The Cola Wars Continue (KO, PEP)

By Jon Ogg | April 24, 2007 AAA

Shares of Coca-Cola (NYSE: KO) rose last week on strong earnings results.

While this is certainly good for Coke, it might be a portent of even better things for rival PepsiCo (NYSE: PEP) when it reports earnings on Wednesday, April 25 and has its annual shareholder meeting on May 2, 2007.

First a Look at Coke
"Life tastes good" over at Coca-Cola. The company has several newer brands such as Enviga, Hi-C, Minute Maid and Dasani Water. Also, the company just rose five spots to No.94 on the Fortune 500 list of companies.

Coca-Cola's market cap is $120 billion and it has a dividend yield of 2.7%. Based on forward earnings, Coca-Cola trades at 20.2-times 2007 EPS and 18.4-times 2008 EPS. On a static basis, this compares to lows in 2003 of $37.01. Also, on a static basis, this compares to highs north of $80 back in 1998; However, on a dividend-adjusted basis, the highs would be roughly $72.96.

What's up for PepsiCo?
While PepsiCo and Coca-Cola are direct competitors in the beverage sector, they actually differ in that Pepsi derives some 30% of its revenues from food products in Frito-Lay and Quaker Foods.

Pepsi's carbonated beverages may have peaked, or at least stalled, but its Aquafina and Gatorade brands have been a winner for the company. It also recently acquired Naked Juice to add to its stable of strong performers. In the non-carbonated beverage arena, Pepsi is winning with a 48.9% of market share compared to Coke's 25.4%.

PepsiCo also rose on the Fortune 500 list this year, jumping two spots to a rank of 63. Pepsi's market cap is $107 billion and it has a dividend yield of 1.9%. (To learn more on this subject, see Market Capitalization Defined.)

Based on forward earnings, PepsiCo trades at 19.8-times 2007 EPS and 17.9-times 2008 EPS. PepsiCo is still trading south of the $66.00 handle, just under its 52-week high of $65.99.

Which is the Better Value?
Coca-Cola is more of a pure-play in the beverage sector, while Pepsi is essentially two companies -- arguably three. If Wall Street continues its push toward "unlocking shareholder value", then PEP would have more spin-off abilities than KO as far as unrelated units or non-core operations. PEP is marginally cheaper than KO on current P/E ratios and on forward P/E ratios, but that is because of the food units. The distinct advantage that Pepsi has in its snack brands is that it's trying to go healthier. Although, calling its snacks "health food" would be a bit of a stretch.

What Else is There to Look For?
Coca-Cola's "Zero" launch was touted as the big win for earnings due to its case volumes. These gains may have come at the expense of the competition -- Pepsi's own line of low-cal diet drinks. The good news is Pepsi has plenty of other operations to absorb this, and it is more diversified because of current and future food products.

Both balance sheets are in similar shape, yet the dividend differential is where PepsiCo could play some catch-up.

With the recent performance seen in Jones Soda (Nasdaq: JSDA) and with the past performance of Hansen Natural Corp. (Nasdaq: HANS), it's getting pretty hard to ignore the beverages sector. Perhaps these aren't simply defensive stocks after all.

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