Pepsico (PEP) - Get Report beat earnings estimates, but on the strength of its food and snack business. The weakness in one of its sales channels for beverages is a glaring negative for Coca-Cola (KO) - Get Report earnings.
Still, buying Pepsi stock over Coca-Cola isn’t exactly a sure bet.
Pepsi shares rose as much as 2% to $137 Monday after beating revenue and earnings estimates.
Revenue was $15.95 billion, against estimates of $15.38 billion. That actual result fell 3% year-over-year, but adjusted earnings per share fell 11% to $1.32, against estimates of $1.25, because of a surge in health and safety costs.
Beverage sales — more than half of company revenue — fell harshly. North America Pepsi revenue fell 6.6%. But Snacks and food revenue surged as consumers stocked up on groceries in the beginning of the quarter. Frito-Lay sales rose 7% and Quaker Foods rose 14%.
But management said the weakness in beverages was on the back of lockdowns. No sporting events meant no sales in stadiums or arenas and shelter-in-place orders meant no restaurant sales until states began reopening in May.
Away-from-home sales, which happen at sporting events, restaurants and other reopening-sensitive establishments, represent about half of company sales, according to recent Coca-Cola SEC fillings.
For Pepsi, the combination of North America Beverage sales and total international sales comprises about 70% of total revenue, so it seems conceivable that a significant chunk of Pepsi’s revenue also comes from its reopening-sensitive sales channels, as North America beverages are a large part of total revenue and international sales are heavily comprised of beverage sales.
But Pepsi was saved by its snack business. Coca-Cola is far lighter on food and snacks, which sell heavily in grocery stores, an essential location during a pandemic.
Coca-Cola does own energy drink and orange juice assets, but doesn't provide much color on those product segments. Meanwhile, Coca-Cola highlighted in April before earnings that it is expecting away-from-home sales to decimate revenue for the second quarter, as management was expecting a 25% hit to sales.
Analysts are looking for a 26% hit year-over-year, according to FactSet consensus estimates. And EPS is expected to fall 34% as health and safety costs, which do not exactly produce additional revenue, are almost surely part of the equation.
In any event, Coca-Cola is expected to see a far harsher EPS hit in 2020 over 2019 than Pepsi will see and Coke’s 2021 rebound will see the company come within 2% of its 2019 level, while revenue also lags by a similar percentage. Pepsi’s 2021 campaign is expected to show growth of 2019.
Coke investors need to see lockdowns go away for good and they will be especially keen to look for any commentary or any sales trend that indicates a path back towards pre-virus levels of revenue and earnings.
Coke shares have fallen 25% year-to-date, while Pepsi shares have risen just under 1%, beating the S&P 500’s slight loss on the year. Importantly, Coke has a slightly higher debt burden than Pepsi has, which, on a technical level, puts it at incrementally higher credit risk.
That’s a negative for the stock’s valuation and Coke does trade at a slightly lower multiple of next year’s earnings than Pepsi does, which may make it look more attractive, especially as the two companies’ revenue and earnings growth fundamentals can, in some pockets of time, look identical. Interestingly, Coke trades at 22 times its 2021 earnings estimates, compared to Pepsi’s 2021 multiple of 21 times.
For some time in the past couple of years, analysts had expected slightly higher margin expansion and emerging markets revenue growth for Coca-Cola, which supports the company’s valuation.
But anyone can debate these two stocks’ valuations until the cows come home. Leaving multiples aside, Coca-Cola has remained wedded to its dividend as the stock has fallen.
Both companies are in excellent financial position and are free cash flow generative by a wide margin. Coca-Cola’s dividend is at 3.5%, while Pepsi’s is just under 3%. That’s premium compared to the treasury market, which offers almost nothing over inflation.
For the defensive portion of a portfolio, these two companies look like solid bets. The one obvious difference: Coca-Cola is more volatile in the COVID environment, which longer-term investors may be able to take advantage of.
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