Coca-Cola Company and Pepsico: Investment

Coca-Cola Company and PepsiCo: Investment Analysis

The relevance of undertaking an in-depth analysis of the financial statements of a company prior to making an investment in the company cannot be overstated. In addition to conducting the said analysis, there is also a need for one to familiarize himself with the background of the company of interest. This text concerns itself with not only the financial statement analysis of the two companies, but with also the analysis of the stock trends of both the Coca-Cola Company and PepsiCo. The two companies operate in the Beverages -- Soft Drinks industry.

The Coca-Cola Company and PepsiCo: Background

The Coca-Cola Company according to Yahoo! Finance (2013) "engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide." Headquartered in Atlanta, Georgia, the company has over time crafted a name for itself as the world's leading beverage corporation with some of its most popular products in the beverages category being Coca-Cola (and its varieties), Sprite, Dasani, Fanta, etc. The Coca-Cola soft drink remains the company's flagship brand. It is also one of the best-known brands in the world. The company's current CEO is Mr. Muhtar Kent. Other top officers of the firm include but they are not in any way limited to Mr. Gary P. Fayard, Mr. Ahmet C. Bozer. Mr. Stephen a. Cahillane, and Mr. Jose Octavio Lagunes Reyes. They are the CFO, President of Coca-Cola International, President of Coca-Cola Americas, and Vice Chairman of the Coca-Cola Export Corp. respectively (Yahoo! Finance, 2013). Currently, PepsiCo is regarded Coca-Cola's main competitor in the Beverages -- Soft Drinks Industry. Coca-Cola's other competitors in the said market include but they are not limited to Nestl and Dr. Pepper Snapple Group, Inc. (Yahoo! Finance, 2013).

Headquartered in Purchase, New York; PepsiCo as I have already pointed out elsewhere in this text is regarded Coca-Cola's most vicious competitor. In addition to manufacturing and offering for sale a wide range of carbonated and non-carbonated soft drinks, PepsiCo also concerns itself with the production of several other products such as snacks. As it points out on its website, some of the products it offers for sale include "Pepsi-Cola, Lay's, Quaker Oats, Tropicana and Gatorade…" (PepsiCo, 2013). It should however be noted that PepsiCo's flagship brand, as is the case with the Coca-Cola Company's Coke Drink, is Pepsi-Cola. The current CEO of the company is Ms. Indraa K. Nooyi. Other top executives include Mr. Zein Abdalla, Mr. Hugh F. Johnson, Mr. Saad Abdul-Latif, and Mr. Brian C. Cornell. The executives mentioned above are the company's President, CFO, CEO of Pepsi Asia, Middle East & Africa, and CEO of Pepsi Americas Foods respectively (Yahoo! Finance, 2013). Currently, both companies have a wide customer base that comprises of households, small vendors, restaurant and supermarket chains, etc.

Analysis of Stock Trends

Feb 1977 (IPO)

Jan 4/2010

Jan 3/2011

Jan 2/2012

PepsiCo

Stock Price ($)

1.3727

60.77

66.39

65.39

April 1962

(IPO)

Jan 4/2010

Jan 3/2011

Jan 2/2012

Coca-Cola

Stock Price ($)

0.9896

27.58

31.46

34.47

Graph 1

From the graph above, it is clear that on average, the share price of both the Coca-Cola Company and PepsiCo has increased over time. From January 2010 to January 2012, the share price of PepsiCo grew from $60.77 to $65.39 per share. This represents a 7.6% growth in share price. Coca-Cola Company's share on the other hand grew from $27.58 to 34.47 within the two-year period. This represents a 24.98% growth in share price within the period under consideration. If this trend is upheld going forward, existing shareholders will continue benefiting from impressive capital gains.

Current Events Analysis

In the year 2010, the Coca-Cola Company in a well-planned move acquired (or took over control of) its North American bottler, i.e. The Coca-Cola Enterprises, in what many saw as a move by the company to prepare the ground for an onslaught into the global beverages marketplace. It is also important to note that the company has in the recent past added a number of new products into its existing portfolio of beverages. This should be seen as a two pronged strategy by the company as it seeks to exploit new markets while at the same time further consolidating its market share. These two events may have increased the demand of the company's stock particularly from long-term investors seeking to invest in companies with high growth potential thus pushing its price even higher.

Last year, PepsiCo acquired its two largest bottlers, i.e. Pepsi Americas and Pepsi Bottling group, in what was seen as an attempt by the company to rein in its high production costs. The positive impact this move may have had on the company's revenues could have contributed towards the enhanced stock price. PepsiCo has also in the recent past embraced attempts to reduce the amount of calories in its products by amongst other things introducing healthier products. In 2009, the company launched Trop50 -- an orange juice sweetened using a natural sweetener. The positive reception this particular product received in the market could have bettered the company's image in the public sphere, thus generating more sales. The 2010/2011 increase in stock price could have been a reflection of this new development.

Financial Statement Analysis

Table 1: Liquidity Ratios

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Current ratio

1.09

1.05

1.17

1.10

0.96

1.11

Cash ratio

0.59

0.58

0.61

0.39

0.24

0.40

Interpretation

In basic terms, liquidity ratios according to Gitman and McDaniel (2008) come in handy in the determination of a business entity's ability to pay its obligations (short-term). A current ratio of more than 1 ordinarily indicates that a company can easily settle its obligations (short-term) should they become due at that point in time. From table 1 above, both Coca-Cola and PepsiCo have current ratios of more than 1 for the most recent financial period, i.e. 2012. This is an indication that the two firms are likely to remain solvent going forward. Another important liquidity measure, the cash ratio seeks to measure how fast an entity can settle its debts (short-term) using only cash (and cash equivalents). For this reason, a strong cash ratio would be preferable to a weak one. Looking at table 1 above, Coca-Cola seems best suited to settle its immediate short-term obligations using cash and cash equivalents. This has been the case during all the three years under consideration. It is however important to note that a cash ratio of less than 1 should not necessarily be regarded an indicator of solvency problems because most businesses do not routinely maintain cash and current liabilities at the same level. This is particularly the case given the need to make use of available cash in profit generation.

Table 2: Profitability Ratios

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Return on Assets

10.47%

10.72%

16.19%

8.28%

8.84%

9.27%

Return on Equity

27.51%

27.10%

38.09%

27.71%

31.29%

29.86%

Interpretation

Profitability ratios come in handy in the determination of how successful a business enterprise is in the utilization of its resources to generate profits (Gitman and McDaniel, 2008). To begin with, the return on assets ratio according to Gallagher and Andrew (2007) is an indicator of the amount of income produced by each dollar of assets. This particular ratio therefore comes in handy in the determination of how successful the management of a given company is in the utilization of an entity's assets to generate profits. From table 2 above, it is clear that the management of the Coca-Cola Company has consistently been more effective than the management of PepsiCo in the utilization of the company's assets to generate profits.

Next, we have the return on equity ratio (ROE) which also happens to be the most important ratio for most potential and existing investors. Unlike the return on assets ratio, ROE according to Stickney, Weil, and Schipper (2009) concerns itself with financing costs. PepsiCo seems to be raking in more returns for its stockholders than Coca-Cola. This is particularly the case during the financial years 2011 and 2012 where the company had a return on equity of 31.29% and 27.71% respectively against Coca-Cola's 27.10% and 27.51% respectively. Looking at the trend however, PepsiCo's ROE experienced a sharp decline in the financial year 2012.

Table 3: Activity Ratios

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Net fixed asset turnover

3.32

3.12

2.38

3.42

3.38

3.03

Total asset turnover

0.56

0.58

0.48

0.88

0.91

0.85

Inventory Turnover

14.71

15.05

13.25

18.29

17.38

17.15

Receivables turnover

10.09

9.46

7.93

9.30

9.62

9.15

Interpretation

The net fixed asset turnover ratio according to Ingram and Albright (2006) is in basic terms an indicator of how effective a given firm is in the utilization of fixed-asset investments to generate sales (net). In that regard, the higher net fixed asset turnover in the case of PepsiCo clearly demonstrates that when it comes to making use of fixed asset investments to generate revenue, PepsiCo has consistently been more effective than the Coca-Cola Company during the three years under consideration. The total asset turnover ratio on the other hand indicates that just as is the case with the fixed asset turnover ratio, the Coca-Cola Company has been less effective in the utilization of all its assets in sales generation.

The inventory turnover ratio is essentially a measure of the number of times the inventory of a business entity is replaced or sold within a given period of time. In the words of Gallagher and Andrew (2007, p.97), "if the company has inventory that sells well, the ratio value will be high." During the three years under consideration (see table 3 above), PepsiCo has consistently had a better inventory turnover ratio than the Coca-Cola Company. This essentially means that PepsiCo has consistently had stronger sales than the Coca-Cola Company. Receivables turnover ratio on the other hand is a worthy measure of how fast a given company is in the collection of accounts receivables (Bragg, 2007). With that in mind, PepsiCo seems more efficient in not only credit extension, but in also the collection of accounts receivables. This is particularly the case given that the company has consistently had a high receivables turnover ratio than the Coca-Cola Company. For this reason, the Coca-Cola Company may deem it fit to conduct a reassessment of its credit policies.

Table 4: Market Value Ratios

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Price-Earnings Ratio (P/E)

19.00

18.27

12.42

18.82

15.44

15.92

Price to Book Value

5.23

4.95

4.73

5.22

4.83

4.75

Interpretation

The price-earnings ratio largely concerns itself with the relationship between the stock price of a company and its earnings. It "measures a company's future earnings prospects (Warren, Reeve, and Duchac, 2008, p.691). The price-earning ratios of both PepsiCo and Coca-Cola could therefore help us determine just how much the market is willing to pay for either entity's earnings. In the financial years 2011 and 2011, the Coca-Cola Company had a higher price-earnings ratio than PepsiCo. This effectively means that the market is willing to pay more for Coca-Cola's earnings than it is willing to pay for PepsiCo's earnings. It should however be noted that although the market seems to be having high hopes in the Coca-Cola Company's stock performance going forward, the high price-earnings ratio could also be an indicator that the company's stock is relatively overpriced.

The price-to-book ratio seeks to establish the relationship existing between the market value of a given stock and its book value (Bragg, 2012). In our case, the lower price-to-book ratio in the case of PepsiCo (in comparison to that of the Coca-Cola Company during the two years under consideration) could either be an indicator that the company's return on assets are poor or that the company's stock is undervalued. The latter argument seems more plausible.

Table 5: Financial and Operating Leverage

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Debt to Equity Ratio

0.99

0.90

0.76

1.27

1.30

1.18

Debt to Capital

0.50

0.47

0.43

0.56

0.57

0.54

Interest Coverage

30.75

28.43

20.43

10.24

11.32

10.12

Interpretation

The ratios I compute in table 5 above are critical when it comes to the determination of how solvent a given firm is in the long-term. To begin with, the debt-to-equity ratio seeks to establish the extent to which a given business entity is making use of both debt and equity to fund its assets. In other words, it is "the ratio of total liabilities to owner's equity" (Gitman and McDaniel, 2008, p.462). Throughout the three years under consideration, PepsiCo has consistently had a higher debt-to-equity ratio than the Coca-Cola Company. This is an indication that in comparison to the Coca-Cola Company, PepsiCo has been using debt more aggressively to finance its growth.