Coca-Cola (KO)
On Tuesday, Coca-Cola (click ticker for report: ) announced decent third-quarter results that showed global volume expansion and share gains in North America for both the sparkling and still-beverage categories. Though reported revenue declined 3% in the period, revenue – adjusted for structural changes and currency – advanced 4% in the quarter. Likewise, comparable currency-neutral operating income jumped 8%, driving comparable earnings per share growth of 4%. Free cash flow generation of $6.1 billion year-to-date represents 17% of sales.
Coca-Cola Americas grew volume 1% in both the quarter and year to date, with North America volume up 2% and Latin America volume even in the quarter. Coca-Cola International grew volume 3% in both the quarter and year to date, with third quarter Pacific volume up 5%, Eurasia and Africa volume up 4%, and Europe volume down 1%. The Company reported solid volume growth in the quarter in key developed markets, including Germany (+3%), the Northwest Europe and Nordics business unit (+3%), and North America (+2%). (Volumes in China and India also performed well, advancing 9% and 6% on a year-over-year basis, respectively.) Source: KO earnings press release.
We continue to be particularly impressed with the volume performance of brand Coca-Cola. The pace of volume growth in such diverse markets as Thailand (up 27%), India (up 22%), Russia (up 11%), the Philippines (up 9%), and Germany (up 8%) is remarkable even for smaller, “less-mature” brands. Sprite volume advanced 3% in the period, while worldwide still beverage volume jumped by a similar pace (cycling 10% expansion). Energy drinks volume advanced 4%, while Dasani propelled 5% volume growth in packaged water volume.
Pepsi (PEP)
Pepsi (click ticker for report: ) reported solid third-quarter results Wednesday as strength in its snacks business offset weakness in beverage volumes. Organic revenue advanced 3.3% in the period, driving core constant currency operating profit and earnings per share expansion of roughly 3% and 5%, respectively. Though the company is on track to achieve its 7% core constant currency earnings per share growth guidance for 2013, the rate of third-quarter expansion was below target. Still, we think a high-single-digit earnings per share trajectory should be relatively easy to accomplish given the firm’s organic revenue trends and share repurchase program. Free cash flow generation of $5.2 billion year-to-date represents 11% of sales.
PepsiCo Americas Foods organic revenue grew 7 percent in the quarter driven by mid-single-digit organic revenue growth at Frito-Lay North America (FLNA) and double-digit organic revenue growth in Latin America Foods (LAF). Reported net revenue increased 5 percent in the quarter driven by mid-single-digit net revenue growth at Frito-Lay North America and high-single-digit net revenue growth at Latin America Foods. Source: PEP earnings press release.
Strength in the firm’s snacks business (PAF) continues to offset weakness in PepsiCo Americas Beverages (PAB), which experienced a 1.5% decline in organic revenue led by a 4% fall in organic volume (shown below). Though management pointed to a seemingly one-time negative impact of concentrate shipment timing, the growth rate at PAB was disappointing relative to Coca-Cola’s volume performance in North America and across the globe.
Image Source: Pepsi
Valuentum’s Take
It’s clear to us the stronger cash-generator between Coca-Cola and Pepsi is the former, on the basis of free cash flow relative to revenue. Coca-Cola’s $17.3 billion in cash on its balance sheet compares to $14.2 billion in long-term debt, while Pepsi’s $9.6 billion in cash compares to more than $24 billion in long-term debt obligations. This significant difference in financial health is apparent in Coca-Cola’s Valuentum Dividend Cushion score of 1.7 and Pepsi’s 1.1, the latter very close to parity and weighed down by a massive debt load.
Coca-Cola’s operating-profit and beverage volume performance in the quarter was also better than that of Pepsi. Though Pepsi does have an activist investor involved in the form of Nelson Peltz and a more diversified presence via its snacks business, which should mitigate some risk regarding consumer backlash against the high-sugar content in sodas, no matter how you slice it or dice it Coca-Cola’s cash-flow performance, financial health, and recent trends are hands down better than Pepsi’s.
We prefer Coca-Cola’s dividend over Pepsi’s, and we think Pepsi’s shares are starting to get a bit rich. We think Coca-Cola is the better idea relative to Pepsi. Still, we’re not compelled to own either in our actively-managed portfolios.