The Coca-Cola Company (KO) and Keurig Dr Pepper Inc. (KDP) are two prominent players in the non-alcoholic beverage industry. KO owns or licenses, and markets beverage concentrates, finished sparkling soft-drinks brands, energy drinks, dairy, and syrups to fountain retailers such as restaurants and convenience stores. It operates through independent bottling partners, distributors, wholesalers, retailers, and bottling and distribution operators. In comparison, KDP manufactures and distributes soft drinks, juices, teas, mixers, water, and other beverages to retailers, bottlers and distributors, restaurants, hotel chains, office coffee distributors, and end-use consumers. It operates through Coffee Systems; Packaged Beverages; Beverage Concentrates; and Latin America Beverages segments.
With restaurants and tourist places witnessing increasing foot traffic, now that travel restrictions are being eased gradually, the non-alcoholic beverage industry is seeing increasing demand for healthy, refreshing, and ready-to-drink beverages. Both fountain retailers and e-commerce platforms are witnessing rising demand for such beverages. The non-alcoholic beverages market is expected to grow at an 8.2% CAGR to $1.73 trillion by 2028. Moreover, being part of the consumer defensive industry, shares of beverage companies are witnessing increasing investor attention amid the market volatility. So, both KO and KDP are expected to benefit.
While KDP has gained 16.5% over the past year, KO surged 7.4%. In terms of their past nine months’ performance, KDP is a winner with a 3.6% gain versus KO’s marginal return. But which of these stocks is a better pick now? Let’s find out.
On April 19, 2021, KO and Coca-Cola Beverages Africa (CCBA) announced plans to list CCBA as a publicly-traded company on the Amsterdam and Johannesburg stock exchanges. As Africa becomes a key growth market for KO, this IPO should allow CCBA to operate as an independent, managed, and domiciled business and gain a broad, supportive, long-term investor base for the continued development of the business.
On July 27, 2021, KDP introduced BrewID, a next-generation technology platform designed to give consumers a perfectly customized, rich, full-flavored coffee just the way they like it. Being launched with KDP’s K-Supreme Plus SMART brewer, BrewID technology recognizes the specific brand and roast of the K-Cup pod and automatically customizes the brew settings. KDP expects to witness high demand for this product in the upcoming months.
Recent Financial Results
KO’s non-GAAP net operating revenues for its fiscal second quarter, that ended July 2, 2021, increased 41.1% year-over-year to $10.13 billion. The company’s non-GAAP gross profit came in at $6.22 billion, representing a 50.4% year-over-year improvement. Its non-GAAP operating income was $3.21 billion, up 49% from the prior-year period. While its non-GAAP net income increased 61.5% year-over-year to $2.93 billion, its non-GAAP EPS increased 61.9% to $0.68. The company had $9.19 billion in cash and cash equivalents as of July 2, 2021.
For its fiscal second quarter that ended June 30, 2021, KDP’s net revenue increased 9.6% year-over-year to $3.14 billion. The company’s adjusted gross profit came in at $1.77 billion, up 10.1% from the prior-year period. Its adjusted income from operations came in at $839 million, representing an 8.3% year-over-year improvement. KDP’s adjusted net income of $538 million for the quarter represents a 14.7% rise from the prior-year period. Its adjusted EPS increased 15.2% year-over-year to $0.38. The company had cash and cash equivalents of $167 million as of June 30, 2021.
Expected Financial Performance
Analysts expect KO’s EPS to increase 5.5% year-over-year in the current quarter ending September 30, 2021, 15.9% in the current year, and 7.5% next year. Its revenue is expected to increase 13.2% in the current quarter ending September 30, 2021, 15% in the current year, and 5.7% next year. Analysts expect the stock’s EPS to grow at a 10.1% rate per annum over the next five years.
In comparison, analysts expect KDP’s EPS to increase 12.8% year-over-year in the current quarter ending September 30, 2021, 14.3% in the current year, and 8.1% next year. Its revenue is expected to increase 4.8% in the current quarter ending September 30, 2021, 7.3% in the current year, and 4.1% next year. The stock’s EPS is expected to grow at a 9.5% rate per annum over the next five years.
In terms of non-GAAP forward PEG, KO is currently trading at 3.10x, 55% higher than KDP’s 2x. In terms of forward EV/Sales, KO’s 6.86x is 39.4% higher than KDP’s 4.92x.
KO’s trailing-12-month revenue is almost three times higher than what KDP generates. KO is also more profitable, with a 35.7% EBITDA margin versus KDP’s 31.9%.
Also, KO’s ROE, ROA, and ROTC values of 37.3%, 7.8%, and 10.4%, respectively, compare favorably with KDP’s 7%, 4%, and 5.2%, respectively.
While KDP has an overall grade of C, which translates into a Neutral rating in our proprietary POWR Ratings system, KO has an overall grade of B, equating to a Buy rating. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both KO and KDP have a B grade for Stability, consistent with their lower volatility than the broader market. KO has a beta of 0.64, while KDP’s beta is 0.63.
KO has a B grade for Quality, which is consistent with its higher-than-industry profitability ratios. KO’s 40.7% trailing-12-month return on common equity is 251.7% higher than the 11.6% industry average. However, KDP’s C grade for Quality is in sync with its lower-than-industry profitability ratios. KDP’s trailing-12-month return on common equity of 7% is 39.7% lower than the industry average of 11.6%.
Of the 38 stocks in the B-rated Beverages industry, KDP is ranked #21, while KO is ranked #13.
Beyond what we’ve stated above, our POWR Ratings system has also graded KO and KDP for Growth, Value, Momentum, and Sentiment.
The rising demand for non-alcoholic beverages with the easing of restrictions should benefit both KO and KDP. However, relatively higher profitability makes KO a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Beverages industry.
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KO shares were trading at $53.16 per share on Tuesday afternoon, up $0.17 (+0.32%). Year-to-date, KO has declined -0.78%, versus a 17.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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