KO) one of the top buys in its industry.

Competitors

Coca-Cola’s biggest competitor, PepsiCo, Inc. (NYSE:PEP), beat earnings estimates for 1Q13 by reporting an EPS of $0.77. Analysts were expecting the company to earn around $0.71 per share. The major reason behind this was an increase in prices that lead to healthier margins. PepsiCo, Inc. (NYSE:PEP) is trading at a forward P/E (1yr) of 17.52 times, making it slightly cheaper than Coca-Cola Company (NYSE:KO). It has a dividend yield of 2.60% and a PEG of 2.05, which leads to a PEGY of 1.64. According to the sell side estimates, PepsiCo has a mean recommendation of 2.2 on the sell side, making it a great buy.

The third largest soft drink producer in the U.S, Dr Pepper Snapple (NYSE:DPS), didn’t do that well in 2012, where it wasn’t able to meet earnings estimates. In 2013 as well, the company doesn’t expect that much amid high costs associated with raw materials. Thus, the company expects to miss its earnings forecast this year. Dr Pepper Snapple Group Inc. (NYSE:DPS) is trading at a forward P/E (1yr) of 14.14 times, and has a PEG of 2.72. Incorporating a dividend yield of 3.20% in its PEG gives us a PEGY of 1.76. A mean recommendation of 2.5 on the sell side suggests that it isn’t as attractive as its peers, PepsiCo, Inc. (NYSE:PEP) and Coca-Cola.

Conclusion

During the past few years, Coca-Cola has shown an amazing level of consistency, which has lead to substantial value for shareholders. Just like the last quarter, 1Q13 results reflect the company’s strong hold on the beverage industry. In 2013 and beyond, the Asian markets would serve as the biggest catalyst for the beverage giant, where it’s expected to make further inroads. As far as products are concerned, juices and energy drinks are expected to be among the top growing items in the years ahead.

The bottom line is that Coca-Cola is still one of the safest and most profitable places to invest in such a volatile market. Thanks to its vast range of beverage products, Coca-Cola has out-maneuvered the recent economic downturn. Going forward as well, this giant is all set to keep on growing. In short, I recommend buying Coca-Cola for a yield of at least 12%.

The article This Beverage Giant Is Here For Good originally appeared on Fool.com.

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