Foolish Face-Off: Battle of the Soda Giants

It's the choice of a new generation. Not so long ago, Pepsi (NYSE:PEP) overtook Coca-Cola (NYSE:KO) in terms of total market capitalization and bragging rights in the cola wars. As it stands now, Pepsi has a total market cap of $108 billion, just ahead of Coke's $105 billion. So will the gap keep widening? Let's turn to the latest Foolish Face-Off for some answers.

It's usually informative to compare the No. 2 player in an industry to the largest player, especially if they collectively dominate their market. Coca-Cola was the clear leader a decade or so ago, but Pepsi has proven quite adept at innovating its way into the pole position by diversifying into numerous other leading consumer brands. So how do the two companies stack up? Check out a number of key investment metrics, including some over the trailing 12 months.

Growth Rates

Advantage: "Pepsi. It's the Cola" -- circa 2003
It's a close call, but Pepsi has experienced stronger top-line growth over the past one- and five-year periods. For further insight, I also checked out the three-year number, and Pepsi grew sales and earnings at a slightly faster rate as well. Income-oriented investors may like Coke's higher dividend yield, but in my mind that speaks to the fact that it has less compelling growth prospects in terms of reinvesting cash flow into the business.

Margins

Advantage: "For headache and exhaustion, drink Coca Cola" -- circa 1900
Some of the older slogans sure are amusing. Coca-Cola is still the king of profitability, with superior gross, operating, and net margins. Both companies are towers of consistency, but Coke proves why it has become one of the most valuable brands in the world. The businesses aren't completely comparable because Pepsi is a very large snack food company, with its Frito Lay and Quaker Oats businesses that should also be compared with Kellogg (NYSE:K), General Mills (NYSE:GIS), and Kraft (NYSE:KFT). But Coke is still the clear winner on the margin front.

Cash Conversion Cycle

Advantage: "Coca-Cola has that extra something" -- circa 1942
Both Coke and Pepsi have impressive cash conversion cycles; that is, they receive cash from customers quickly. But the negative CCC demonstrates that Coke turns over inventory faster and takes a longer time to pay off suppliers, likely earning interest income in the process. In other words, Coke is superior in terms of days in inventory and days payables outstanding, winning another category.

Performance

Advantage: "Why Take Less When Pepsi's Best?" -- circa 1949
This category surprised me; I figured Coke's superior profit margins would leave Pepsi in the dust, but the return numbers are very similar and Pepsi beats Coke in terms of return on invested capital over the past year. The overall numbers are again similar and very consistent, but due to my initial expectation, I'll award the advantage to Pepsi because of its improved ROIC over time and ability to stand up there with Coke's impressive figures.

Valuation

Advantage: "Coca-Cola ... continuous quality" -- circa 1947
Coca-Cola is more reasonably valued in terms of the multiple one must pay for its earnings and free cash flow, but that is likely because it has had difficulty growing sales over the past several years. Pepsi is clearly a great company, but the multiple likely reflects how successful it has been. I would characterize Pepsi as the growth company, with its subsequent higher multiples, and Coke as more of a value play, with the potential for growth to improve and possible multiple expansion opportunities.

The face-off finale
This one is close. Coca-Cola won three categories while Pepsi won two, but most metrics were very similar and could have gone either way. So what do the stock charts tell us? Overall, the market has awarded Pepsi clear dominance, as it has outperformed Coca-Cola in every time frame imaginable, be it one, two, or five years, or a longer term. And over the past year, Pepsi stock has appreciated more than 15% while Coke's is up a hair over 5%, although both have proven to be very profitable investments over the long term.

In any case, it's the future results that matter to investors. Pepsi arguably has more avenues (Frito Lay generates huge profits and growth) to keep growth chugging along, but the multiple Fools would have to pay for that growth is steep these days. Coke may offer a compelling alternative, with its higher performance metrics and lower multiples. It's still a close call, but the takeaway here may be that both are worthy of consideration for any portfolio because they dominate the beverage and snack food industry and have generated stable cash flow throughout the years.

"I'd like to buy the world a Coke" (1971), but you may also want to "have a Pepsi day!" (1976).

Coca-Cola is a Motley Fool Inside Value pick. If you'd like to see more ideas for good stocks that are trading at significant discounts, take a free trial today. You'll get access to all of the newsletter's recommendations, with no obligation to subscribe.

Kraft is an Income Investor recommendation.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.