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Coca-Cola share price pops to hit record high; but is PepsiCo really winning?

The Coca-Cola Company [KO] and PepsiCo [PEP] fight just as hard for a place in traders’ portfolios as they do for the prime shelving spots in supermarkets. With a 20% share price rise in 2019 so far, PepsiCo has delivered the most fizz for investors. But The Coca-Cola Company closed the gap on Tuesday as upbeat Q2 results propelled the stock to a record $54 – a 15.7% year-to-date gain. 

In February, The Coca-Cola Company’s board temporarily depressed investor sentiment as it guided for full-year EPS of $2.08, virtually flat from the previous year and well below the $2.23 that analysts were hoping for. That gloomy forecast set the share price back 8.4% to $46.59 in one day. But an upwards revenue growth revision on Tuesday from 4% to 5%, along with the eight quarterly EPS beats in a row, provided investors with a newfound thirst for Coke – particularly the non-sugar variants.

Speaking to CNBC after the results were released, CEO James Quincey said “the storm” the company was worried would hit consumption “never arrived”, allowing for “stronger momentum than we were expecting”. However, he warned “clouds” persist, which is why Coca-Cola is sticking to flat earnings guidance for the moment.

The company’s namesake soda remains in demand: sales volumes rose 4% year-on-year for the quarter. But consumers worldwide are shifting to lower-sugar alternatives and different flavours – and Coca-Cola, like rival Pepsi, has every intention of staying ahead of changing tastes.

 

Less sugar, more energy

Coke Zero continues to be one of the fastest-growing products in the company’s core-portfolio, with sales rising by double-digit percentages over the quarter. The release also cited amalgamations like vanilla- and coffee-flavoured Coca-Cola as a boost to volumes.

Water, “enhanced water” and energy drinks sales rose 2%. Energy drinks, for which Coca-Cola hasn’t further broken-down the numbers, have been a point of focus for analysts. Coca-Cola has an investment in Monster [MNST] energy drink, with which it has a noncompete, but nevertheless launched “Coca-Cola Energy” in April, and in sugar-free variants too. Monster protested the move, but an adjudicator recently ruled in favour of The Coca-Cola Company, noting the Coca-Cola brand’s exclusion from the noncompete.

 Coca-ColaPepsiCo
Market cap$230.99bn$180.94bn
PE ratio (TTM)34.4214.33
EPS (TTM)1.579.03
Return on Equity (TTM)36.21%105.87%

Coca-Cola & PepsiCo share price vitals, Yahoo finance, 24 July 2019

 

The launch of Coca-Cola Energy looks to capitalise on the growing popularity of energy drinks. But it also marks a noticeably different strategy from PepsiCo’s. Earlier this month, PepsiCo CEO Ramon Laguarta told analysts that the opportunity is in brands like Mountain Dew and Gatorade, cautioning against the idea that branded cola energy blends would become central to the category.

 

Costa’s “tremendous opportunity”

While cold soft drinks continue to be the key battleground, a game-changing acquisition from The Coca-Cola Company took place last summer, acquiring the Costa Coffee chain from the UK’s Whitbread [WTB] for £3.9bn ($5.1bn). The acquisition closed ahead of schedule in early January, and bore fruit last month, with the launch of ready-to-drink versions of Costa’s most popular concoctions.

That, however, is only the tip of the iceberg when it comes to The Coca-Cola Company’s hot drinks ambitions. “[We will] serve the express model, ready-to-drink and solutions for at-home in packaged bins [or] in the future in pods,” CFO John Murphy told analysts at a Deutsche Bank event in June. “We see a tremendous opportunity ahead to participate in the hot coffee segment [where] we today have a very low position.”

“We see a tremendous opportunity ahead to participate in the hot coffee segment [where] we today have a very low position.” - Coca-Cola CFO John Murphy

 

Brand value

In terms of intangibles, The Coca-Cola Company’s main asset remains its namesake soda. The latest annual ranking from consultancy Brand Finance put the brand’s value at $36.2bn, up 19% from a year earlier. PepsiCo’s worth, meanwhile, fell 8% to $18.5bn.

The main edge that PepsiCo maintains over The Coca-Cola Company is a much bigger presence in food, which has helped it post growth even as soda consumption across the US fell. The total worth of PepsiCo’s brands, at $58.9bn, is second only to Nestlé’s, according to Brand Finance – although The Coca-Cola Company, at $53.6bn, is quickly narrowing the gap.

After Tuesday’s boost, The Coca-Cola Company’s shares trade at 25.3 times forward earnings, slightly above Pepsi’s 23. KO shares currently trade slightly above their one-year target estimate of 53.86, whereas PEP stock is currently trading away from its respective target, of 133.85. It follows then that CNBC panellist Dan Nathan believes Pepsi shares are “priced for perfection”, due to the predicted negative earnings trend and the company’s low-single-digit sales growth; all of which, according to Nathan, render the stock “kind of expensive”. 

In May Morgan Stanley called The Coca-Cola Company its top pick among consumer staples mega-caps, saying it “offers a clearly superior growth outlook versus… [its] peers, with stronger pricing power… and rebounding emerging market trends.”

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