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Pepsi

By:   •  Case Study  •  1,016 Words  •  April 24, 2010  •  998 Views

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Pepsi

while Pepsi recently announced that it will start selling a berry flavored cola, Pepsi Blue, in August. With Vanilla Coke, the company seems to be banking on nostalgia. (John Travolta's character in "Pulp Fiction" ordered a Vanilla Coke at a 50's themed diner, for example.)

Pepsi Blue, on the other hand, seems to be a concerted attempt to reach out to the hipper, younger demographic that drinks Pepsi's Mountain Dew. And embracing that demographic has worked. The launch of Code Red, a cherry-flavored version of Mountain Dew, last year helped Pepsi increase its market share. According to the Beverage Market Corporation, unit volume for all of Pepsi's soda brands (including Diet Pepsi and Mountain Dew for example) increased 1.3 percent in 2001 while volume for Coke's carbonated beverage brands (Diet Coke, Cherry Coke and Sprite among others) declined by .2 percent.

"This is a mistake for Coke. Pepsi is going after the right market. Younger audiences are going to buy more of Pepsi Blue. I don't see any edge in vanilla," says Ted Parrish, co-manager of the Henssler Equity Fund. As of April 30, Pepsi was the fund's second-largest holding. The fund does not own Coke.

Pepsi is not as pricey

Regardless of which soda you like better though, Pepsi seems the better value than Coke right now. Coke is trading at a nearly 20 percent premium to Pepsi based on 2002 P/Es even though the two companies' earnings growth rates are nearly identical. (Pepsi's are actually a shade higher.)

And when you look at revenues, the gap is even more dramatic. Coke is trading at 7 times estimated 2002 sales while Pepsi is trading at 3.5 times 2002 revenue estimates. Both companies are expected to post slight declines in sales this year and an increase of about 4 percent in 2003. Due to this disparity in valuation, Jeff Kanter, an analyst with Prudential Securities, says he has a "buy' rating on Pepsi and "hold" on Coke. Prudential does not do investment banking.

To be sure, Coke is still the market share leader in soft drinks. One of the main reasons the stock has outperformed Pepsi this year was because it reported a better than expected gain in unit volume in the first quarter. And the company has taken steps to cement its carbonated beverage lead as well gain ground in the bottled water market. (Coke and Pepsi both have their own brands of water, Dasani and Aquafina, respectively.)

On Tuesday, Coke announced that it was acquiring the Seagram's line of mixers, tonic, ginger ale and seltzer from Diageo and Pernod Ricard. And last month, Coke entered into an agreement with Group Danone to distribute Evian bottled water in North America.

Some pretzels with that soda?

But while Coke relies solely on beverages for growth, another factor in Pepsi's favor is its diversity. "What attracts me to Pepsi is I have more faith in their ability to grow earnings. Not only are they successful on the beverage side but they are successful with salty snack foods," says Crit Thomas, director of growth equity for National City Investment Management Co., the subadvisor for Armada Funds. As of March 31, Pepsi was the seventh-largest holding in the Armada Tax Managed Equity Fund and the tenth-largest holding in the Armada Equity Growth Fund.

In fact, Pepsi's carbonated beverages are not even the biggest generator of sales and earnings for the company. Pepsi's Frito-Lay brand of snack foods, which include Fritos, Doritos and Rold Gold, accounted for 61.2 percent of revenue and 65.3 percent of operating profits in the first quarter.

Pepsi's soft drink business made up 19

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