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Coke Vs. Pepsi: Has COVID Changed The Odds?

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The more than century-long war between PepsiCo (PEP - Free Report) and Coca-Cola (KO - Free Report) has grown more significant than just a soda duopoly. These two began battling for the nascent carbonated drink market at the turn of the 20th century, and today the two soda giants are the largest beverage enterprises in the world (by market capitalization).

A valuation divergence that had been wedged between this duopoly is now beginning to reverse. KO has held the market value lead for decades, but PEP is slowly but surely usurping the soda king. This trend has been taking shape for the past decade, only to be accentuated by the unprecedented pandemic. 

Now PepsiCo is nipping at Coke's coattails with an over $190 billion valuation, closing in on Coke's $212 billion market value.

KO has underperformed PEP since the pandemic trade hit the fan in March. This performance divide has been widening throughout the year, and it appears that this course is poised to continue.

Duopoly Recent Performance & Earnings

KO is currently down over 10% year-to-date, while PEP has stayed buoyant this year, illustrating a marginal gain of just over 1%.

PepsiCo released a strong quarterly report this past Thursday (October 1st), beating the Street's estimates on both top and bottom-lines while increasing its 2020 guidance. Investors decided to pull profits off this report, and the stock continues to trail down against the grain of the broader equity market today. PEP bounced off its 50-day moving average this morning at around $137 (represented by the blue line in the chart above), which looks to be the support level to watch for this stock.

There seems to be a profit-pulling theme in the markets this earnings season, with stocks that have come a long way from their respective March bottoms. After investors/traders see what they are looking for in quarterly reports, they appear to be quick to trim positions. This is no cause for concern for long-term investors.

Coca-Cola is preparing to release its Q3 estimates later this month before market open on Thursday, October 22nd. According to Zacks Consensus estimates, Coke is anticipated to produce an EPS of $0.45 on sales of $8.35 billion, which would represent a double-digit percent decline year-over-year on both metrics.

What is Causing The Drink Duopoly's Pandemic Divide 

Let's get back to the meat and potatoes of my argument here. PepsiCo has been taking a much more aggressive strategy in its search for growth, leveraging synergies in acquisitions across the consumer package goods (CPG) segment, and taking risks on budding products.

PepsiCo's savvy management team has continued to illustrate steady market growth for decades. PEP is trading right below its all-time high market value north of $200 billion, but these shares are well on its way to make new highs.

Coca-Cola has maintained its long-held strategy of retaining customer loyalty in its house brand names. It has stuck with its core competency of beverages, while PepsiCo expands its CPG footprint into foods. Coke still derives most of its top and bottom line from carbonated drinks, though it has made steps towards healthier drink trends. PepsiCo has established a diverse portfolio of CPG products of both food and beverages that help hedge the company against secular market trends (e.g., Quaker Oats).  

Coke has not seen much growth in recent years. In fact this mature enterprise has been experiencing a top and bottom line decline since 2012. Today Coca-Cola is sitting at the same market value as at it was in the summer of 98'.

The pandemic has only accelerated a trend that has been underway for some time, just as it did the retail apocalypse and economic digitalization. Coca-Cola is losing its grip as society changes its consumption habits. While this beverage giant isn't going anywhere, its share price may not have much upside if management doesn't adopt a more proactive strategy.

PepsiCo just illustrated record sales in its quarterly report last week, leveraging this pandemic to its advantage. The company also acquired Rockstar Energy in the heat of the COVID chaos in March, adding to its energy-based offering and creating synergies with its Mountain Dew brand.

With PEP trading at a relative valuation discount to KO, I would buy PEP over KO all day. Still, both stocks yield a healthy dividend of around 3% annually, and analysts remain optimistic about these legacy beverage giants in the roaring 20s but don't expect parabolic gains. 

Final Thoughts

Coke and Pepsi aren't going anywhere. These CPG powerhouses maintain robust portfolios of consumers' favorite foods and beverages. Society is becoming more focused on healthy natural options, and the CPG industry has to adapt. PepsiCo has been making moves to create a health-oriented hedge against the decline in sugar-infused soft-drinks sales.

Coca-Cola has a good portfolio of healthy drinks, including teas, which have seen a big uptick on sales in recent years. Unfortunately, the decline in its core Coca-Cola product volumes isn't entirely offset by the growth in its health-oriented and alternative drink options.

The beverage industry's future is evolving more quickly every day. The recent pandemic added existential mortality feelings to consumers across the globe. Consumers want more naturally sourced products as the world focuses on sustainable practices, which includes sustaining one's health.

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