Interactive Investor

Two famous American stocks: buy, hold or sell?

16th February 2022 08:41

Rodney Hobson from interactive investor

Sales for these two companies have been fizzing, but the big worry is inflation. Our overseas investing expert analyses two global brands.

Cola sales have been fizzing during the festive season. What a pity that inflation is keeping a cap on expectations. Even so, the can is half full rather than half empty.

Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) have both managed to make higher prices stick so far, leading to higher revenue than expected at both companies in the three months to the end of December.

Revenue at Coca-Cola, the world’s largest drinks company, rose 10% to $9.5 billion in the final quarter of 2021, as drinks consumed outside people’s own homes rose strongly and the company was able to draw on its experience during the pandemic to manage the business more efficiently.

This completed a year in which volumes grew steadily quarter by quarter. The improvement was patchy but was spread across all markets so that total volumes for the full year were higher than in 2019, thus surpassing pre-pandemic levels.

Net income leapt 66% to $2.4 billion. The downside was a slippage in operating margins from 27.3% to 22.1% as supply chain constraints and rising wages pushed costs higher, as in so many sectors.

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

PepsiCo managed a greater percentage rise in revenue in the final quarter, 12.4% to $25.25 billion, but suffered a 28.6% fall in net income to $1.32 billion as it was hit by a sharper rise in general costs and in marketing and administrative expenses than Coca-Cola. 

PepsiCo’s sales accelerated throughout 2021 compared with the pandemic-affected 2020. For 2021 overall, revenue increased 12.9% to $79.5 billion and net income rose 7% to $7.7 billion.

The big worry is inflation – and with energy, commodities and distribution all costing more, hopes that the spike will be temporary are looking increasingly overoptimistic as inflation rates hit the highest level for 40 years. The US consumer price index had stood at 7% in December, which was bad enough, so the 7.5% level recorded in January was a nasty shock.

The debate now is not whether the Federal Reserve will raise interest rates next month but by how much.

Neither company is downcast at this scenario and both have strong brands. Coca-Cola expects organic revenue growth around 7% to 8% this year, although it accepts that price inflation on the commodities it buys will be in the mid-single digits, wiping out some of the benefits. Even so, it forecasts that earnings per share will improve by a further 8-10%.

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

PepsiCo expects some slowdown as the distortions of the pandemic work their way out of year-by-year comparisons, with 6% revenue growth this year, which is still at the high-end of its long-term target range. An 8% increase in earnings per share is forecast.

As a show of confidence, it has raised its full-year dividend by 7% to $4.60 per share from June, and is starting a $10 billion share buyback programme to run over the next four years.

Coca-Cola shares topped $60 for the first time two years ago before falling off a cliff as the realities of Covid-19 struck home. They are now back near their all-time best at $61, where the yield is 2.77%.

PepsiCo has had a more steady upward climb to reach $175 compared with $100 nearly four years ago, though it too is just off its recent best at $166. The yield is currently 2.55%.

Hobson’s choice: long-term shareholders in both companies have had a good ride and recent weakness is no cause for panic. Coca-Cola looks fully valued for now but rate a buy if they slip below $60 again. I previously recommended the company on two separate occasions below $50. The case for PepsiCo is less clear-cut but if the shares slip below $154, then buy as I suggested in October.

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

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