The Coca-Cola Company And PepsiCo Get Upgraded But Which Is The Better Buy?

Which Is The Better Investment, The Coca-Cola Company Or PepsiCo?

The Coca-Cola Company NYSE: KO and PepsiCo NASDAQ: PEP both received bullish commentary and fresh, high price targets with the start of the new year but one is still clearly a better buy. As we pointed out last year, PepsiCo’s diversification into snacks has elevated it to a level above mere beverage company and boosted its growth along the way. In our view, there is really no comparison but that doesn’t mean Coca-Cola isn’t a good buy either. While PepsiCo wins our dollars as a diversified consumer staple Coca-Cola is still the best pure-play on beverages there is. 

PepsiCo Gets A New High Price Target From Argus

PepsiCo got a new high price target from Argus. This is the first analyst activity since the last earnings report and, we think, only the first in the next string of upgrades and price target increases. The new high target is $195 or about 12.5% above the current price action and it is trending higher. The consensus target of $165.97 is up over the last 90 and 30-day periods but still lags the price action. The Marketbeat.com consensus sentiment in PepsiCo is, oddly enough, a firm Hold compared to Coca-Cola’s weak buy but price action in the stock tells a different tale. PepsiCo is clearly outperforming Coca-Cola in the near, short, mid, and long terms. 

The Coca-Cola Company also received a new high price target. The new high price target was set by Guggenheim at $66 which implies about 11% of upside. The difference here is that The Coca-Cola Company’s consensus price target has been holding flat over the past 90 and 30 day periods which explains some of the underperformance. Guggenheim analyst Laurent Grandet thinks that "baring new more lethal COVID variants, we expect on-premise to be back to almost pre-COVID levels by summer ’22, which is about 6 months earlier than what we were assuming a year ago."

PepsiCo Earned Its Valuation 

Both stocks are trading at high valuations, nearly 28X earnings for PepsiCo and 26X earnings for The Coca-Cola Company, and there is a reason for the difference. While The Coca-Cola Company has struggled to return to pre-pandemic levels of revenue PepsiCo exceeded them long ago. Worse, the sequential 3.5% improvement expected for the coming quarter is still below the pre-pandemic levels and a bit tepid compared to the 7.7% expected for PepsiCo. The upshot is that The Coca-Cola Company has a bright outlook in regards to restaurant reopenings next year (as does PepsiCo) and it pays a slightly better dividend. 

The Coca-Cola Company is paying a healthy 2.80% compared to PepsiCo’s 2.5% and both are expected to grow in the coming year. The tickler is that PepsiCo’s 69% payout ratio, 7.5% CAGR, and 49-year history are enough to make the payout ever so slightly more attractive. The Coca-Cola Company pays out about 73% of its earnings consensus and only a 3.7% distribution CAGR. In either case, there is every expectation for additional increases but we expect PepsiCo’s to be larger. 

The Technical Outlook: The Coca-Cola Company Breaks Out

The Coca-Cola Company stock broke out and set a new all-time in the wake of its upgrade but the stock is still underperforming versus PepsiCo. Price action in KO may move up and close the gap but that is expecting a lot in the face of PepsiCo’s similar position within the foodservice industry and lingering tailwinds in the snacks end of the business. In our view, while The Coca-Cola Company is expected to continue trending higher we expect to see PepsiCo continue to outperform.