'They're Both Favorite'

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

"...if they have both, I'll get grape, because grape is a little more favorite. But if they don't have grape it's like alright its fine, cause cherry's favorite anyway. It's like another favorite, but not as much. Not as much favorite. But they're both good."  -Brian Regan

I've read many articles, and I'm sure you have too, trying to convince me to invest in the Coca-Cola Company (NYSE: KO) and, at the same time, pass on PepsiCo (NYSE: PEP).  But I don't have to look very far to find an article trying to convince me of exactly the opposite.  As I got to thinking about, I asked myself:  "do these have to be mutually exclusive investments?"

It's impressive to look back at the birth of the US space program.  Technology developed at an unprecedented rate to get us to the moon.  Farm boys left the farm and risked their lives to get us there.  The whole country got behind the president and the program until we accomplished our goal:  a man on the moon.  But did you ever wonder why it was so important for us in the first place?  What exactly did we need that the moon offered?  Why were we willing to go to such great risk, expense, and effort to land on the moon and then come home?  Roger Launiuscurator of the Smithsonian's National Air and Space Museum, says "The driving reason was Cold War competition with the Soviet Union.  Without that, it wouldn't have happened."

Competition is a wonderful motivator to push the limits of possible.  And there is no doubt that Coca-Cola and Pepsi are huge competitors.  They both want to be the superior company.  I think that this has made, and will make, both companies better.  As we consider that they are both pushing each towards excellence, I don't think we have to invest in one at the exclusion of the other.

Stock Price

If we look at these companies' stocks, some eerie similarities begin to emerge.  Let's start with their stock prices.

<img src="http://media.ycharts.com/charts/e840fd941e689f7fdfbc14eacbd8bd04.png" />

KO data by YCharts

Over the last 10 years, both companies' stocks are up 55%.  That is incredible.  Excluding dividends, an investment in Coca-Cola 10 years ago would be worth virtually the same as an investment in Pepsi.  To me, that makes both companies great investments.  Consider that not everyone in the beverage industry sees their stock price appreciate at the same rate.  Cott Corporation just so happens to be down 55% over the past 10 years.

Price to Earnings

But their share prices aren't an isolated scenario.  Theoretically speaking, one company can make money and the other can lose money and they could still see their stock gain at the same rate, if the market will allow it. But that is not what we see here.  If the P/E ratio is a good indicator of value (and it often is), it will be helpful to look at.

<img src="http://media.ycharts.com/charts/811d4fe59645a6b6c6c7e305c13d0ba4.png" />

KO PE Ratio TTM data by YCharts

Both Coca-Cola and Pepsi's P/E ratio have been just about the same over the past 10 years.  All other factors aside, this would seem to indicate that neither represents a better value than the other.  Both are valued at roughly the same percentage of their income.

Some companies in the beverage industry are valued much higher.  Monster Beverage (NASDAQ: MNST) has seen its stock fall from nearly $84/share just a few months ago, to where it currently sits around *$53/share. However, even with this huge drop in stock price, Monster still totes a P/E ratio of around 30.  Granted, Monster has been a very fast growth company.  Still, Coke and Pepsi look to be decent values with their sub 20 P/Es.

*since the time of this writing, Monster has seen it's stock price, and consequently it's P/E ratio, fall on lawsuit concerns.

International Powerhouses

If you are worried about the economy in the United States, you'll be glad to be reminded that Coke and Pepsi are both international powerhouses.  Coke is the leader of the two.  According to Coca-Cola they operate in over 200 countries worldwide.  That's really impressive considering that some counts say there are only 196 countries in the world total.

Because Coke is so good worldwide, Pepsi is driven to rise to the occasion.  They continue their international expansion.  Just last year, Pepsi was reintroduced in Paraguay.  They were hoping to snag a 30% market share in the country, and have already hit their goals.  Coke still holds the market share, but Pepsi has taken a bite out of their profits.  

Not all companies seem to be motivated by Coke and Pepsi's race to dominate the world.  Dr. Pepper Snapple Group (NYSE: DPS) seems pretty content just to hang out in North America for the time being.  I think that Dr. Pepper is a well run business with a great product, but I would like to at least see some talk in this area of international growth.  

So Which is Favorite?

I've always been a Coke fan, and that's not about to change.  But as you look at these two companies as investment opportunities you realize that they both are good.  To borrow the words of Brian Regan:  "I'll get Coke, because Coke is a little more favorite. But if they don't have Coke it's like alright its fine, cause Pepsi's favorite anyway. It's like another favorite, but not as much. Not as much favorite. But they're both good. They're both good."

thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, and PepsiCo. 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.

blog comments powered by Disqus