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PEP vs. FMX: Which Stock is Placed Better at the Moment?
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The soft drinks industry is on the road to recovery across at-home and away-from-home channels after suffering for a long time. This, along with improved pricing, digital acceleration and continued innovation to suit consumers’ needs, bodes well. Beverage companies remain on track with the expansion of their digital offerings and investments in loyalty programs to gain customers and market share.
The soft drinks industry comprises two categories — carbonated and non-carbonated drinks. With changing consumer preferences, the demand for non-carbonated drinks is on the rise. This is mainly due to rising cases of diabetes and obesity, as well as the adverse health impacts of the pandemic. With consumers’ increased focus on health-consciousness and personal well-being, beverage companies are putting their best foot forward amid a new market reality.
Industry players are replacing sugar, preservatives, added colors and artificial sweeteners with unusual ingredients such as natural, plant-based and organic products, which have health benefits as well as added flavor. Gluten-free, low-calorie and low-carb products are the current favorites. Some other additions to the beverage space — CBD-infused drinks — have been gaining traction lately.
Continued strength in the Ready-to-Drink (RTD) category remains an upside. The companies are making efforts to introduce products and expand in newer markets to gain market share. Notably, RTD has emerged as the fastest-growing category since 2018. It is expected to rise 29% over the next three years, per IWSR Drinks Market Analysis.
Driven by such upsides, the Global Soft Drinks Market size is expected to reach $589.9 billion by 2028, according to a report by Globe Newswire.
However, not all is as rosy as it seems for the soft drinks industry, as the companies continue to grapple with elevated costs, supply-chain disruptions and inflationary pressure. Rising operating expenses related to marketing and advertising act as deterrents. Also, governments across several countries have restricted sugar intake by introducing sugar tariffs. Such stringent rules and regulations have somewhat hurt soft drinks companies.
PepsiCo’s market capitalization is $231 billion, whereas that for FEMSA is $74 billion. Considering the business size, PepsiCo undoubtedly has the edge over FEMSA and is positioned better for the long term, courtesy of its massive scale of operations. However, short-term industry trends are likely to equally have a bearing on the companies.
Sales Performance
PepsiCo’s revenues improved 5.2% year over year, marking the 16th straight quarter of a sales beat in second-quarter 2022. The top line benefited from volume growth and robust price/mix. On an organic basis, revenues grew 13% year over year, driven by broad-based growth across categories and geographies.
PEP continues to gain from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities to build competitive advantages. It also gained from the resilience and strength in the global beverage and convenient food businesses.
PepsiCo has raised its revenue guidance for 2022. The company expects organic revenue growth of 10% for 2022 compared with 8% growth mentioned earlier.
Meanwhile, FEMSA’s revenues of $8,367 million (Ps. 167,504 million) improved 22.2% year over year in second-quarter 2022. This marked the fifth straight quarter of a revenue beat. On an organic basis, total revenues rose 18.9%. The improved trends across segments resulted from its effective growth strategies and robust demand across most markets.
FEMSA continues to focus on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations. The company’s Coca-Cola FEMSA is leading the way with its omni-channel business, while FEMSA Comercio is progressing with the adoption of digital initiatives. Within its OXXO store chains, the company is on track with investment in digital offerings, loyalty programs and fintech platforms.
Competitive Advantage
PepsiCo has the competitive advantage of selling snacks as well as beverages, which are complementary food categories. On a year-over-year basis, organic revenues grew 17% for the convenient food business in the second quarter. In the second quarter, both Frito-Lay North America (“FLNA”) and Quaker Foods North America (“QFNA”) delivered robust organic revenue growth. The FLNA and QFNA businesses delivered revenue growth of 14% and 18%, respectively, in the second quarter, on a reported and organic basis.
PEP witnessed solid revenue growth across key trademark brands like Doritos, Ruffles and Cheetos, each delivering double-digit net revenue growth. Tostitos and Lay’s delivered high-single-digit revenue growth. Revenues for the Quaker business benefited from market share gains in the rice and pasta, lite snacks, ready-to-eat cereal, and snack bar categories as Quaker continued to capitalize on the elevated demand for tasty products that deliver convenience and value.
FEMSA has been on track with its strategy of creating a national distribution platform in the United States through the expansion of its footprint in the specialized distribution industry. In February 2022, FEMSA completed the acquisition of OK Market. The small-format proximity store chain in Chile added 131 locations to FEMSA’s proximity business, reaching 258 locations.
In March 2022, FEMSA acquired ATRA Janitorial Supply in the United States through its Envoy Solutions subsidiary. In April 2022, the company’s Envoy Solutions subsidiary agreed to acquire Sigma Supply of North America Inc., an independent specialized distribution company based in Hot Springs, AR. This marks another step in FEMSA’s strategy of building a national distribution platform in the United States.
Prior to this, FEMSA acquired Next-Gen Supply Group Inc., Penn Jersey Paper Co., Daycon Products Co., Southeastern Paper Group, Inc. and Southwest Paper Company, Inc. to expand its presence in the specialized distribution industry.
Estimate Movement
While comparing earnings estimates for the last 30 days, both PepsiCo and FEMSA’s earnings estimates for 2022 increased by a penny. PepsiCo’s earnings are expected to grow 6.4% in 2022 against FEMSA’s decline of 3.6%. Here, PepsiCo has the edge over FEMSA.
Price Performance
PepsiCo’s shares have gained 7.3% in the past year compared with the broader industry’s 6.3% growth. However, FEMSA’s shares have lost 26.1%. Similarly, PepsiCo shares compare favorably with the 9.6% decline recorded by the S&P 500 index, while FEMSA’s shares have lagged the same.
Image Source: Zacks Investment Research
Valuation
PepsiCo has a trailing 12-month price-to-sales (P/S) ratio of 2.93X, which is above the industry’s average of 2.05X, while FEMSA has a lower P/S ratio of 0.81X. However, PepsiCo boasts a Momentum Score of B compared with FEMSA’s Momentum Score of D.
Our Take
Our comparative analysis shows that PepsiCo has the edge over FEMSA in terms of price performance and 2022 earnings growth. The fundamentals of both companies are solid. Also, PepsiCo scores higher on the valuation front, which suggests that there is more upside left for the stock. Meanwhile, FEMSA performs well only on the key metrics side. As the scale is significantly tilted toward PepsiCo, the stock makes a more promising investment proposition.
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PEP vs. FMX: Which Stock is Placed Better at the Moment?
The soft drinks industry is on the road to recovery across at-home and away-from-home channels after suffering for a long time. This, along with improved pricing, digital acceleration and continued innovation to suit consumers’ needs, bodes well. Beverage companies remain on track with the expansion of their digital offerings and investments in loyalty programs to gain customers and market share.
The soft drinks industry comprises two categories — carbonated and non-carbonated drinks. With changing consumer preferences, the demand for non-carbonated drinks is on the rise. This is mainly due to rising cases of diabetes and obesity, as well as the adverse health impacts of the pandemic. With consumers’ increased focus on health-consciousness and personal well-being, beverage companies are putting their best foot forward amid a new market reality.
Industry players are replacing sugar, preservatives, added colors and artificial sweeteners with unusual ingredients such as natural, plant-based and organic products, which have health benefits as well as added flavor. Gluten-free, low-calorie and low-carb products are the current favorites. Some other additions to the beverage space — CBD-infused drinks — have been gaining traction lately.
Continued strength in the Ready-to-Drink (RTD) category remains an upside. The companies are making efforts to introduce products and expand in newer markets to gain market share. Notably, RTD has emerged as the fastest-growing category since 2018. It is expected to rise 29% over the next three years, per IWSR Drinks Market Analysis.
Driven by such upsides, the Global Soft Drinks Market size is expected to reach $589.9 billion by 2028, according to a report by Globe Newswire.
However, not all is as rosy as it seems for the soft drinks industry, as the companies continue to grapple with elevated costs, supply-chain disruptions and inflationary pressure. Rising operating expenses related to marketing and advertising act as deterrents. Also, governments across several countries have restricted sugar intake by introducing sugar tariffs. Such stringent rules and regulations have somewhat hurt soft drinks companies.
All said, let us undertake a comparative analysis of two prominent beverage players — PepsiCo (PEP - Free Report) and Fomento Economico Mexicano (FMX - Free Report) . Let us delve deeper into factors beyond rank as both companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Market Cap
PepsiCo’s market capitalization is $231 billion, whereas that for FEMSA is $74 billion. Considering the business size, PepsiCo undoubtedly has the edge over FEMSA and is positioned better for the long term, courtesy of its massive scale of operations. However, short-term industry trends are likely to equally have a bearing on the companies.
Sales Performance
PepsiCo’s revenues improved 5.2% year over year, marking the 16th straight quarter of a sales beat in second-quarter 2022. The top line benefited from volume growth and robust price/mix. On an organic basis, revenues grew 13% year over year, driven by broad-based growth across categories and geographies.
PEP continues to gain from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities to build competitive advantages. It also gained from the resilience and strength in the global beverage and convenient food businesses.
PepsiCo has raised its revenue guidance for 2022. The company expects organic revenue growth of 10% for 2022 compared with 8% growth mentioned earlier.
Meanwhile, FEMSA’s revenues of $8,367 million (Ps. 167,504 million) improved 22.2% year over year in second-quarter 2022. This marked the fifth straight quarter of a revenue beat. On an organic basis, total revenues rose 18.9%. The improved trends across segments resulted from its effective growth strategies and robust demand across most markets.
FEMSA continues to focus on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations. The company’s Coca-Cola FEMSA is leading the way with its omni-channel business, while FEMSA Comercio is progressing with the adoption of digital initiatives. Within its OXXO store chains, the company is on track with investment in digital offerings, loyalty programs and fintech platforms.
Competitive Advantage
PepsiCo has the competitive advantage of selling snacks as well as beverages, which are complementary food categories. On a year-over-year basis, organic revenues grew 17% for the convenient food business in the second quarter. In the second quarter, both Frito-Lay North America (“FLNA”) and Quaker Foods North America (“QFNA”) delivered robust organic revenue growth. The FLNA and QFNA businesses delivered revenue growth of 14% and 18%, respectively, in the second quarter, on a reported and organic basis.
PEP witnessed solid revenue growth across key trademark brands like Doritos, Ruffles and Cheetos, each delivering double-digit net revenue growth. Tostitos and Lay’s delivered high-single-digit revenue growth. Revenues for the Quaker business benefited from market share gains in the rice and pasta, lite snacks, ready-to-eat cereal, and snack bar categories as Quaker continued to capitalize on the elevated demand for tasty products that deliver convenience and value.
FEMSA has been on track with its strategy of creating a national distribution platform in the United States through the expansion of its footprint in the specialized distribution industry. In February 2022, FEMSA completed the acquisition of OK Market. The small-format proximity store chain in Chile added 131 locations to FEMSA’s proximity business, reaching 258 locations.
In March 2022, FEMSA acquired ATRA Janitorial Supply in the United States through its Envoy Solutions subsidiary. In April 2022, the company’s Envoy Solutions subsidiary agreed to acquire Sigma Supply of North America Inc., an independent specialized distribution company based in Hot Springs, AR. This marks another step in FEMSA’s strategy of building a national distribution platform in the United States.
Prior to this, FEMSA acquired Next-Gen Supply Group Inc., Penn Jersey Paper Co., Daycon Products Co., Southeastern Paper Group, Inc. and Southwest Paper Company, Inc. to expand its presence in the specialized distribution industry.
Estimate Movement
While comparing earnings estimates for the last 30 days, both PepsiCo and FEMSA’s earnings estimates for 2022 increased by a penny. PepsiCo’s earnings are expected to grow 6.4% in 2022 against FEMSA’s decline of 3.6%. Here, PepsiCo has the edge over FEMSA.
Price Performance
PepsiCo’s shares have gained 7.3% in the past year compared with the broader industry’s 6.3% growth. However, FEMSA’s shares have lost 26.1%. Similarly, PepsiCo shares compare favorably with the 9.6% decline recorded by the S&P 500 index, while FEMSA’s shares have lagged the same.
Image Source: Zacks Investment Research
Valuation
PepsiCo has a trailing 12-month price-to-sales (P/S) ratio of 2.93X, which is above the industry’s average of 2.05X, while FEMSA has a lower P/S ratio of 0.81X. However, PepsiCo boasts a Momentum Score of B compared with FEMSA’s Momentum Score of D.
Our Take
Our comparative analysis shows that PepsiCo has the edge over FEMSA in terms of price performance and 2022 earnings growth. The fundamentals of both companies are solid. Also, PepsiCo scores higher on the valuation front, which suggests that there is more upside left for the stock. Meanwhile, FEMSA performs well only on the key metrics side. As the scale is significantly tilted toward PepsiCo, the stock makes a more promising investment proposition.