For Pepsi and Coke, Taste Test Is Over -- Here's Why

NEW YORK (TheStreet) -- With year-to-date gains of 12.35%, PepsiCo (PEP) shareholders are toasting the good life -- at least they should be.

Pepsi stock closed Friday at $91.85, up 0.07%.

On the other side of the isle is rival Coca-Cola (KO), whose shares have gained just 0.49% in 2014. And when looking back at their respective three-year and five-year charts, Pepsi has outperformed Coke by more than 6% in aggregate.

New investors continue to pile into Pepsi while Coke remains flat. The taste test results are in. And at this point, the debate as to which company is better has already been decided.

Coke has run out of innovative ideas. The company has, instead, taken a venture-capital tack to help offset weak sales. And its recent purchase of a 17% stake in Monster Beverage (MNST) is the latest example of how management is scrambling to quench Wall Street's thirst for growth. The way I see it, Coke cares only about dominating the beverage industry.

Pepsi, meanwhile, which has a strong-performing beverage business of its own, has fully embraced snack foods. The company's motto says, "Bet you can't eat just one" -- referring to its Frito-Lay potato chips.

It's the snack business that's become the key to differentiating Pepsi from Coke.

Restaurants like Buffalo Wild Wings (BWLD), a fast-growing restaurant chain, are ditching Coke products in favor of Pepsi. Buffalo Wild Wings gets a majority of its business during the height of sports seasons or events. With Pepsi owning sponsorship rights to the NFL and Major League Baseball, this is a perfect match for a sports-focused environment like Buffalo Wild Wings.

Then there's also Taco Bell, the fast-food restaurant operated by Yum! Brands (YUM). Pepsi's "outside the bun" thinking spawned the popular innovation of Doritos Locos Tacos. This has become one of the fastest-growing new product introductions in the history of fast food. At the time, Greg Creed, CEO of Taco Bell, said this was "the biggest launch in Taco Bell history."

Since introducing the new tacos in March 2013, Taco Bell has sold more than $1 billion worth of Doritos Locos Tacos. Taco Bell's success was not lost on Buffalo Wild Wings.

Although Coke currently owns roughly 70% of the U.S. fountain beverage business, Pepsi's innovative qualities should spur more market share gains in the coming years.

Restaurants looking for new product categories and/or enhancements to existing products will have to consider the added advantages of Pepsi's large portfolio of snack products.

To that end, it's time for activist investor Nelson Peltz, who's demanding drastic operational changes, including breaking up the snack food business, to take a step back. Besides, there's no guarantee that Peltz's proposed value creation will be achieved by splitting up the company. Messing with Pepsi's formula doesn't make sense at this point, especially when Pepsi is already outperforming Coke in some critical metrics, including revenue and earnings per share.

All told, Pepsi's management, which has always had bigger ambitions than second place, is on the right track.

With shares trading at around $91, the stock should reach $100 in the next 12 to 18 months on the basis of improved volumes and cash flow growth.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates COCA-COLA CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate COCA-COLA CO (KO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its expanding profit margins, reasonable valuation levels and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for COCA-COLA CO is rather high; currently it is at 65.60%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.63% is above that of the industry average.
  • COCA-COLA CO' earnings per share from the most recent quarter came in slightly below the year earlier quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, COCA-COLA CO reported lower earnings of $1.90 versus $1.96 in the prior year. This year, the market expects an improvement in earnings ($2.08 versus $1.90).
  • KO, with its decline in revenue, slightly underperformed the industry average of 4.4%. Since the same quarter one year prior, revenues slightly dropped by 1.4%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • The change in net income from the same quarter one year ago has significantly exceeded that of the Beverages industry average, but is less than that of the S&P 500. The net income has decreased by 3.0% when compared to the same quarter one year ago, dropping from $2,676.00 million to $2,595.00 million.

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