Investment Analysis: Pepsi Vs Coca Cola

The Coca Cola Company

Company History

The inception of Coca Cola Company is dated back to 1896, from the curiosity of an Atlanta pharmacist, (‘Coca‐Cola Co ‘, 2008). Dr. John S Pemberton together with Frank M. Robinson formed the company and together they drafted a transcript trademark for the company that is still used to date. The Company is now world’s leading producer of beverages with branches virtually in every country in the world. Since its foundation in 1896, the company has been a market leader in beverage manufacture and the company manufactures over 500 brands of products that are positioned geographically to meet customer demands, (Coca Cola, 2014). The company is under stewardship of Muhtar Kent, chairperson of the board and the company chief executive officer.

Company Products, Major Suppliers and its Clients

Coca Cola Company produces a number of products under its brand name and these products vary from region to region. The company has a number of portfolio products that it produces and these include mineral water, sport drinks, energy drinks and carbonated beverages among other products, (Hillman, 2009). The company products cover over 580 million across 28 countries in the world, making it the single largest manufacturer of alcohol-free beverages.

The major consumers of the Coca Cola products include sportspeople, children, and older people of all ages. In fact, the company products cover all market segments. However, majority of the company sales come from the beverages where it accounts for over 63% (2013 statistics). The company major suppliers includes suppliers of raw materials that include fruit juice, suppliers of machines, bottles as we as its bottling partners. The company products include Dasani, coke, Fanta, sprite, Krest, and coke zero among other beverages.

Pepsi Inc.

Company History

Pepsi Inc. is a food, snack and beverage company whose invention dates back to 1893 due to work of Caleb Davis Bradham. Caleb Davis Bradham worked as a part-time pharmacist in a nearby store in North Carolina. He would soon open his own drug store where he invented what came to be Pepsi Company, (Pepsico.com, 2014). The company celebrated its 100th anniversary in 1998. The company introduced a new and revolutionary campaign dubbed GeneratioNex in 1997 that sought to challenge new norms and way of doing things.

The company leadership boasts of talented and strong individuals. The company leadership consists of president, vice-presidents and CEO’s of various regions in the world. The company president is Zein Abdalla with various CEO’S that include Albert P Carey, CEO Americas beverages among others. The company leadership is guided by company mission which is “performance with purpose”, (Gottlieb, 2010).

Company Products, Clients and Major Suppliers

  According to statistical analysis of 2013, the major contributors of the revenue of Pepsi cola originated from foods (63%) and beverages (37%), (PepsiCo, 2014). The foods produced by the company include gamesa, sabritas, chips and cheese flavored snacks among other foods. The company also produces beverages that include Mountain Dew, Pepsi, 7 Up, Gatorade, SoBe Lifewater, Tricana juice and Aquafina among other many beverages. The company suppliers include the suppliers of its raw materials that are mainly from agricultural produce and the suppliers of machinery.

In addition to the concentrates that the company uses, it also purchases syrup containers, boxes for packaging its cans, bottles, sweeteners and glass. Finally, the company purchases its potatoes, milk, apples and oats from various farms in the world. The company has a special team in Europe that is responsible for monitoring and managing the company’s agricultural business, (Elmore, 2013).

Financial Analysis of the two Companies

Profitability Ratios

Investors look at how the company is efficient in converting its operations into profits, a fact that is only possible through analysis of company operations using its profitability ratios. Profits constitute the most followed metrics in business, investment and finance, (Ramsden, 1998). Profits are one of the key drivers of stock in the business world. There are many profitability ratios that investors can look into in order to determine on whether to invest in a company. Some of the common profitability ratios are current ratio, quick ratio, return on equity, and profit margin and debt-to-equity ratio among other types of ratios, (Magoon, 2008). This report shall look at profitability analysis of Coca Cola and Pepsi based on current ratio, debts to assets and debt to equity ratios.

 

The current ratios from the two companies shows a steady growth from 2011 – 2013, however, in 2011 Pepsi had more liabilities compared to Coca Cola in the same year. In addition, Coca Cola Company has more assets than Pepsi since it has higher current ratios compared to those by Pepsi in same years, except in 2013 where Coca Cola had 1.13 and Pepsi had 1.24. For an investor wishing to invest in the two companies, Coca Cola would be more profitable since it had shown steady growth and most of the company investments are held in assets.

 

Debts to Assets Ratios for the two Companies

Debt to asset ratio for any company is a ratio used to evaluate the assets funded by the creditors and it is a useful tool in determining the shorter solvency of a company, (Bull, 2008). This is calculated by dividing total liabilities by total assets, Debts to Assets =Liabilities/ Assets, (Bull, 2008).

From the calculations in the table 2 above, the two companies show a difference in the debt rations. Coca Cola is healthier since less of the company assets are financed by the creditors to the company; this is shown from the fact that the ratios are smaller compared to Pepsi whose assets receive most of its finances from the company creditors than in Coca Cola Company.

In Coca-Cola Company for instance, in 2013, the creditors funded 63% and shareholders funded 37%, for Pepsi in the same year, creditors funded 68% and shareholders funded 32%.  Given that, Assets = Liabilities + Shareholders Equity, For Coca Cola, $1.00 = $0.63 + $0.37, this means in the year 2013, for every dollar of the asset, the shareholders had 37cents, while in Pepsi, for every asset of the company the shareholders had 32 cents. This means that the two companies are highly leveraged although it is profitable to invest in Coca Cola than Pepsi.

Debt to Equity Ratios

Debt to equity ratio is a profitability ratio that shows the variation of debts to assets. The debt to equity ratio is in fact a tool used to assess the balance between the liabilities and the equity of the shareholders that is employed to fund assets, (Ramsden, 1998). It is obtained by dividing total liabilities by total shareholder’s equity. In the calculations in the table 3 above, Pepsi had $2.52 in liabilities for each dollar in the shareholders equity, which is higher than that of Coca Cola that had $1.52 in liabilities for each dollar in the shareholder’s equity.

Although the debt to equity for Pepsi shows a decrease from 2011 t0 2013, its figure remains high than that of Coca Cola which kept rising in the same period. However, the values remain higher than the industry average of 0.94 to 1 in the same period.

News Events of the Two Companies from 2012 to Present

The major news and events in the two companies centers mainly on acquisition of more market share and generation of more sales by the end of 2014. The two companies introduced two new brands of beverages. Pepsi introduced Pepsi Next while Coca Cola introduced its own called coke zero, (Ajc.com, 2014).

However, the two companies intend to market its new brands in the market through different sponsorship deals in the market. The path that Pepsi has taken is to invest even more in the super bowl, which targets over 180million Americans viewers. In doing so, the company hopes to sale even more bottles of Pepsi Next. In contrast, Coca Cola introduced its Coke Zero, a new sugar free brand that it intends to create more market awareness to its consumers. Unlike Pepsi, Coca Cola invested both in the Winter Olympics as well as Super bowl. In addition, Coca Cola has acquired stakes in Monster Beverage Company, buying over 16% of the stakes in the company for over $2.15 billion, (Topics.nytimes.com, 2014).

Analysis of the Income Statements of the two Companies

The income statement is a representation of the financial operations of a firm over a given period, detailing the revenues generated in that period. In addition, income statement gives the costs that were incurred in generating the revenues, (Peterson Drake & Fabozzi, 2006).

The net revenues for Coca Cola increased steadily from 2011 to 2012, decreasing slightly in 2011. In 2011, the net operating revenues were $46,542,000,000 in 2012 was $48,017,000,000 decreasing to $46, 854,000,000 in 2013, (Stock Analysis on Net, 2014). However, the net revenue for Pepsi decreased from 2011 to 2012 and increased in 2013. The revenues for the years 2011 – 2013 are $66,504,000,000, $65,492,000,000 and $66,415,000,000.

It is clear from the analysis above that Pepsi has a higher net income than Coca Cola although Coca Cola seems in good financial shape than Pepsi. Therefore, in order to boost its revenue base, the company should increase its product base through acquisitions and development of other product lines.

Analysis of the Balance Sheets of the Two Companies

Vertical Analysis

  In vertical analysis, the consolidated balance sheet of the two companies shall be used to analyze the growth of the two companies. In this study, the percentage of the total assets for the two companies shall be used as base amounts. The current assets of Pepsi in 2013 equal $22,203,000,000 and this equals 28.7% of the total assets. In the year 2012, the current assets equal $18,720,000,000, in 2011, the value is $17,441,000,000, and this translates to 25.0% and 23.9% of the total assets respectively, (Coca-Cola, 2014). This shows that the company witnessed steady growth in its assets value from 2011 to 2013.

Similarly, the current assets of Coca Cola in 2011 were $25,497,000,000, which equals to 31.9% of the total assets in the same year. In the year 2012, the company current assets equal $30,328,000,000, which equal to 35.2% of the total assets in the same year. Finally, in 2013, Coca Cola had current assets of $31,304,000,000 and this accounted for 34.8% of the company total assets for 2013. This shows that Coca Cola had a steady growth in its current assets from 2011- 2012, however, the growth in the assets dropped in 2013. The company assets grew from 31.9% in 2011 to 35.2% in 2012, however, the figure dropped to 34.8% in 2013. The drop in the growth of the current assets could not have been felt had the total liabilities dropped in the same period.

In 2011, the current liabilities for Pepsi were $18,154,000,000, 34.8% of total liabilities. In 2012 and 2013, the values were $17,089,000,000 and $17,839,000,000 respectively. This translated to 32.7% and 33.6% of the total liabilities respectively for the respective years. The total liabilities of Pepsi dropped in 2012 by 2.1%, however, the company liabilities rose in 2013 by 0.9%. The increase in the company liabilities can be attributed to the reduced growth of assets for the company in the same year.

For the same period, the current liabilities for Coca Cola were $24,283,000,000 in 2011, $27,821,000,000 in 2012 and $27,811,000,000 in 2013, (Coca-Cola, 2014). These translate to 50.2%, 52.1% and 48.95% of the total liabilities respectively. These show that the current liabilities of Coca Cola dropped steadily from 2011 to 2013. In the same period, the assets of Coca Cola dropped by 1.6%, the company liabilities dropped 3.15%. This data analysis shows that Coke’s shares of equity are worth than those of Pepsi due to their profitability. In to make its balance sheet attractive to investors, Pepsi should reduce the amount of liabilities and increase stockholder’s equity.

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