Coke Is It
By Rick Munarriz (TMF Edible)

Coke is it! The Atlanta-based company with the golden global brand name knows it, too. Last year, we consumed nearly three billion gallons of Coca-Cola(NYSE: KO) products in this country. We downed billions more overseas. As a matter of fact, just 5.6 billion of last year's 18.7 billion unit case sales originated in North America.

You can't get much better than pumping out the syrup concentrate that produces the high-margin sugar water that everyone craves and always feels like pocket change well spent.

Coke has built a fortress with a seemingly impenetrable moat. Warren Buffett said it best: "If you gave me $100 billion and said 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."

It can't. You don't topple what is arguably the world's most recognized brand overnight. Not when it took Coke all of 117 years to get there. Even in a lull, it is just as sexy as its signature curvy bottle suggests.  

Financially speaking, Coke is the real thing. The company expects to produce an average of just over $6 billion in annual cash flow over the next five years. While it's true that the stock ran ahead of its sobering fundamentals during the 1990s, the frothy fizz is over.

After watching its share price cut in half over the past five years, the company now has a reasonable valuation. That's a compelling notion given the fact that its mindshare in the soft-drink space is invaluable to begin with.
It's worth noting that Coke's nearest pop rival, PepsiCo(NYSE: PEP), is so far behind that even as Pepsi has expanded into everything from potato chips to instant oatmeal, it is well behind the leader. Coke is still more profitable, with fatter margins, and a substantially higher employee efficiency ratio.

Coke is a winner. As big as it is, the company has been nimble enough to innovate. Its Vanilla Coke won it 8 million new consumers that weren't drinking Coke before. What did Pepsi introduce? That Smurfy Windex concoction called Pepsi Blue. Pepsi's berry-flavored brew isn't a brand -- it's a phonetic surrender. Pepsi "Blue" it. Big time. While Coke breaks in sophisticated sippers with a lemon-spiced Diet Coke and becomes the dorm room champ with its cool Fridge Pack packaging, Pepsi's trying to figure out which controversial or fading pop star will sign on as its next endorser.

When Pepsi couldn't sway restaurants beyond Saturday Night Live's fictional Olympia "No Coke, Pepsi" diner to serve its carbonated creations, it bought its own fast-food chains to acquire the pouring rights. Coke's growth has been mostly organic, not by hitting on the guy on the box of Quaker boxes.

But let's get back to Coke, the real choice of any generation. When's the last time that you were able to buy shares of Coke for just 20 times next year's earnings? You can now. With nearly $20 billion in sales last year along with juicy double-digit profit margins and an enviable track record of raising its dividend for 41 consecutive years, shouldn't you be owning what you were just drinking an hour ago?

Pepsi's the One
By Mathew Emmert (TMF Gambit)

Coca-Cola may claim bragging rights over PepsiCo when it comes to which of the two company's popular cans of soft drink is the bigger seller. But in truth, PepsiCo maintains market dominance in everything that matters.

When looking at overall U.S. beverage sales, including both carbonated and non-carbonated drinks, Pepsi claims 28% of the market vs. Coca-Cola's 27%. This is largely due to Pepsi's lead in the faster-growing, non-carbonated segment.

But even that statistic has a fairly high yawn factor when you realize PepsiCo's entire beverage business accounted for a mere 36% of 2002 profits. In other words, this company has bigger chips to fry, literally. PepsiCo, owner of Frito Lay, Quaker, Tropicana, and Gatorade brands, is a more diverse firm than Coca-Cola can ever hope to be, and that's where the real story lies.

Despite our claims that we need to eat healthier, we simply can't resist the siren's call of the potato chip aisle, which is why Frito Lay contributed 57% of PepsiCo's 2002 operating profits. As far as I'm concerned, market share of the U.S. beverage business can stay neck and neck forever, just as long as Frito Lay maintains its near 60% domination of the lucrative snack business.

That's not to say that beverages aren't important to Pepsi's future. Pepsi is focused on the real growth segment here as well. While Coke has continued pushing carbonated beverages, Pepsi has expanded its arsenal in the non-carbonated beverage market. With its acquisitions of Gatorade and the popular SOBE line, PepsiCo has taken the lead in this high-margin business. In addition, with its Aquafina brand, Pepsi boasts the lead over its boorish competitor in another sweet spot, bottled water.

PepsiCo has also continued to roll out successful partnerships, such as its Lipton Iced Tea drinks, and its new line of coffee beverages from Starbucks(Nasdaq: SBUX).

Sure, Pepsi's made its share of mistakes (read: Pepsi Blue). That's always a risk when you're on the cutting edge of soda-pop culture, but, hey, it's not like they changed the entire formula or anything. These are small missteps in the grand scheme of things.

Overall, the company has a sterling record when it comes to adding a marketing edge to its products. Aside from varying opinions about her artistic merit, signing Britney Spears was a fantastic marketing move. The deal gave Pepsi immediate credibility with millions of screaming teenaged girls -- not to mention their older brothers -- all with sizable allowances in their pockets.

Trading at a multiple of 22 times trailing free cash flow vs. Coca-Cola's multiple of 28, PepsiCo clearly presents the better value. The firm is growing both the top and bottom lines faster than Coca-Cola, and is expected to post earnings-per-share growth in the 12% range just shy of forever. In 2002, net cash from operating activities was up 21%, long-term debt was down 18%, and the firm repurchased more than 53 million shares, up 28% from 2001.

Coke is a stumbling, bumbling giant that will be relegated to counting its share of a shrinking cola market. In the end, I'd much rather own this more diverse, better-managed company.

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Rick Munarriz is a long-time Fool contributor, and Mathew Emmert is a new Fool on the block who owns shares of PepsiCo. The Motley Fool has a complete disclosure policy.