Investment Analysis Pepsi versus Coca Cola

InvestmentAnalysis: Pepsi versus Coca Cola

InvestmentAnalysis: Pepsi versus Coca Cola

Thesoft drink is one of the most profitable and highly competitiveindustries, but the global market is currently dominated by two majorplayers, including PepsiCo Incorporation and the Coca Cola Company.The industry ranks among the key sectors driving the global economyby accounting for $ 5.7 trillion of the total food production,retail, catering, distribution, and farming in the world (IMAPIncorporation, 2010). This industry has witnessed a consistentgrowth, which is characterized by the new entrants into the industry,presentation of new products into the market, and the integration ofmarket concerns (such as health) in the processes of product designand production. However, the two large companies (PepsiCo and theCoca Cola) have developed their own barriers to entry (such asdominating the channels of distribution, commanding the largestmarket shares, and customer loyalty), which makes it difficult fornew companies to flourish in the industry. This paper will provide aninvestment analysis of the two major competitors (including Pepsi andthe Coca Cola) in the beverage industry with the objective ofrecommending the best investment option.

Analysisof the two companies

TheCoca Cola Company

TheCoca Cola Company was established in 1886 by a pharmacist named JohnPemberton (Ford, Stephens, Cooper, 2007). The company has itsheadquarters located in Atlanta, Georgia. The first product coca colawas produced by combining cinnamon, soda water, Brazilian weeds, andcoca leaves. The original recipe was then purchased in 1891 byanother pharmacist, Asa Chandler, who improved and marketed theproduct to give it the international recognition (Ford, Stephens,Cooper, 2007). The ownership of the company has been changing overthe years, which have been accompanied by frequent changes in theleadership and the management of the company. Currently, the companydeals with approximately 400 brands and products (including Fanta,sprite, Fruitopia, Dasani, Nestea, Powerable, and Minute Maid andothers) in more than 200 countries (Ford, Stephens, Cooper, 2007).The Coca Cola products are designed for customers of all age groups,geographical region, and financial background. The company gets itssupplies from multiple suppliers, but the major supplier ofconcentrates and syrup is TCCC.

PepsiCoIncorporation

PepsiCoIncorporation was founded in 1902, but the first recipe was developedin 1898 by a young pharmacist named Caleb Bradham (LeaderDistribution System Incorporation, 2012). The formulation wasprepared by combining sugar, carbonated water, rare oils, vanilla,and cola nuts and given the name Pepsi-cola. The company hasdiversified its products over the years, and it currently deals withabout 21 brands, including the Mountain Dew, Quaker Food, Pepsi,Mirinda, Lay’s Gatorade, and Ruffles among others (LeaderDistribution System Incorporation, 2012). All these brands aredesigned to suit the needs of the consumers of all walks and age.Similar to other multinational corporations, PepsiCo Incorporationdepends on many and diverse suppliers. According to Freeman (2009)Pepsi depends on supplies from about 180 established companies, butthe E2M is the most trusted supplier. In addition, the company hasundergone mergers, reorganizations, and changes in the managementseverally, within the last one decade of its existence. Currently,Pepsi if headed by Indra Nooyi as the chief executive officer andShaiq Wani as the president.

Figure1: Stock prices for Coca Cola Company and PepsiCo

Fromthe gram the stock price of Coca Cola Company increased exponentiallyfrom the IPO price up to January 2012 before declining exponentiallyto a price that is slightly below the IPO price in January 2013.Similarly, the stock price of PepsiCo increased exponentially fromthe IPO price to January 2011, but it increased at a very low rate upto January 2012, but it continued increasing up to January 2013instead of decreasing like the case of Coca Cola in the same period.It is evident that the price of Coca Cola stock increased at a higherrate than Pepsi from the time of IPO to January 2011 and from January2011 to 2012, but the price fell exponentially compared to Pepsiprices that continued increasing from January 2012 to January 2013.This is a clear suggestion that there must have been significantdiscoveries pertaining to certain weaknesses of the Coca Cola Companythat reduced the preference of its stock in the market compared toPepsi’s stock.

Newevents affecting investment decisions

CocaCola

Althoughthe stock price of Coca Cola has been reducing over time, there arethree major events that have occurred between 2012 and now, which arelikely to affect investors’ decisions. First, Coca Cola Company hasappreciated the role of acquisition as a strategy for entry into theinternational market and the easiest means of addressing the marketchallenges. Consequently, the company has made two announcements toacquire two different companies that produce beverages that areslightly different from those produced by Coca Cola. The firstannouncement stated that Coca Cola would acquire ZICO, which producesPremium Coconut Water (Hope Natural, 2014). This was a move by theCoca Cola Company to increase its market share in the field of healthbeverages with the objective of catching up with the market trends.The purchase was made in 2012, but the coconut brand took its placein the signature of the Coca Cola 2013 (Hope Natural, 2014).

Ina similar announcement, the Coca Cola Company announced that it wouldacquire a stake in Monster Beverages, which manufacture natural softdrinks and a wide range of fruit drinks, such as Hansen’s NaturalSoda, Peace Tea, and Hansen’s Junior Juice (Brown, 2014).Similarly, the decision to acquire a stake in Monster was intended tohelp the Coca Cola Company venture in health beverages at a fasterrate. This acquisition would be expected to make a contribution ofabout 3 % of the total net profit earned by Coca Cola annuallyfollowing the increase in the popularity of the natural drinksmanufactured by the Monster Beverages. The two events show that CocaCola will increase its profitability in the future and this is likelyto increase the preference of its stock among investors.

PepsiCo

Pepsi,which is the immediate competitor of Coca Cola, is also a viableinvestment opportunities, but there two major events that are likelyin influence investor`s decision to buy its stock. First, Pepsi hasdemonstrated its plan to diversify its range of products whilediscouraging mergers and acquisitions, which are being used by itscompetitor Coca Cola. In one of the most viable merger with Mondelez,an investor activist named Nelson Peltz was added into the board ofMondelez, which hampered his urge for the merger between Pepsi andMondelez (Munshi, 2014). A successful merger would have given Pepsian opportunity to expand its market share of healthy snacks byincluding the snack and products (such as Cadbury Chocolate, Oregoncookies, and Trident gum) manufactured by Mondelez into its basket.

Secondly,the protest organized in the United States in 2012 by differentgroups of activists to compel the United States Surgeon General tocarry out a comprehensive study of the negative effects of soda onhuman health is likely to affect the performance of Pepsi in thefuture (Berr, 2012). This is because Pepsi controls about 30 % of allthe carbonated soft drinks in the world, which is too significant forthe company to lose because of its adverse effects on human health.Although Pepsi has other products (including soft drinks and snacks)carbonated drinks is one of the major sources of its revenue. Thisimplies that the effect of the increase in the concept of healthconsciousness will affect the financial performance of the company.The two events are likely to reduce Pepsi competitiveness in thefuture, thus reducing investors’ preference for its shares.

Financialanalysis: Financial ratios

Ratios

Coca Cola

Pepsi

2012

2013

2012

2013

Liquidity ratios:

Current ratio

1.09

1.13

1.1

1.2

Quick ratio

0.97

1.0

0.89

1.05

Profitability analysis:

Return on assets ratio

0.11

0.1

0.08

0.09

Return on equity

0.28 (28 %)

0.26 (26 %)

0.29 (29 %)

0.29 (29 %)

Activity analysis:

Assets turnover ratio

0.58

0.52

0.89

0.87

Accounts receivable ratio

9.9

9.6

9.39

9.49

Capital market analysis:

Price earnings ratio

17.61

21.4

30.57

36.24

Capital structure ratio:

Debt to equity ratio

1.62

1.71

2.33

2.17

Source:The Coca Cola Company Annual Report (2013) and PepsiCo (2013)

Thecurrent ratios of the two companies are within the recommended rangeof between 1 and 2 (Lincoln, 2010). This implies that the twocompanies can use their current assets to cover all their currentliabilities. The two companies had a quick ratio of less than 1 in2012, which means that they could not pay meet all their currentliabilities, but the ration improved in 2013 to greater than 1.

Therate of return on assets for Coca Cola reduced slightly from 0.11 in2012 to 0.1 in 2013 while ROA for Pepsi increases from 0.08 to 0.09in the same periods. However, the ROA for Coca Cola is higher thanthat of Pepsi in the two financial periods, which implies that CocaCola is in a better position to convert investment into return.Return on equity for Coca Cola reduced from 28 % in 2012 to 26 % in2013, while ROE for Pepsi remained constant (29 %). However, Pepsihas the highest return on equity in the two financial periods, whichimplies that Pepsi promises its shareholders a better return forevery $ invested in it than Coca Cola.

Theasset turnover ratio for Coca Cola reduced from 0.58 in 2012 to 0.52in 2013, while ATR for Pepsi reduced from 0.89 in 2012 to 0.87 in2013. However, Pepsi had the highest asset turnover ratios for thetwo periods, which means that Pepsi has been utilizing its assetsmore efficiently than Coca Cola. Coca Cola has the highest ratio ofaccounts receivable for the two years than Pepsi, but its ratioreduced from 9.9 in 2012 to 9.6 in 2013, while the ratio increasedfrom 9.39 to 9.49 in the same periods. This suggests that Coca Colahas a higher capacity to generate more sales for every dollar ofassets, but this capacity seems to be reducing while that of Pepsi isincreasing.

Pepsihas a higher price earnings ratio than Coca Cola for the two years,which means that investors expect a higher growth and performance ofPepsi in the future. Although the price earnings ratio Coca Cola hasbeen increasing, it is too low compared to Pepsi’s ratio.

Pepsihas the highest debt to equity ratio than Coca Cola, which means thatPepsi has been using more of creditor funds in its investmentprojects than the investment funds generated from the shareholders.

Reliabilityof the data for investment decisions

Thedata used in the financial analysis section is accurate and thefindings can be relied on by potential investors in making theirinvestment decisions. The data is obtained from audited financialstatements for two financial periods. In addition, the use of datafrom more than one financial period allows potential investors toobserve the key trends from one year to another. In addition, thefinancial statements used to conduct the analysis are consistent withthe international financial reporting standards in terms ofpresentation and disclosures. This implies that all the informationthat potential investors needs to know about the two companies hasbeen made available in the standard format. This implies that thedata is accurate and reliable.

Recommendedinvestment option

Thetwo companies (Coca Cola and PepsiCo) are relatively stable in termsof finance, but Pepsi is a best investment option for a potentialinvestor. Based on the financial analysis, the financial soundnessand efficiency of PepsiCo have been improving over time while that ofCoca Cola has been declining in many respects. Liquidity ratiosobtained from the latest audited accounts shows that Pepsi has ahigher current ratio (1.2) and quick ration (1.05) compared to CocaCola with 1.13 and 1.0 current and quick ratios respectively in theyear 2013. This implies that Pepsi has a higher liquidity than CocaCola.

AlthoughCoca Cola has a higher return on assets ratio than Pepsi in bothfinancial periods 2012 and 2013, Pepsi has a high and stable returnon equity ratio. Return on equity for Coca Cola declined from 28 % in2012 to 26 % in 2013, while the same ration for Pepsi remained stableat 29 %. This shows that potential investors will get a higher returnfor every dollar they invest in Pepsi than every dollar they investin Coca Cola.

Pepsiis also more efficient in generating more revenue using the availableassets than Coca Cola. This is indicated by the assets turnover ratioof 0.52 for Coca Cola and 0.87 for Pepsi in 2013. Although Coca Colahas a higher accounts receivable than Pepsi, the difference is toosmall to discredit the rate of efficiency of Pepsi as indicated bythe assets turnover ratio.

Theprice earnings ratio shows that investor has more confidence in Pepsithan they have in Coca Cola. For example, Pepsi had a price earningsratio of 36.24 in 2013 and Coca Cola had the ratio of 21.4 in thesame year. This shows that Pepsi has a higher probability ofperforming better in the future than Coca Cola.

Althoughthe news, events shows that Coca Cola have been venturing in healthyproducts through the acquisition of smaller firms that manufacturethese products, Pepsi had foreseen and responded to changes in themarket early before. This is because Pepsi managed to understand theshift in consumption behavior from sugary snacks and drinks (such assoda) to healthy snacks and drinks. Consequently, Pepsi actedproactively and manufactured a wide range of healthy products (suchas fruit juices, teas, water, and sport drinks) in nearly all retailoutlets in the world, while Coca Cola is now reacting to the shift inconsumption behaviors. This implies that Pepsi stands a betterposition to increase its market share of healthy products before CocaCola catches up. In conclusion, Pepsi is the most viable investmentoption.

References

Berr,J. (2012). Coca Cola, PepsiCocannot ignore health issues.Redmond, WA: Microsoft Corporation.

Brown,A. (2014). CocaCola buys stake in Monster beverages.London: Forbes.

Ford,W., Stephens, R., Cooper, L. (2007). CocaCola case study: An ethics incident.Macon, GA: Macon State College.

Freeman,E. (2009). Pepsivalues E2M as a supplier that exceeds expectations.Springfield, NJ: Diversity Careers.

IMAPIncorporation (2010). Foodand beverage industry global report 2010.Normal, IL: IMAP.

HopeNatural (2014). CocaCola acquires ZICO.Boulder, CO: Hope Natural.

LeaderDistribution System Incorporation (2012). Thehistory of Pepsi.Brattleboro, VT: Leader Distribution System Incorporation.

Lincoln,I. (2010). Financialratios.Sydney: Australian Shareholders’ Association.

Munshi,N. (2014). Peltzdrops campaign for Mondelez merger.London: Financial Times LTD.

PepsiCo(2013). 2013Annual Report. Purchase,NY: PepsiCo.

TheCoca Cola Company Annual Report (2013). Annualreport pursuant to section 13 or 15 (d) of the securities exchangeAct of 1934.Washington, DC: United States Securities and Exchange Commission.

Appendix

Financial ratios

Ratios

Coca Cola

Pepsi

2012

2013

2012

2013

Liquidity ratios:

Current ratio = current assets / current liabilities

1.09

1.13

1.1

1.2

Quick ratio = Quick assets / current liabilities

0.97

1.0

0.89

1.05

Profitability analysis:

Return on assets ratio = Net income / Average total assets

0.11

0.10

0.08

0.09

Return on equity = Net income / Average stockholders’ equity

0.28

0.26

0.29

0.29

Activity analysis:

Assets turnover ratio = sales / Average total assets

0.58

0.52

0.89

0.87

Accounts receivable turnover ratio = sales / Average accounts receivable

9.9

9.6

9.39

9.49

Capital market analysis ratio:

Price earnings ratio = Market price of share / earnings per share

17.61

21.4

30.57

36.24

Capital structure ratio:

Debt to equity ratio = Total liabilities / Total stockholder’s equity

1.62

1.71

2.33

2.17