Beverage companies benefit from the unchanging demand for their products, which results in steady revenues even during market downturns, making the industry a reliable choice for investors seeking stability during periods of uncertainty.
Moreover, demand for ready-to-drink (RTD) beverages are on the rise due to consumers’ desire for health-conscious choices amid busy lifestyles. Functional juice, sparkling water, soda, and tea are also gaining popularity, driven by the demand for nutritious options.
The beverage industry’s revenue is projected to reach $89.53 billion in the US this year. This upward trajectory is expected to continue at a CAGR of 16%, resulting in a US market volume of $162.10 billion by 2027.
In terms of price performance, PEP is the winner. While KDP has declined 13.2% over the past year, PEP has soared 1.8%. Over the past six months, PEP has returned 2.2%, while KDP has fallen 4.4%.
Now, let’s explore the comparison:
On August 1, PEP’s subsidiary SodaStream entered into a corporate power purchase agreement with Enlight Renewable Energy Ltd (ENLT), a leading global renewable energy platform. The agreement will enable the full operation of SodaStream’s global production sites in Israel to operate utilizing renewable energies beginning in 2024.
Moreover, on July 26, PEP and Walmart Inc. (WMT) announced a seven-year collaboration to invest $120 million in supporting U.S. and Canadian farmers in improving soil health and water quality through regenerative agriculture practices. This partnership recognizes the diversity of agriculture and offers a flexible, voluntary approach to sustainability that involves farmers in the decision-making process.
On the other hand, on July 20, 2023, KDP and La Colombe announced a strategic partnership which includes a long-term sales and distribution deal for La Colombe ready-to-drink coffee and a licensing, manufacturing, and distribution agreement for La Colombe K-Cup® coffee pods by KDP.
KDP will also make an equity investment in La Colombe. This partnership aims to leverage La Colombe’s premium coffee offerings and KDP’s distribution network to boost availability and growth in mainstream retail channels in the U.S. and Canada.
Recent Financial Results
PEP’s net revenue increased 10.4% year-over-year to $22.32 billion in the fiscal second quarter that ended June 17, 2023. Its non-GAAP gross profit grew 13.1% from the year-ago quarter to $12.20 billion and non-GAAP operating profit increased 13.2% year-over-year to $3.86 billion.
Also, the company’s non-GAAP attributable net income rose 12% and 12.4% year-over-year to $2.89 billion and $2.09 per share.
Conversely, KDP’s net sales for the second fiscal quarter (ended June 30, 2023) increased 6.6% year-over-year to $3.79 billion. Its gross profit grew 14.9% from the prior-year quarter to $2.04 billion.
The company’s attributable net income and EPS amounted to $503 million and $0.36, up 130.7% and 140% year-over-year, respectively.
On July 20, PEP declared a quarterly dividend of $1.265 per share of its common stock, payable to shareholders on September 29, 2023. This represents a 10% increase compared to the previous year. PEP has maintained a tradition of paying quarterly cash dividends since 1965, and the company celebrated its 51st consecutive year of raising dividends this year.
PEP pays a dividend of $5.06 per share annually, translating to a 2.90% yield on the current price. Its dividends have grown at 6.9% CAGR over the past three years. Its four-year average dividend yield is 2.71%.
In contrast, On July 14, KDP paid its shareholders a quarterly dividend of $0.20 per share. Its annual dividend of $0.80 translates to a 2.41% yield on the prevailing market prices, while its four-year average dividend yield is 2.07%. Its dividend payouts have grown at a CAGR of 10.1% over the past three years.
Past and Expected Financial Performance
PEP’s revenue and net income grew at a CAGR of 10% and 4.9%, respectively, over the past three years. Analysts expect PEP’s revenue to increase 6.8% in the current quarter, 3.3% in the next quarter, and 10.3% in the current year. The company’s EPS is expected to grow 8.9% in the current quarter, 4.7% in the next quarter, and 7% in the current year.
On the other hand, KDP’s revenue and net income grew at a CAGR of 8.9% and 11.3% over the past three years. Analysts expect the company’s revenue to increase 4.4% in the current and next quarter and 6.2% in the current year. The company’s EPS is expected to grow 1.9% in the current quarter, 10.9% in the next quarter, and 5.9% in the current year.
PEP’s trailing-12-month gross profit margin of 53.69% is higher than KDP’s 52.75%. PEP’s trailing-12-month asset turnover ratio of 0.95x is higher than KDP’s 0.28x.
Furthermore, PEP’s trailing-12-month ROCE, ROTA, and ROTC of 43.60%, 8.24%, and 13.27% are higher than KDP’s 6.33%, 3.09%, and 4.83%, respectively.
Hence, PEP is more profitable.
In terms of forward EV/Sales, PEP is currently trading at 3.00x, which is lower than KDP, which is currently trading at 4.06x. Moreover, PEP’s forward P/S multiple of 2.60 is lower than KDP’s 3.02.
Thus, PEP is more affordable.
PEP has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. KDP, on the other hand, has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories.
PEP has a Sentiment grade of B. Among the 13 analysts who evaluated the stock, nine recommended it as a Buy, while four opted for a Hold rating.
On the other hand, KDP has a Sentiment grade of C. Among the 11 analysts who assessed the stock, seven advocated for a Buy rating, three suggested a Hold, and one recommended a Sell.
Moreover, PEP has a grade of A for Quality. Its trailing-12-month gross profit margin of 53.69% is 64.6% higher than the industry average of 31.61%. Its trailing-12-month cash from operations of $10.95 billion is significantly higher than the industry average of $505 million.
KDP has a B grade for Quality. Its trailing-12-month gross profit margin of 52.75% is 61.7% higher than the industry average of 31.61%. Its trailing-12-month cash from operations of $1.95 billion is 286.1% higher than the industry average of $505 million.
Among the 37 stocks in the B-rated Beverages industry, PEP is ranked #14, while KDP is ranked #21.
Beyond what we’ve stated above, we have also rated both the stocks for Growth, Momentum, Value, Stability, and Sentiment. Click here to view additional POWR Ratings for PEP. Access other KDP ratings here.
Amid the ongoing economic uncertainty, the beverage industry showcases its resilience, thanks to the unwavering demand for its products. Consumers tend to prioritize their beverages, making this sector notably resistant to economic downturns.
Furthermore, beverage companies are proactively adapting to evolving consumer preferences by incorporating sustainable and health-conscious options into their product lines.
These industry tailwinds should help both KDP and PEP navigate the ongoing macroeconomic challenges. However, KDP’s elevated valuation multiples place PEP in a more advantageous position. Therefore, PEP appears to be a superior choice in the beverage industry compared to KDP.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Beverages industry here.
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PEP shares were trading at $175.99 per share on Friday morning, down $0.41 (-0.23%). Year-to-date, PEP has declined -0.55%, versus a 17.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...
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