Coca-Cola Enterprises Is Good, but Invest in the Empire

Coca-Cola Enterprises (NYSE: CCE  ) markets, produces, and distributes its products in Belgium, France, Great Britain, Luxemburg, Monaco, the Netherlands, Norway, and Sweden. In these licensed territories, Coca-Cola Enterprises provides Coca-Cola, Fanta, Capri-Sun, Schweppes, Dr Pepper, Monster, Relentless, and PowerAde. What's interesting about Coca-Cola Enterprises's third-quarter performance is that the volume numbers appear to be moving in the opposite direction from industry trends for sparkling and still beverages, but there's a reason for this.

Recent results
Prior to going over recent volume performance, it should be noted that the rise of the health-conscious consumer has led to declining demand for sparkling beverages (soda). Also thanks to the rise of the health-conscious consumer, demand for still beverages (juices, ready-to-drink teas, etc.) has increased. However, that wasn't the case for Coca-Cola Enterprises in the third quarter.

In the third quarter, volume increased 2.5% year over year, with sparkling beverage volume popping 4% and still beverage volume sliding 5%. Coca-Cola trademark beverage brand volume jumped 5%, with strong growth in Coca-Cola Classic, Coca-Cola Zero, Cherry Coke Zero, and Vanilla Coke. A lot of this success has to do with Coca-Cola's (NYSE: KO  ) status as a marketing juggernaut.

It doesn't seem to matter what headwinds are thrown at Coca-Cola. It will find a way to offset those headwinds. For instance, Coca-Cola's "Share a Coke" program has been a continued success and its international potential is still in its infant stages. If you would like an example of the "Share a Coke" program, you can watch this short video: http://youtu.be/5l0cCyElfgg

Even the CIA is helping Coca-Cola. No ... undercover spies aren't tapping into phones and watching potential customers with night-vision goggles. This is a different CIA -- the Culinary Institute of America. Researchers at this CIA help determine what meals best complement Coca-Cola. This information is then passed on to certain quick-service and full-service restaurants. The idea here is to enhance the customer experience for these restaurants. While many consumers have a beverage of choice, others will select a drink based on their mood. This program can help lead customers in the right direction in order to maximize their meal experience.

As far as still beverages go, the 5% volume decline is primarily due to difficult year-over-year comparisons. For instance, Schweppes Abbey Well was the official water of the 2012 London Olympic Games.

Still beverages should bounce back, and Coca-Cola has proven that it has the capability to drive demand for sparkling beverages with its marketing power. This is a positive for Coca-Cola Enterprises. There is also good potential in emerging markets as these consumers aren't as health-conscious as Americans. At least not yet.

The health kick
PepsiCo (NYSE: PEP  ) is a highly diversified company that owns many brands, including Frito-Lay, Gatorade, Quaker, and Tropicana. Its Pepsi Next has been a major hit. With 60% less sugar, Pepsi Next targets the health-conscious consumer who doesn't want to sacrifice taste. Pepsi Next generated almost $100 million in retail sales in less than one year. Looking ahead, Pepsi will focus on natural sweeteners and flavorings while reducing calories.

Investment potential
If you're looking to invest in one of the aforementioned companies, this can be a difficult comparison, but there are some differences. First consider that PepsiCo has outperformed its peers on the top line over the past year:

KO Revenue (TTM) data by YCharts

Now consider some key metric comparisons:

	Forward P/E	Profit Margin	Dividend Yield	Debt-to-Equity Ratio	Operating Cash Flow
Coca-Cola Enterprises	15	7.81%	1.90%	1.77	$861 Million
Coca-Cola	18	18.49%	2.80%	1.12	$10.52 Billion
PepsiCo	18	10.05%	2.60%	1.32	$10.02 Billion

While Coca-Cola Enterprises is a quality operation, it lags PepsiCo on the top line, it comes up short of Coca-Cola and PepsiCo at turning revenue into profit, and its yield isn't quite as impressive as Coca-Cola or PepsiCo.

When you compare Coca-Cola and PepsiCo, as always, it seems like somewhat of a wash. While PepsiCo is performing better on the top line, Coca-Cola is more impressive in profit margin, yield, and debt-to-equity ratio. However, debt isn't really a concern for any of these companies, since they generate so much cash. In other words, they're capable of paying down those debts.

Coca-Cola might be a marketing juggernaut, but if you're looking for resiliency then PepsiCo might be a slightly better option thanks to its broad product diversification.