With the Non-Alcoholic Beverages industry up 21.56% this year it is time to take the Pepsi Challenge and determine where the best value lies: Pepsi (PEP) or Coca-Cola (KO)? There will be no blindfolds here as we compare Pepsi ($71.10) and Coca-Cola ($38.56) based on their operating margins, P/E ratios, and return on assets. Each of these metrics are explained below:
- Operating Margin: How much a company makes on each dollar of sales before interest and taxes
- P/E: Current share price divided by earnings per share
- Return on Assets: How efficient management is at using assets to generate earnings
On the first sip Coca-Cola takes the lead with an operating margin of 22.33% compared to Pepsi’s 13.89%. Coca- Cola wins again with a return on assets of 10.63% while Pepsi’s return is only 8.17%. So far we have determined that Coca-Cola is earning .09 more cents per dollar of sale than Pepsi and is more efficiently using its assets by 2.49%.
A P/E ratio of 20.4% shows that investors are willing to pay more per share for earnings of Coca-Cola than Pepsi, who has a P/E ratio of 18.7%. Given all our analysis, Coca-Colas slightly higher P/E ratio is justified by its superior return on assets and operating margin.
Thus, we crown Coca-Cola the winner in this round of the valuation challenge.
Business Section: Investing Ideas
If you are looking to diversify your portfolio and cash in on the growth in the Non-Alcoholic Beverage industry, consider that the valuations favor Coca-Cola over Pepsi. We conclude that although Coke has a slightly higher P/E you can capitalize on its lower price per share and superior metrics compared to Pepsi.
Use Kapitall’s free tools, such as the Turbo Chart below, to continue your analysis.
Written by Nick Sousa