Interactive Investor

Recent weakness is signal to buy either of these two stocks

Despite delivering solid growth and upgrading forecasts, these fierce rivals have both underperformed the wider stock market this year. That makes no sense, says investing expert Rodney Hobson who names his favourite of the two.  

6th December 2023 09:21

Rodney Hobson from interactive investor

Rival fizzy drinks makers Coca-Cola Co (NYSE:KO) and PepsiCo Inc (NASDAQ:PEP) have raised profits guidance this year after producing encouraging quarterly results, yet their share prices have tailed off lately on overblown fears surrounding health issues. This could be a time to buy.

Coca-Cola, based in Atlanta, Georgia, reported at the end of October that revenue rose by 8% year-on-year in the third quarter to 29 September, reaching almost $12 billion. Net income fared even better, up 9.2% to nearly $3.1 billion.

This “overall solid quarter,” to use the company’s own justified description, prompted chair and chief executive James Quincey to raise his organic revenue forecast for the full year to 10-11% from 8-9% previously. Counted in constant currencies, earnings per share growth will come in at 13-14%, up from the already commendable earlier forecast of 9-11%.

As nearly 10 months of the year had been completed by the time he issued the revised forecast, one must assume that barring an unlikely catastrophic Christmas the prognosis will be pretty much spot on. The upward revision should allay investors’ fears that earnings will be squeezed as worries grow over obesity and unhealthy eating habits.

It is not just the Coke brand that makes this group the largest producer of soft drinks in the world. Its portfolio includes other top brands such as Sprite, Fanta, Schweppes and Innocent Smoothies. It is hard to see more than one turning sour at the same time, especially as Coca-Cola has taken steps to reduce the sugar and calories in its drinks.

The past few months has brought a similar story at Pepsi, where revenue rose 6.7% to $23.5 billion and net income by 14% to $3.1 billion in the three months to 9 September. While revenue expectations for the full year were left at 10%, earnings per share were indicated to come in 13% higher rather than earlier expectations of 12%.

This followed a particularly strong second quarter for Pepsi when it bounced back from a disappointing first three months, and augurs well for a successful start to 2024. However, Pepsi is more susceptible to criticism of encouraging unhealthy lifestyles as it dominates the global savoury snacks market.

Life should start to get a little easier for these two rivals after they have fared well in tough trading conditions, including rising costs. Both have managed to raise prices without affecting sales. Both will benefit from a slight weakening of the US dollar as the round of interest rates making the currency more attractive to foreign exchange traders comes to an end. This will boost sales and profit figures when translated into dollars.

Apart from a slump to $108 in the general stock market crash in early 2020, Pepsi shares rose steadily for about four years to reach $198 in May this year. They have tailed off to just below $170, where the price/earnings (PE) ratio is banking on continued growth at 28.2 but the yield compensates at 2.9%.

Source: interactive investor. Past performance is not a guide to future performance.

Coca-Cola shares suffered an even more dramatic slump in the first months of 2020, hitting $28, but their performance over the past couple of years has been more subdued than at Pepsi.  A peak of $65 was reached in May last year but the share price is back below the pre-pandemic peak at $59. The PE at 23.7 is a little less demanding than Pepsi’s and the yield is a little higher at 3.1%.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: I rate both shares as a buy after recent weakness, but Coca-Cola is surely the better option with its superior PE and yield, especially as it has raised its dividend every year for 60 years, a trend that looks extremely likely to continue.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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