During the October 2 episode of Mad Money, Jim Cramer discussed the widening gap between PepsiCo, Inc. (NASDAQ:PEP) and The Coca-Cola Company (NYSE:KO) ahead of PepsiCo’s earnings report. He said:
Speaking of burdens, on Thursday morning, we have one of the most problematic earnings reports imaginable: that of PepsiCo. For years, this company was running circles around archrival Coca-Cola thanks to the strength of its snack food business, not its soft drink. This year, things are upside down. Coca-Cola stock is up 22.5%, leading the packaged food industry, while PepsiCo stock is down 12%. What explains the disparity? Simple: live by junk food, die by junk food.
You can also find out why Cramer recently turned his attention toward Procter & Gamble instead of PepsiCo.
Coca-Cola Delivers Stronger Organic Growth
The companies’ latest results show different growth rates. The Coca-Cola Company’s second-quarter organic revenue increased 6%, with global unit case volume rising 5%. Comparable earnings per share increased 11% to $0.97. Management raised its full-year outlook to approximately 5% organic revenue growth and between 9% and 10% comparable EPS growth.
PepsiCo, Inc. reported second-quarter revenue of $24.18 billion, up 6.4%, although organic growth was a more modest 2.4%. Core earnings per share increased 4%. Its international operations provided support, while management continued expanding smaller portions, functional products and zero-sugar beverages. Only one of these companies made it to our list of best dividend kings to buy.
PepsiCo Offers More Income at a Lower Multiple
Cramer linked PepsiCo, Inc.’s difficulties to changing consumption habits and competition for investors’ income dollars, as he said:
PepsiCo crushed Coca-Cola back in the days when Frito-Lay snacks business was much stronger than carbonated water or soda. But now Frito-Lay is uniquely in the crosshairs of the GLP-1s and the health-conscious younger consumers. Now, of course, PepsiCo sports a 4.7% yield, which is terrific, but when the 10-year Treasury yields 5.28%, you know that risk-free bond competition looks a lot better by comparison.
PepsiCo is trading at approximately 14.7x forward earnings, compared with 26x for The Coca-Cola Company. Their annualized dividend yields were approximately 4.71% and 2.45%, respectively. It shows that PepsiCo offers a substantial valuation discount and higher income, while Coca-Cola’s stronger recent growth comes at a higher price. You can also find out more about Coca-Cola’s $10 billion bet.
Lower Prices Have Yet to Restore Food Revenue Growth
PepsiCo, Inc.’s reported performance gives a more specific picture than Cramer’s broad warning about snacks. North American food volume was flat in the second quarter, while organic revenue declined 2% because of lower effective pricing. The company reported volume market-share gains, but those gains had not translated into revenue growth. Cramer remained unwilling to recommend the shares on the possibility of a temporary recovery, as he said:
I want so badly to say to you that this could be the quarter when PepsiCo turns things around, but even if I believe that, all you get is a short-term bounce, so the risk/reward is just simply not compelling. Is that too harsh? I don’t think so. Campbell’s recently had to cut its dividend. General Mills and Conagra missed their quarters. And yesterday, we got a really problematic quarter from former growth gold standard McCormick, the spice company. I can’t recommend something if it comes from a packaged food milieu and it’s just going to bounce. We’re not traders on this show.
Fund Ownership Moves in Opposite Directions
Insider Monkey’s database showed 68 hedge funds holding PepsiCo, Inc. in Q2, down from 72 in Q1. The Coca-Cola Company attracted a broader group, with 90 holders compared with 76. Short interest was 2.11% for PepsiCo and 0.95% for Coca-Cola, highlighting relatively limited short exposure to either company.
PepsiCo gives investors more dividend income and a lower earnings multiple, but its North American food business still needs to turn market-share gains into sales growth. Coca-Cola has delivered stronger operating momentum. The choice comes with a clear price difference, rather than an equally priced choice between two familiar brands.
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