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Coke Vs. Pepsi: By The Numbers

Monday, March 24, 2014 - 10:00am

History has shown us that America was built on the back of positive rivalries.

Like the long-standing feud between the New York Yankees and the Boston Red Sox... or the U.S. vs. Russia in the Olympics. That's to say nothing of more serious rivalries like the political feud between Democrats and Republicans.

Nothing can drive competitors to perform their best like a well-matched rivalry. This is particularly true in the world of business. Think of Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL), Ford (NYSE: F) and General Motors (NYSE: GM), or AT&T (NYSE: T) and Sprint (NYSE: S).

All of these (and dozens of others) have resulted in increased innovation, industry growth and -- most critically for investors -- shareholder value. One rivalry in particular stands out to me in terms of longevity, pure competitive zeal and using nearly every trick in the book for the upper hand: the epic cola war between Coca-Cola (NYSE: KO) and Pepsico (NYSE: PEP).

Both of these companies have made great investments over the years, both offer solid growing dividend yields, and both excel in a particular niche. However, going forward, I think one of these companies has the edge on the other as an investment.

Coca-Cola was launched in 1886 by an Atlanta chemist. Seven years later, Pepsi was created as a direct competitor. The cola war waged on for decades with the edge moving back and forth between the two competing firms.

But truth be told, Coca-Cola has won the cola war. Coke controls 42% of the total carbonated soft drink market, compared with Pepsi's 30%, according to Beverage Digest.

Coke Has Won -- But Does It Matter For Investors?
Despite Coke's clear victory, I expect this will have little relevance going forward for investors.

Due to changing tastes and a healthier consumer, both cola brands have been in decline. Research firm IbisWorld has forecast that per-capita soda consumption's downward trend will continue with no end in sight. No matter how much money is spent on clever marketing, the overwhelming secular trend against sugary, calorie-filled carbonated beverages cannot be reversed.

Why Pepsi Has The Edge
While Coca-Cola has vowed to rebuild sales in the United States and focus on international sales, Pepsi has taken a different and smarter track. The change within Pepsi started back in 2006 with the hiring of Indra Nooyi as CEO.

A former management consultant, Nooyi understood the changing consumer with the shift from sugary soft drinks to healthy drinks and snacks. This fact is quite obvious due to the vast numbers of alternative and often health oriented drinks found at nearly every retail outlet. The new CEO refocused Pepsi on water, teas, juices and sport drinks. The company plans on expanding its nutritional business from $10 billion to $30 billion by 2020. It is relying on using its Gatorade, Quaker Oats, and Tropicana divisions, plus the newly formed Global Nutrition Group to follow the trend away from sugary sodas to healthier snacks and drinks.

On the other hand, Coke has vowed to ramp up marketing with an extra $3 billion over the next three years. In addition, a partnership with Keurig Green Mountain (NYSE: GMCR) is expected to ride the future wave of "home-brewed" sodas. (As I wrote recently, Coke must know something I don't, because I don't see what long-term value Coca Cola expects from this partnership.)

To be sure, Coca-Cola has been on a buying frenzy to ramp up its healthy offerings with brands, such as VitaminWater and Odwalla. While this shift is a huge positive, soda remains 75% of Coca-Cola's global sales.

On the other hand, Pepsi's snack division makes up about 50% of the company's sales volume. Soda is just 25% of the company's U.S. sales compared to 60% of Coca Cola's. What this all means for investors is that Pepsi is better prepared to handle the unstoppable trend away from its flagship product than Coca-Cola.

Finally, Coca-Cola is one of Buffett's "big four" stocks, and he's said he's very unlikely to sell his position within the next five years. He may be missing the big picture with this company.

Risks to Consider: Sugar prices recently plunged to a near three-year low. While this may help lower costs for Coca-Cola and Pepsi products alike, I'm not expecting much of an effect since these companies generally lock in commodity prices through futures.

Action to Take --> I am certainly not saying that Coca-Cola is a bad investment, just that the edge right now is with Pepsi due to its product mix, healthy focus, and having less exposure to the declining market of sugary sodas. I think Coca-Cola is nearing the end of its glory days, and the share price may drop soon. Buying Pepsico's shares on a breakout of $83 with initial stops at $80 and a one-year target of $87 makes solid risk/reward sense.

If you are a risk-embracing investor, shorting KO at or below $39 with a $36 profit target makes sense. Remember to keep tight stops at $40 should you wish to take a short position.

P.S. The Coke-Pepsi rivalry dominates the soft-drink market. We recently identified more of the market's most dominant companies in a recent report, "The Top 10 Stocks For 2014." One stock has raised its dividend 36 times since 2004, while another has boosted its dividend a whopping 183% since 2011. And that's just the beginning... These 10 stocks have delivered a market-crushing total return of 237% over the past five years, including individual gains of as much as 925%. To get more information, including names and ticker symbols, click here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.