coke and pepsi

Coke or Pepsi, which is better? Both are lousy as consumer products. But I mean, which is better as a stock? Coke is worth $191 b, and Pepsi, $161 b. The Coke stock implies nearly 30 times its earnings, the Pepsi stock, 13 times. Why should Coke trade at a higher multiple than Pepsi? Is Coke growing better than Pepsi? Which business has a better return on capital and return on equity? Or is there a bias?

Coke has a better operating margin (20%) compared to Pepsi (16%). But I don't care much about operating margin. What I do care is return on capital. Pretax return on capital for Coke is 25%, and that of Pepsi is 30%. These are long term averages. The most recent values are 36% for both Coke and Pepsi. 

And I care as much about sustainable growth rate. The 5-year average growth rate in revenues for Coke is negative 7.43%, and the 10-year average is 0%. It had revenues of $31 b in 2008, and they were $31 b in 2018. For Pepsi, the 5-year average growth rate in revenues is 0%, and the 10-year average is 4%. It had revenues of $66 b in 2013, and they were $64 b in 2018. Pepsi's revenues grew 1.79% in 2018, and Coke's fell 10%. So much for growth rates. 

They have products that are not healthful, and there is no growth in revenues. Do we really want to talk further? Both companies spend considerable amount on advertising. But it seems that Coke is more desperate, for its average ad spending is 10% of its revenues compared to Pepsi's 4%. Yeah, Pepsi has more diversified products. 

When we capitalize advertising costs, the pretax return on capital changes to 27% for Coke and 31% for Pepsi for 2018. I am using pretax return on capital because of strange things that have happened in tax rates recently. 

Both companies are mature businesses and payout significant dividends. The 5-year average growth rate for Coke dividends is 6% and 8% for Pepsi. The 10-year average is 7% for both. 

Let's look at free cash flows. Pepsi had $6.75 b pretax cash flows for 2018, and Coke had $6.1 b. The 5-year average for Pepsi is $9 b and $6.79 b for Coke. For both companies, free cash flows have not been growing. In fact, they are falling. 

So again, why should Coke be priced higher than Pepsi? Is it because a prominent investor holds it and backs it? That's appears to be a stupid idea. But then we are not dealing with rational people.

I will start with $6 b as aftertax free cash flows for Coke and $6.5 b for Pepsi. Never mind these are much higher for Coke compared to its historical numbers. With these assumptions and a growth rate of 5% leading to a cap on the growth rate after a decade, we get similar values ($85 b) for both at an expected rate of 10%. 

Based upon free cash flows at least, the market pricing for both companies appears to be on the higher side. But my point is that Coke should not be priced higher but lower than Pepsi. And this has not happened for a long time. In fact, most of the time, the yearly low market value of Coke has been higher than the yearly high market value of Pepsi. That is bias, Coke being accepted as a more prestigious brand. But then who cares for the brand when the cash flows behind it do not justify the price? 

I am no fan of either, for I don't like their products. But it is time that the market realizes the potential of these companies, and prices them accordingly.