DRIP PORTFOLIO

<THE DRIP PORTFOLIO>
Pepsi vs. Coke, Part 2
Up close and personal

by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (August 18, 1999) -- Our second food and beverage study began with Coca-Cola and PepsiCo. However, the two were not directly pitted against each other until Fools did so on the message board. The competition has been tight, but lately more positive remarks are being made about Pepsi.

PepsiCo (NYSE: PEP) -- The absolute monster in the snack food world has a lot in its favor: a strong management with new leaders in key positions, a new business structure, a better advertising campaign, more room to grow internationally (if it can take market share from Coca-Cola), and a much more down-to-earth valuation by many common measures.

Coca-Cola (NYSE: KO): The world leader in beverages still has strong management despite recent blips and, some say, hubris. Also, the company still possesses tremendous growth opportunities in international markets -- if it can innovate the product line. Coca-Cola runs a giant cash-generating machine (as does Pepsi) that -- in comparison to most business models -- holds minimal downside risk aside from the catastrophic. (One catastrophe, for example: the public stops drinking soda.)

So, both companies have many positives. However, Coke currently sports more negatives.

Recent problems at Coca-Cola: management and public relations gaffes overseas, a poor advertising campaign (in the opinion of many), and a lack of sales growth over the past four years. Add to this a smattering of increased competition, foiled or compromised acquisitions, and a share price that many view as aggressive enough to limit significant upside for the next three to five years.

Both businesses have been wealth creators in the long term, and both will likely continue to do so. Which will be better, though? Right now, your votes are about 50/50 on which has stronger management and the most potential. This split vote isn't surprising. In the past, Coca-Cola and PepsiCo have often swapped leadership positions as well. One decade Coke may lead; the next, it's Pepsi out front.

It's time to compare key metrics of the two companies for a clearer picture of where each stands. In the following numbers, stock prices are as of today (8/18/99) mid-day, and other numbers are as of the end of fiscal 1998 or the second quarter, June 30, 1999, as indicated. Much of this data was obtained from the SEC Edgar Financials filings of Coca-Cola and Pepsi, which are arranged in an excellent, useful format on the Fool at http://quote.fool.com. The other data was found at http://quote.fool.com as well, from Fool data.

                                  KO           PEP
Share Price.....................$58.93       $35.75   
Market Cap.....................$145.2b       $52.2b
1998 Sales......................$18.8b       $22.3b
Market Cap/Sales..................7.72         2.34
Cash & Equiv....................$2.36b       $3.01b
LT Debt.........................$1.10b       $2.62b
Enterprise Val.................$143.9b       $51.8b
Enter. Val/Sales..................7.65         2.32
Dividend/Share...................$0.64        $0.54
Dividend Yield...................1.06%        1.45%
Trailing EPS.....................$1.28        $1.45
Trailing P/E......................46.0         24.6
1999 EPS Est/Share...............$1.36        $1.22
Y-O-Y Growth.......................-3%           3%
2000 EPS Est.....................$1.56        $1.38
Y-O-Y EPS Growth...................15%          13%
5 Year Est. EPS Growth..........13.91%        13.38%
P/E on 1999 EPS Est...............43.3         29.3   
P/E on 2000 EPS Est...............37.7         25.9
Past 5-Yr Sales CAGR.............6.14%          N/A
Past 5-Yr EPS CAGR..............11.20%          N/A
Past 5-Yr Div. CAGR.............12.03%       11.05%
Primary Business..................Soda   Snack Food
% of income from lead Biz..........98%          63%
Recent Volume Growth...............-2%           4%
Net Margin on lead Biz...........18.7%        16.3%
Return on Equity (98)............45.1%        34.1%
Return on Assets (98)............16.5%         9.9%
Return on Invest.Cap (98)........30.2%         2.5%
Gross Margin (98)................70.4%        58.0% 
Operating Margin (98)............26.4%        11.0%
Net Margin (98)..................18.7%         9.6%

That is a great deal of numbers. It took over 90 minutes to compile. A good 10 minutes is required to read, compare, digest and ponder them. Print this page. Bring it to the kitchen table. Marvel over the numbers with your significant other. Convince him or her that you can see through these numbers to choose the best investment. (Hide this paragraph under your hand.) If you could decide which was better with these numbers, that'd be something to marvel at indeed. Which stock will outperform the other remains anyone's guess.

You'll notice that Pepsi has lower profitability ratios than Coca-Cola. Pepsi still had over $2 billion in sales from bottling operations in the first six months of this year, down from $3.3 billion last year. The trend, though, is pointing to higher profitability. In the second quarter of this year, Pepsi's margins were on the rise. Gross margin topped 59%, up from 58% in 1998, and operating margin topped 14%, up from 11% last year. Pepsi's average return on equity this year is also up, rising to 49% thus far from 35%.

If I had to choose, I'm inclined to side with Pepsi. This is based primarily on valuation, yield, and the recent growth -- or lack of growth -- in the companies' respective key businesses. The latest performance of management at each company is also significant. All three of Pepsi's divisions outperformed expectations last quarter and -- regarding the all-important long term -- Pepsi's refined business model seems to be gaining traction.

Meanwhile, Coca-Cola is largely operating the same business that it was five years ago. The company had neck-snappin' traction (hitting on all cylinders, growing sales and improving profitability, etc.) in the late 1980s and early 1990s. The past four years, however, the engine has been cooling while waiting for another boost.

Both companies move to our Finalist List. When we get to that list, I'll initially be biased towards Pepsi. We have over a half-dozen other companies to consider first, however, beginning with The Big Gum Master, Wrigley (NYSE: WWY).

Before that, if you have more thoughts on Pepsi and Coke, please post them on the Drip Companies message board. Tomorrow will be a community-based column on the topic to the fullest extent possible. Fool on!

Drip Portfolio

8/18/99 Closing Numbers
 Ticker   Company   Dly Pr Chg   Price 
CPB  CAMPBELL SOUP                -13/16   $44.63
INTC  INTEL CORP                   -1/2   $78.50
JNJ  JOHNSON & JOHNSON            -2   $96.31
MEL  MELLON BANK CORP             -7/16   $33.69

  Day Week Month Year
To Date
Since
7/27/97
Annualized
DRiP -1.23% -1.02% 7.14% 12.77% 28.26% 12.85%
S&P 500 -.84% .39% .31% 8.43% 41.97% 18.56%
S&P 500(DA) -.83% .38% .30% 8.88% 44.60% 19.62%
S&P 500(DCA) n/a n/a n/a n/a 24.26% 11.12%
NASDAQ -.51% .86% .73% 21.21% 69.33% 29.15%

 Trade Date   # Shares   Ticker   Cost/Share   Price   LT % Val Chg 
  9/8/97  19.4789INTC    40.907  $78.50  91.90%
  11/14/97  9.076JNJ    76.563  $96.31  25.80%
  11/5/98  22.4534MEL    34.156  $33.69  -1.37%
  4/13/98  8.134CPB    54.638  $44.63  -18.33%

 Trade Date   # Shares   Ticker   Cost   Value   LT $ Val Ch 
  9/8/97  19.4789INTC    $796.82  $1,529.09  $732.28
  11/14/97  9.076JNJ    $694.89  $874.13  $179.25
  11/5/98  22.4534MEL    $766.91  $756.40  ($10.51)
  4/13/98  8.134CPB    $444.42  $362.98  ($81.44)
  Cash: $24.33  
  Total: $3,546.94  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.