Warren Buffett Takes the Pepsi Challenge

Warren Buffett weighed in on Coke and Pepsi this month. Which stock won the challenge?

Mar 22, 2014 at 9:00AM

When Warren Buffett drinks soda, investors listen. Earlier this month, the Sage of Omaha (who's famous for a junk food-fueled diet that includes Cherry Coke) poured investors some advice with his take on Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP).

Which stock won Buffett's Pepsi Challenge? Read on for Buffett's analysis of the soda rivals.

Buffett rebuffs Peltz
PepsiCo has been volatile lately. That's due to activist shareholder Nelson Peltz, whose public pressing for Pepsi to spin off its Frito-Lay snacks division has made a loud crunch in the investment world. Peltz argues that Pepsi and Frito-Lay are both suffering decreasing returns to scale thanks to a bloated corporate bureaucracy and lack of entrepreneurship.

Buffett's take: "I don't see any reason to split them up." Buffett sees Frito-Lay and Pepsi as winning businesses, while agreeing with Peltz that Frito-Lay's doing better right now. Given Buffett's investment and dietary tendencies toward simple, reliable food businesses like Dairy Queen and Heinz Ketchup, it makes sense the Sage favors Pepsi and Frito-Lay.

Buffett is a proud Coke investor
While Buffett sees Pepsi and its Frito division as sound, his money and mouth lean toward Coca-Cola. Although certain investors are worried that the stock's growth will soften, Buffett's a proud investor and drinker with Coca-Cola as one of his "Big Four" investments.

Buffett sees Coca-Cola as a well-branded American drink, and as the world's soda fountain: "I think [Coke's] got wonderful brands and wonderful acceptance around the world; Coca-Cola brand itself sold 100 million more cases last year, as I remember, than the year before and it sold more that year than the year before. It's a very, very good business."

That's a strong vote of confidence from Omaha's Wizard. As Buffett noted, Coca-Cola's ubiquity is stunning: Coke constitutes 3% of global liquid consumption (making it a rival to water), and "Coca-Cola" is the second most-known phrase in the world behind "OK."

Coke and Pepsi losing fizz?
Despite Warren Buffett's recent endorsement of both Coke and Pepsi, these stocks face challenges. Shrinking soda-drinking rates, especially in health-conscious developed nations, means these rivals are sipping profits from a smaller soda can.

Warren Buffett's probably right that if Coke's a sound investment, so is Pepsi. Duopolies like the soda industry spend tons of money on advertising to remain competitive, with neither company the clear winner. Coke and Pepsi's dividends are also close at around 3%.

But Coke may have a leg up on Pepsi in the home soda consumption market, thanks to a deal made earlier this year to sell beverages for the Keurig Green Mountain home soda machine.

Perhaps such first-mover innovation explains why Buffett invests in Coke over Pepsi.

Foolish bottom line
Investors challenged to buy Coca-Cola or Pepsi shares should take comfort in Buffett's endorsement of both soda makers. Both will float or fizz along with the soda industry.

What would Buffett do?
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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