PepsiCo vs Coca-Cola: Who is the better investment choice?

This year, the stock market has shown significant differences in performance. Coca-Cola (KO) rose by 16%, while PepsiCo (PEP) fell by 10%. Why? Mainly because PEP encountered a setback in the North American market—demand for Frito-Lay snacks has slowed, coupled with the recall of Quaker oats due to salmonella contamination (the source of contamination had lurked in the factory for 4 years), which directly dragged down organic sales growth.

Revenue Comparison: KO is more stable, but PEP has a larger base

Between 2021 and 2024, Coca-Cola had an average annual rise of 7% (from $38.7 billion to $47.1 billion), slightly outpacing PepsiCo's 5% rise (from $79.5 billion to $91.9 billion). KO's growth was primarily supported by precise pricing to hedge against inflation pressures, with strong performance in the North American and Latin American markets. PEP, while stabilizing growth through price increases and the market share of zero-sugar Pepsi and Gatorade, was directly affected by the Quaker crisis, which dragged down the overall numbers.

Profit Margin Reversal: PEP Quietly Turns Around

There is an interesting phenomenon here – Coca-Cola's net profit margin fell from 25.3% to 22.6% (due to rising costs and marketing expenses), while PepsiCo actually rose from 9.6% to 10.4%. Behind this is PEP's cost management and pricing strategy beginning to take effect.

Financial Health: KO is more robust

Coca-Cola's debt ratio is only 16% (PEP is 27%), and its cash reserves as a percentage of assets are also higher (14% vs 8%). From the numbers, KO is indeed more financially stable.

4-Year Stock Price Comparison: Both Underperform the Market

Since the beginning of 2021, KO has risen 40% (from $50 to $70), while PEP has only risen 4% (from $130 to $135), and the S&P 500 has risen 65%. Both beverage giants have been left behind by the market. Looking closely at the annual performance:

• KO: 2021 +11%, 2022 +11%, 2023 -4%, 2024 +9%
• PEP: +21% in 2021, +7% in 2022, -3% in 2023, -8% in 2024

KO is more stable, but PEP has been a bit underperforming in the last two years.

Valuation is Key: PEP is Severely Undervalued

This is the reversal point. PEP is currently trading at a price-to-earnings ratio of 17 times (adjusted earnings per share of $8.03), significantly below its 4-year average of 22 times PE—this means PEP is currently undervalued. In contrast, KO is trading at a price-to-earnings ratio of 25 times (earnings per share of $2.89), already above its historical average of 22 times.

Investment Conclusion: PEP is More Worth Buying

Although PEP faced a short-term setback after the Quaker incident, considering that:

1. The current valuation is at a historical low.
2. The North American market has room for rise.
3. It is expected that next year's revenue will recover to mid-single-digit growth.

From a value investing perspective, PEP is now more attractive than KO. Of course, if you want to avoid the volatility of a single stock, diversifying your portfolio is also an option.