PepsiCo and Coca-Cola: Two Very Different Businesses
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Investors with little interest in PepsiCo (NYSE: PEP) or Coca-Cola (NYSE: KO) can mistakenly believe the two soda giants are fiercely competing in the same markets. This couldn't be further from the truth. A look at geographic revenues, product-type sales, and sources of profits and growth reveal two totally distinct businesses that investors should approach differently.
Pepsi's product revenues are split right down the middle: 50% food, 50% beverages. Coke, on the other hand, generates 100% of its revenues from beverages. Coke may be the leader in cola, but Pepsi is the clear leader in the global snack market.
The implications here are huge: Pepsi's snacks business enjoys much higher profit margins than its beverage business. In fact, Pepsi's North American snack business represents only 24% of revenue, yet it accounts for 41% of operating profits. If Pepsi's snack business continues to grow as a percentage of revenue, its gross margins of 52% could begin to catch up to Coke's gross margins of 60%.
Geographic breakdown of revenue
Roughly 70% of Coke's revenue comes from outside the United States, while only 50% of Pepsi's revenue comes from international sources. This gives Coke several advantages. First, Coke's global distribution network is much larger than Pepsi's, giving Coke an edge in international penetration. Second, this larger network makes it easier for Coke to expand internationally faster than Pepsi. Coke is not taking this opportunity lightly: It plans to spend $30 billion on international expansion over the next five years in China, India, the Middle East, and Russia to support anticipated growth.
Two different approaches to valuation
Though Coke and Pepsi appear similar, investors shouldn't try to value them the same way.
According to Coke's 2020 Vision, it plans to double its business over the course of the decade. International expansion is the key to accomplishing this goal. Consider just one example that highlights Coke's opportunity for international growth: In 1998, China's annual consumption per capita of Coca-Cola products was just eight servings––today, it's 38. In the United States, annual consumption per capita equals a whopping 403 servings. Coke expects per capita consumption in regions like China to expand rapidly as their middle-class consumers grow wealthier. Therefore, when investors value Coke, they should focus on the potential for continual international expansion and try to estimate its implications on future earnings.
When valuing Pepsi, its beverage unit is still very important, but the investor should recognize that much of Pepsi's opportunity comes from its snack business. Its Lays branded chips, alone, represent almost half of Pepsi's worldwide sales.
The bottom line
Choosing between the two very different investments, therefore, really comes down to choosing between international profits or domestic profits. Coca-Cola's powerful, global distribution system and aggressive, international expansion plans promise ample international opportunity. Pepsi, on the other hand, benefits from the opportunities related to its much more lucrative North American snacks bands.
Need more North America in your portfolio? Pepsi's North American snack business is a good fit. Need more international influence in your portfolio? Coca-Cola's aggressive international expansion represents a good match.
DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.