Coca-Cola Co., a nonalcoholic beverage company is traded on NYSE under the symbol of KO and I believe it must be AVOIDED.
Coca-Cola Co. is a big player in the business of manufacturing, distribution, and marketing of nonalcoholic beverage concentrates and syrups. In the absolute sense, KO has strong fundamentals. Coca-Cola Co. recently reported gross profit margin of ~ 66 % (greater than the industrial average) and quarterly revenue growth of ~ 7% (on par with the industrial average). Though Coca-Cola does clear the first pass of being a good investment choice, one must look beyond its financials. Besides, companies function in a competitive environment and this makes the complete analysis of the industry important and necessary.
Paying closer attention to other players in the soft drink business such as PepsiCo Inc. (PEP) and Jones Soda Co. (JSDA) changes the entire investment strategy.
Fundamentally, I believe PEP is the strongest. One parameter all investors care about the most is earnings per share (EPS). Greater EPS implies more value being returned to shareholders. EPS for PEP is 3.34, which is greater than the industrial average (0.9) as well as EPS for KO (2.16) and JSDA (0.186). Another plus for Pepsi is its efficient management. Return on equity (ROE), indicative of business efficiency, is greatest for PEP (~ 38%) compared to KO (~ 30%) and JSDA (~ 19%). Also, Pepsi is the cheapest in the group. The price to earnings ratio (P/E) for PEP is 18.79, lower than that of KO (21.89) and JSDA (107.63). Another fairvalue indicator, the PEG ratio for PEP is 1.71, which is lower than that of KO and JSDA. Both KO and JSDA have PEG ratio > 2 (KO PEG = 2.3 and JSDA PEG = 2.84), which means that they are currently traded at a premium twice its expected growth.
Other than better fundamentals I also like Pepsi because of its bigger product line compared to that of KO or JSDA. In addition to carbonated, noncarbonated and sports drinks, PepsiCo also offers a wide variety of chips and ready-to-eat cereals.
Though Jones Soda is fundamentally not as strong as PEP or KO and is the most expensive in the lot (with a triple digit P/E ratio), I still believe it is a good investment choice. I like Jones Soda because it is a relatively new company (JSDA was founded in 1986 and is about 100 years younger than the two Cola giants). And, where the multinationals PEP and KO have already penetrated most of the markets, Jones Soda predominantly serves Northern America (United States and Canada), and thus has high potential for growth and expansion worldwide. Also, I believe Jones Soda Co. is doing a great job marketing its products as "healthy". JSDA uses pure cane sugar instead of high fructose syrup (predominantly used throughout the industry), and thus has been able to lure the increasingly health conscious market. I believe this sets Jones Soda apart from its competitors and in effect gives it an edge over others in the industry. As a result, the market share for Jones Soda is increasing. JSDA has been able to increase its gross profit margin from 34.6% in 2005 to 39.2 % in 2006. Also, its EPS increased by 217% in 2006 compared to 2005.
In addition to the fundamental analysis, basic technical analysis also favors PEP and JSDA over KO. For the last 5 years Coca-Cola stock has moved sideways losing more than 10% in value. In the same period JSDA has gained more than 2000% and PEP has gained more than 20%. Basic charting shows that PEP correlates very well with the S&P 500 index and thus is a great defensive stock, while JSDA has the got the momentum.
Bottom line, Coca-Cola has lost its mojo and in my opinion investors should switch from KO to the best in the class. I believe both PEP (the best defensive soft-drink stock) and JSDA (the soft-drink stock with high growth potential) will beat KO in coming years.
Coca-Cola Co. is a big player in the business of manufacturing, distribution, and marketing of nonalcoholic beverage concentrates and syrups. In the absolute sense, KO has strong fundamentals. Coca-Cola Co. recently reported gross profit margin of ~ 66 % (greater than the industrial average) and quarterly revenue growth of ~ 7% (on par with the industrial average). Though Coca-Cola does clear the first pass of being a good investment choice, one must look beyond its financials. Besides, companies function in a competitive environment and this makes the complete analysis of the industry important and necessary.
Paying closer attention to other players in the soft drink business such as PepsiCo Inc. (PEP) and Jones Soda Co. (JSDA) changes the entire investment strategy.
Fundamentally, I believe PEP is the strongest. One parameter all investors care about the most is earnings per share (EPS). Greater EPS implies more value being returned to shareholders. EPS for PEP is 3.34, which is greater than the industrial average (0.9) as well as EPS for KO (2.16) and JSDA (0.186). Another plus for Pepsi is its efficient management. Return on equity (ROE), indicative of business efficiency, is greatest for PEP (~ 38%) compared to KO (~ 30%) and JSDA (~ 19%). Also, Pepsi is the cheapest in the group. The price to earnings ratio (P/E) for PEP is 18.79, lower than that of KO (21.89) and JSDA (107.63). Another fairvalue indicator, the PEG ratio for PEP is 1.71, which is lower than that of KO and JSDA. Both KO and JSDA have PEG ratio > 2 (KO PEG = 2.3 and JSDA PEG = 2.84), which means that they are currently traded at a premium twice its expected growth.
Other than better fundamentals I also like Pepsi because of its bigger product line compared to that of KO or JSDA. In addition to carbonated, noncarbonated and sports drinks, PepsiCo also offers a wide variety of chips and ready-to-eat cereals.
Though Jones Soda is fundamentally not as strong as PEP or KO and is the most expensive in the lot (with a triple digit P/E ratio), I still believe it is a good investment choice. I like Jones Soda because it is a relatively new company (JSDA was founded in 1986 and is about 100 years younger than the two Cola giants). And, where the multinationals PEP and KO have already penetrated most of the markets, Jones Soda predominantly serves Northern America (United States and Canada), and thus has high potential for growth and expansion worldwide. Also, I believe Jones Soda Co. is doing a great job marketing its products as "healthy". JSDA uses pure cane sugar instead of high fructose syrup (predominantly used throughout the industry), and thus has been able to lure the increasingly health conscious market. I believe this sets Jones Soda apart from its competitors and in effect gives it an edge over others in the industry. As a result, the market share for Jones Soda is increasing. JSDA has been able to increase its gross profit margin from 34.6% in 2005 to 39.2 % in 2006. Also, its EPS increased by 217% in 2006 compared to 2005.
In addition to the fundamental analysis, basic technical analysis also favors PEP and JSDA over KO. For the last 5 years Coca-Cola stock has moved sideways losing more than 10% in value. In the same period JSDA has gained more than 2000% and PEP has gained more than 20%. Basic charting shows that PEP correlates very well with the S&P 500 index and thus is a great defensive stock, while JSDA has the got the momentum.
Bottom line, Coca-Cola has lost its mojo and in my opinion investors should switch from KO to the best in the class. I believe both PEP (the best defensive soft-drink stock) and JSDA (the soft-drink stock with high growth potential) will beat KO in coming years.
3 comments:
I didn't know Pepsi sold ready to eat cereals
Hi Devyani
Nice blog.
Can you invest for me too? Is the FREE LUNCH offer still valid?
Thanks :-)
Please feel free to email me at bedekard@gmail.com and we can discuss more about you getting invested.
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