Investment Analysis of Coca-Cola Co. and PepsiCo Inc
Investment Analysis of Coca-Cola Co. and PepsiCo Inc
1. Company Profiles – A Synopsis
PepsiCo Inc, an American multinational, is a food and beverage organization which has headquarters in New York, United States. The company has interests in the production, marketing and distribution of beverages, snack foods, and other products. This publicly traded company was formed in the year 1965 after Pepsi-Cola Company merged with Frito-Lay, Inc. Coca-Cola Company, also an American multinational, sells carbonated soft drink in every store having a headquarter in Atlanta, Georgia of United States. It was founded in 1886.
PepsiCo has a diverse beverage and food portfolio which includes around twenty two brands where each brand generates at least $1 billion in annual sales revenue. The portfolio includes brands like Pepsi, diet Pepsi, Quaker, Lays and Cheetos Chips, sports drinks, fruit juices like Tropicana, Mountain Dew, 7-Up as well as Aquafina mineral water etc. The Coca-Cola has introduced various cola drinks under the brand name - Coke. The most common drinks are Caffeine-Free Coca-Cola, Diet Coke, Diet Coke Caffeine-Free, Coca-Cola Zero, Coca-Cola Cherry and Coca-Cola Vanilla etc.
Customer base of PepsiCo includes independent distributors and authorized bottlers, such as retailers and foodservice distributors who enter exclusive contracts with PepsiCo to manufacture and sell beverage products bearing Pepsi trademarks within a given geographic area. Close customers of Coca-Cola include restaurants, movie theaters, grocery stores, convenience stores, amusement parks and street vendors etc.
Valuable leadership of PepsiCo includes most reputable human capital where the names of Indra K. Nooyi (Chairman and Chief Executive Officer), Zein Abdalla (President), Jon Banner (Executive Vice President, Communications), Oswald Barckhahn (President, PepsiCo North America Nutrition), Rich Beck (Senior Vice President, Global Supply Chain Operations), Sanjeev Chadha (Chief Executive Officer, PepsiCo Asia, Middle East and Africa), Robert Dixon (Senior Vice President and Chief Information Officer) and Dr. Mehmood Khan (Executive Vice President, PepsiCo Chief Scientific Officer, Global Research and Development) are important to be mentioned.
The global leadership of Coca-Col includes Muhtar Kent (Chairman of the Board and Chief Executive Officer), Herbert A. Allen, Ronald W. Allen and others as Board of Directors. Senior Operations Leadership of coca-Cola includes Ahmet Bozer (President, Coca-Cola International), Nathan Kalumbu (President, Eurasia & Africa Group), Atul Singh (President, Asia Pacific Group), Irial Finan (President, Bottling Investments Group) and J.Alexander M. Douglas Jr. (President, Coca-Cola North America) etc. For Coca-Cola, Senior Functional Leadership has a human resource capital consisting of Alexander B. Cummings (Chief Administrative Officer), Ed Steinike (Chief Information Officer), Kathy Waller (Chief Financial Officer) and Joseph V. Tripodi (Chief Marketing and Commercial Officer) etc.
2. Financial Performance Analysis for Creditors
Liquidity Strength Analysis
For a more thorough financial examination, the quick ratio, which is also called acid-test ratio, is analyzed. Quick analysis excludes inventories and prepayments from calculations because both of them are not easily and quickly convertible to cash without decline in their financial value. Close observation reveals that the liquidity strength of PepsiCo and Coca-Cola improved slightly in 2013; however, it seems that PepsiCo has more dollars in current assets to repay its creditors than Coca-Cola. Still, these businesses underperform the global standard of 1:1 in case of quick ratio but PepsiCo is operating closer to this benchmark. Overall, PepsiCo seems to outperform the Coca-Cola where its default risk is lesser and safety margin to creditors’ investment is higher than that of its counterpart.
Financial Flexibility Analysis
Here, the extent to which these organizations employ debt and equity in their operation is analyzed through debt-to-equity ratio. Additionally, another ratio is also incorporated to measure the capacity of PepsiCo and Coca Cola to repay their fixed interest obligations.
The above table reveals that PepsiCo tends to employ more debt in its business operation than its counterpart, Coca-Cola which uses almost half the debt percentage. One may say that PepsiCo has less financial flexibility than Coca-Cola because of using more debt in capital structure. In this case, PepsiCo will find it difficult to raise capital from the financial markets. Due to using more debt, PepsiCo is exposed to increased interest rate risk which is kept to an optimal level in case of Coca-Cola. PepsiCo’ counterpart, Coca-Cola will find it easy to raise necessary funds from the capital markets because of using optimal capital structure in operations.
Because of using more debt, PepsiCo’s capacity to cover its fixed interest obligations is lesser than that of Coca-Cola in 2012 and 2013. Similarly, as Coca-Cola employed more debt in 2013, its financial flexibility and capacity to repay debtors has declined in the most recent year. Overall, Coca-Cola outperforms its business rival (PepsiCo) in 2012 and 2013 because it uses less debt, exposed to less interest rate risk and its capacity to pay fixed interest payments is really very high than PepsiCo.
Profitability Ratio Analysis
Among many profitability ratios, the return on assets is analyzed which measures the capacity of the concerned two business rivals to net income for every dollar invested in total asset mix.
The above table reveals that Coca-Cola outperforms the PepsiCo only by a slight margin in 2013. PepsiCo was able to generate only $8.86 for every dollar its management invested in acquisition and maintenance of total assets during 2013. In contrast, Coca-Cola generated more dollars (around $0.88 in 2013) for investment of each dollar in current and non-current assets which is considered good by shareholders and potential investors.
Recommendation to Improve Ratios
3. New Events Affecting PepsiCo and Coca-Cola
Under this section, those two news events which reveal the rivalry between two global brands are summarized. Comparatively, it seems to be a zero sum game where victory of one brand automatically leads to a loss of the business rival. Both of these companies compete with each other to capture more media and audience attention to increase their profit generation and market share.
One of the news events that negatively affected Coca-Cola’s market share was when PepsiCo won top-tier sponsorship of Torch Relay and Olympic Games in the second quarter of 2012. PepsiCo was able to increase its market share by around eighteen percent whereas its business rival in cola industry, Coca-Cola, only managed to increase its market share through diet coke only by six percent . After Coca-Cola lost its sponsorship and the ability to capture more market attention, it started to witness a sudden decline in its sales revenue due to which the bottom line of its financial statements was influenced negatively.
Another or second news event which negatively affected Coca-Cola negatively in front of the media and target audience was when Ronaldo de Assis Moreira, a Brazilian footballer playing for Mexican club, lost Coca-Cola sponsorship for $750,000 after he had a sip of Pepsi during a news conference in 2012 . Coca-Cole ended its relationship with Ronaldo de Assis Moreira because he failed to endorse coke during the conference and he endorsed the Pepsi brand instead displaying an attitude of disloyalty to Coca-Cola . Because of this media event, stakeholders (including the investors) of Coca-Cola became very disappointed. It came to the front during media coverage that many celebrities are nor preferring Pepsi over Coke due to which many of the fans turned over their taste preferences to Pepsi. While the market switched from Coke to Pepsi, the bottom line of the financial statements of Coca-Cola declined because it was now difficult to generate more revenue for value creation.
Fewer earnings were made available to Coca-Cola’s common shareholders (investors) due to which the global brand was unable to create value for its investor base. Comparatively, as PepsiCo continued to grow through collaborative relationships, it was able to leverage sponsorship with the aid of activation programs that heavily supported its marketing objectives for 2012 and beyond. Because of this, PepsiCo was able to generate lucrative profits through introduction of multi-brand strategy which improved its bottom line and created more shareholder value for investors.
Following a multi- brand strategy, PepsiCo was able to introduce a wide range of its products which included Pepsi, Pepsi Max, Pepsi Next and Diet Pepsi etc. it also managed to add Quaker Oats and tantalizing breakfast food category to its collaborative sponsorship relation with MLS (Major League Soccer) in 2012. With sponsorships and activation programs, PepsiCo was able to achieve its marketing objectives smoothly by taking new marketing initiatives to add more products to its brand which improved the bottom line of its financial statements .
4. Analysis of Income Statement
The above statement reveals that PepsiCo outperformed Coca-Cola in every aspect during the financial accounting year of 2012 to 2013. Gross profit increased for PepsiCo by 2.84% whereas for Coca-Cola, it declined by 1.83%. Compared to Coca-Cola, PepsiCo was not only able to increase its sales revenue but also managed to reduce its cost of sales by 0.15% as well during 2012 to 2013. Despite the fact that total operating expenses increased more for PepsiCo than those for Coca-Cola, yet the former was able to increase its operating income by 6.51% as against Coca-Cola whose operating income declined by approximately 5%.
Even though Coca-Cola employs less debt than PepsiCo in its capital structure, yet its interest expense increased by 16.62% whereas for PepsiCo, it only increased by 1.33% which shows that Coca-Cola is exposed to higher interest rate risk than PepsiCo. In addition to these developments, PepsiCo was able to make more income available to its common shareholders than Coca Cola. This is confirmed by Net income available to common shareholders and Earning per Share data presented in the income statement stated above.
Though Coca-Cola has more liquidity strength and employs less debt than PepsiCo, yet, it is unable to increase revenue and reduce costs as well as expenses being more exposed to higher interest rate risk. It is recommended for Coca-Cola to utilize its assets and financial resources with more efficiency and effectiveness. It lost much of the revenue because of losing sponsorships and collaborative relationships which have been outlined in section 3 of this research. The management of Coca-Cola is advised to make more efforts to capture more media and targeted audience attention so that it could use multi-brand strategy (like PepsiCo) to improve revenue generation and cost coverage capacity. To mitigate the interest rate risk exposure, Coca-Cola’s management should use financial derivatives of interest rate swaps to increase capacity to pay fixed interest obligations.
5. Vertical Analysis of Balance Sheet of Coca-Cola and PepsiCo
For comparative analysis under this section, the following vertical analysis has been performed which reveals the relationship among all balance sheet or permanent items relative to total assets :
The above balance sheet’s vertical analysis for both the companies during 2013 makes it apparent that Coca-Cola seems to have more liquidity than that of PepsiCo which is completely in opposite direction to what was confirmed by liquidity ratios. This is so because Coca-Cola’s financial figures (volumes) in quick assets are much higher than that of its rival. However, ratios analysis reveals that PepsiCo has more liquidity strength than its counterpart in the global cola/beverage industry. It can also be cited that PepsiCo invested more resources in acquisition of Property, plant and equipment than Coca-Cola in the year 2013. Because of this, its asset utilization capacity improved leading to a more liquid strength of the business.
Because Coca-Cola employs less long-term debt, it is more dependent on a short-term debt than PepsiCo in 2013. Similarly, compared to Coca-Cola, PepsiCo was able to obtain more trade credit from suppliers or vendors to support business operations. Not only this, PepsiCo employs more dependency over long-term debt due to which its interest rate risk seems to be very high and such a fact has already been confirmed by financial flexibility analysis performed in section 2.
Coca-Cola, in 2013, bought back much of its common shares from the market due to which its treasury stock increased and outstanding decreased more than that in case of PepsiCo. Such an initiative was taken after Coca-Cola lost sponsorships in 2012 and lost much of the investor base.
Ratios analysis reveals that though PepsiCo uses more debt yet the interest rate risk exposure for Coca-Cola is really very high because its interest payments increased by 16.63% in 2013. It is recommended for the management of Coca-Cola to reduce its dependence over long-term debt and use raise more short-term capital from creditors for sustainable operations.
Like PepsiCo, Coca-Cola must make special arrangements to obtain trade credit from its suppliers which do not only require any fixed interest payment but the management can still retain the business control as well. In contrast, PepsiCo should increase dependence on short-term investments to improve short-term liquidity and make cash collections from customers more quickly so that the risk of bad debts could be kept to a minimum.
After a careful analysis of PepsiCo and Coca-Cola, one may arrive at a conclusion that liquidity strength for both of these companies are operating to globally acceptable standards where PepsiCo outperforms Coca-Cola by a slight margin. As PepsiCo employs more long-term debt than its counterpart, its ability to cover fixed interest payments was less than that for Coca-Cola in 2013.
Despite using less long-term debt, Coca-Cola is exposed to higher interest rate risk as its interest payments increased dramatically in 2013. Overall, Coca-Cola is a better investment arena for short-term investors whereas PepsiCo is a good investment for investors pursuing long-term horizon because it creates more value shareholders and kept more earnings available to common shareholders than Coca-Cola in 2013.
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