Is Pepsi a Better Stock Than Coke?

After reporting first-quarter results, PepsiCo clearly seems to be performing better than analysts anticipated. At a time when soda sales are on the decline, is the company still a buy, or is Coca-Cola a more attractive prospect?

Daniel Jones
Daniel Jones
Apr 24, 2014 at 2:00PM
Consumer Goods

Source: Wikimedia Commons. 

After reporting its financial results for the first quarter of its 2014 fiscal year, shares of PepsiCo (NASDAQ:PEP) inched up about 1% to close at $85.55. Now, with shares trading just shy of the company's 52-week high of $87.06, is it, as well as rival Coca-Cola (NYSE:KO), an appealing prospect, or should the Foolish investor look elsewhere for better returns?

Pepsi's results fizzed to the top
For the quarter, Pepsi reported revenue of $12.62 billion. Although this is only 0.3% above the $12.58 billion it enjoyed last year, the company's performance was considerably better than the $12.40 billion analysts anticipated. In its release, Pepsi attributed its higher-than-expected revenue to higher sales from its Frito-Lay North America segment.

Compared to the same quarter last year, Pepsi's Frito-Lay North America segment grew revenue by 3%, from $3.12 billion to $3.22 billion. This was largely attributable to a 3% jump in volume combined with a 1% rise in prices, but was negatively affected by foreign currency fluctuations.

In terms of profitability, Pepsi did even better. For the quarter, management reported that earnings per share came in at $0.79. This is $0.04 higher than analysts expected and a whopping 14% above the $0.69 the company reported the same quarter last year.

Despite its revenue ticking up modestly, Pepsi's bottom line expanded significantly due to cost-control initiatives implemented by management. For the quarter, the business reported that cost of goods sold came in at 45.5% of sales, down from the 46.4% seen a year earlier. Selling, general, and administrative expenses also fell, but to a lesser extent.

Source: Wikimedia Commons.

Is Pepsi a better prospect than Coca-Cola?
Looking at this data, it's not hard to say that Pepsi's quarter was fairly impressive. This took place at a time when Coca-Cola also reported better-than-anticipated metrics but still saw its operations do no more than sputter along. Over the long run, however, both companies have done quite well.

Take both Pepsi's and Coca-Cola's performance over the past five years. Between 2009 and 2013, Coca-Cola's revenue rose a respectable 51%, from $31 billion to $46.9 billion. With the exception of 2013, when Coca-Cola's top line contracted a bit, revenue has increased every year over this time frame. The largest jump in sales came from the company's acquisition of the North American operations of Coca-Cola Enterprises, a major Coca-Cola bottling operation, in 2011. This was a major contributor to Coca-Cola's revenue rising 33% from $35.1 billion in 2010 to $46.5 billion.

KO Revenue (Annual) Chart

KO Revenue (Annual) data by YCharts.

In regard to revenue generation, Pepsi's performance has been even more impressive. Between 2009 and 2013, the company's top line grew 54%, from $43.2 billion to $66.4 billion. In 2010, the company benefited greatly from some strategic M&A activity that increased the business's revenue by 34%.

Looking at revenue growth, it appears that Pepsi has been the better prospect. When it comes to improvements in profitability, however, the drink's in the other hand. During the past five years, Coca-Cola's net income jumped 26%, from $6.8 billion to $8.6 billion.

Although the company enjoyed larger profits from its increased revenue, its cost of goods sold rose from 35.8% of sales to 39.3%, preventing its bottom line from rising at the rate of its top line. This change in cost structure was mostly attributable to the company's purchase of the North American operations of Coca-Cola Enterprises, which carried with it lower margins.

KO Net Income (Annual) Chart

KO Net Income (Annual) data by YCharts.

Pepsi also enjoyed a rise in profitability, but not to the extent that Coca-Cola did. Between 2009 and 2013, Pepsi's net income rose only 13%, from $5.9 billion to $6.7 billion. Even though management reported higher revenue growth, its profits were stymied by soaring selling, general and administrative expenses, which rose from 34.8% of sales to 38.2%.

Foolish takeaway
Based on the data provided, it looks pretty clear-cut that Pepsi had a decent quarter. This, combined with the company's attractive long-term revenue growth, suggests that it may be an appealing prospect for the Foolish investor. However, if what you're looking for are margins, Coca-Cola might be a better play. On top of seeing its top-line growth expand almost as quickly as Pepsi's, the company's profits rose twice as fast as its rival.