Investor Taste Challenge: Pepsi vs. Coke (PEP, KO, PBG, PAS)

PepsiCo Inc. (NYSE: PEP) is trading down after the company’s quarterly earnings report from this morning.  PepsiCo’s earnings were $1.08 EPS on a 1.5% drop in revenues to $11.08 billion, versus Thomson Reuters estimates of $1.03 EPS and $11.25 billion in revenues.  Pepsi did manage to beat estimates, but the amount of the beat appears to be the result of a lower effective tax rate and on some of the cost cutting measures as we have seen at so many firms.  The strength of PepsiCo’s snack food unit could actually highlight a potential weakness at Coca-Cola.  What is interesting is that rival The Coca-Cola Company (NYSE: KO) is down a fraction of what has been in seen in PepsiCo shares.

Revenues were hurt by falling North American soft drink sales.  More importantly, CEO Indra Nooyi and her management team are cautious on the hopes of a consumer spending revival.  Nooyi specifically noted research pointing to the age of thrift in the U.S. and Western Europe customers will likely continue in 2010.  Nooyi noted that Asia and South America should continue to see consumer spending growth but that won’t likely make up for what is being seen elsewhere.

If you have tracked the earnings reports from many companies, there is a pattern of the bottom line beating estimates, but on lower revenues and on cost cuts and other efficiency metrics.  This may be a concern to many investors who want to see a return to top-line growth in 2010.  Pepsi is likely to see some growth as a result of its $7.8 billion acquisitions of Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS).  While Pepsi affirmed its 2009 earnings target and gave a 2010 earnings growth target of 11% to 13% on a constant currency basis, some may argue that is not organic growth.

Our focus here is how this can be perceived in rival Coca-Cola.  Pepsi said that sales by volume rose 2% in the snack food unit in the Americas and in international segments.  Drinks were the drag as volume was up 0.5%, measured as a 9% gain internationally and a drop of 6% in the Americas.  While Pepsi has the snack food operations, Coca-Cola does not.  And we can recall at the height of the time of fear when Coca-Cola was being treated like a luxury brand.  If you draw a straight line at 0.5% for drinks only, this may signal at least some caution for Coca-Cola.  Yesterday’s upgrade of Coca-Cola from Deutsche Bank may be helping today.

At 2:00 PM EST we have PepsiCo shares down 1.9% at $60.00 and Coca-Cola down 0.5% at $54.54.  We would also note that Coca-Cola is trading less than 2% off its 52-week highs and that PepsiCo is down 8% from its 52-week highs.  If the Thomson Reuters estimates are met, then Pepsi trades at a forward multiple of about 14.6-times expected 2010 earnings and Coca-Cola trades at about 16.2-times expected 2010 earnings.

What is possible is that Coca-Cola did slightly better in the beverage side.  But Coca-Cola has no significant snack food sales as Pepsi does.  If the trends of PepsiCo are the same at Coca-Cola, then there may be more profit taking ahead by Coca-Cola shareholders.

JON C. OGG
OCTOBER 8, 2009