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Pepsi's Junk-Food Empire Can't Beat Coke

BOSTON ( TheStreet) -- Among corporate rivalries, few are as famous as the battle between Coca-Cola (KO - Get Report) and PepsiCo (PEP - Get Report) for dominance of the soda market.

Pepsi, who once held blind taste tests to draw consumers to its soda, has since diversified into potato chips and other snacks with its Frito-Lay subsidiary. Coke has branched out into energy drinks, juices and tea, but its trademark cola is still the Atlanta-based company's key revenue generator.

Pepsi has built a product roster that's filled with the top names in junk food, but Coke's success in the beverage business makes it a better long-term bet. Coke continues to gain share in the drinks market and has been rewarding investors with better share performance. Coke also has one of the world's best-known brands and the endorsement that comes from being a long-time portfolio holding of Warren Buffett's holding company Berkshire Hathaway (BRK.B).





Coke stock has appreciated 28% in the past 12 months, ranking among the best-performing Dow components. Pepsi has risen a more modest 8.2% and is up 4.8% in 2011, slightly more than the benchmark S&P 500 Index. Coke has outperformed Pepsi in spite of its lumbering market value of $155 billion, compared to Pepsi's $108 billion. Coke will announce its second-quarter performance on Tuesday before the market opens. Pepsi is due to report its results on Thursday. Coke is forecasted to report an 8.7% increase in per-share earnings and sales growth of 43%, compared to Pepsi's 14% and 12%, respectively, according to estimates.

Last quarter, Coke's gross margin and operating margin came in at 68% and 23%, respectively, ranking in the 92nd and 85th industry percentile. Pepsi's margins hit 58% and 15%, lagging Coke's spreads. Pepsi is trading at a trailing earnings multiple of about 18, marginally above its five-year average. Coke, on the other hand, is selling at a trailing multiple of 13, a 33% discount to its five-year average, and a 26% discount to its average peer.

Coke currently pays a quarterly dividend of 47 cents, translating to an annual yield of 2.8%. The dividend has grown 8.1% and 9.1%, annually, over a three- and five-year span, respectively. Pepsi's dividend growth has matched Coke's over a three-year span, but outpaced its expansion over a five-year period, during which Pepsi's dividend grew at an annualized pace of nearly 13%. Pepsi's current yield is also higher, at about 3%. Still, analysts, in aggregate, favor Coke's stock. The Atlanta-based bottler receives "buy" recommendations from 81% of the analysts who follow the equity, more than Pepsi's 70% proportion.

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