Which drink stock is a better buy?
The Coca-Cola Company (KO) and Keurig Dr Pepper Inc. (KDP) are two major players in the soft drink industry. KO owns or licenses and markets beverage concentrates, brands of finished sparkling soft drinks, energy drinks, dairy products and syrups to fountain retailers such as restaurants and convenience stores. It operates through independent bottling partners, distributors, wholesalers, retailers and bottling and distribution operators. In comparison, KDP manufactures and distributes soft drinks, juices, teas, blenders, water and other beverages to retailers, bottlers and distributors, restaurants, hotel chains, office coffee distributors and end consumers. . It operates through Coffee Systems; Packaged drinks; Drink concentrates; and the Latin American Beverages segments.
As restaurants and tourist spots experience an increase in foot traffic, now that travel restrictions are gradually eased, the non-alcoholic beverage industry is experiencing a growing demand for healthy, refreshing, ready-to-drink beverages. Fountain retailers and e-commerce platforms are experiencing an increasing demand for these drinks. The non-alcoholic beverage market is expected to grow at a CAGR of 8.2% to reach $ 1.73 trillion by 2028. Additionally, being part of the consumer defensive industry, shares of beverage companies attract growing investor attention amid market volatility. Thus, KO and KDP should benefit from it.
While KDP has gained 16.5% in the past year, KO has jumped 7.4%. In terms of performance over the past nine months, KDP is a winner with a 3.6% gain over KO’s marginal return. But which of these titles is the best choice now? Let’s find out.
On April 19, 2021, KO and Coca-Cola Beverages Africa (CCBA) announced their intention to list CCBA as a company listed on the Amsterdam and Johannesburg stock exchanges. As Africa becomes a key growth market for KO, this IPO is expected to allow CCBA to operate as an independent, managed and domiciled business and to acquire a broad base of long-term investors for the continued development of the company.
On July 27, 2021, KDP introduced BrewID, a next-generation technology platform designed to deliver perfectly personalized, rich and full-bodied coffee to consumers, just the way they like it. Launched with KDP’s K-Supreme Plus SMART brewer, BrewID technology recognizes the specific brand and roast of the K-Cup pod and automatically customizes brewing settings. KDP expects strong demand for this product in the coming months.
Recent financial results
KO’s non-GAAP net operating income for its fiscal second quarter, which ended July 2, 2021, increased 41.1% year-on-year to $ 10.13 billion. The company’s non-GAAP gross profit was $ 6.22 billion, a 50.4% year-over-year improvement. Its non-GAAP operating profit was $ 3.21 billion, up 49% from the prior year period. While its non-GAAP net income increased 61.5% year-over-year to $ 2.93 billion, its non-GAAP EPS increased 61.9% to $ 0.68. The company had $ 9.19 billion in cash and cash equivalents as of July 2, 2021.
For its fiscal second quarter ended June 30, 2021, KDP’s net revenue increased 9.6% year-on-year to $ 3.14 billion. The company’s adjusted gross profit was $ 1.77 billion, up 10.1% from the same period a year earlier. Its adjusted operating profit was $ 839 million, an 8.3% year-over-year improvement. KDP’s adjusted net profit of $ 538 million for the quarter represents an increase of 14.7% over the prior year period. Its adjusted EPS rose 15.2% year-on-year to $ 0.38. The company had cash and cash equivalents of $ 167 million as of June 30, 2021.
Expected financial performance
Analysts expect KO’s EPS to grow 5.5% year-on-year in the current quarter ending September 30, 2021, 15.9% for the current year, and 7.5% % next year. Its revenue is expected to grow 13.2% in the current quarter ending September 30, 2021, 15% for the current year, and 5.7% next year. Analysts expect the stock’s EPS to rise at a rate of 10.1% per year over the next five years.
In comparison, analysts expect KDP’s EPS to grow 12.8% year-on-year in the current quarter ending September 30, 2021, 14.3% for the current year, and 8.1% next year. Its revenue is expected to grow 4.8% in the current quarter ending September 30, 2021, 7.3% for the current year, and 4.1% next year. The stock’s EPS is expected to grow at a rate of 9.5% per year over the next five years.
In terms of the non-GAAP forward PEG, KO is currently trading at 3.10x, which is 55% higher than KDP’s 2x. In terms of EV / forward sales, KO’s 6.86x is 39.4% higher than KDP’s 4.92x.
KO’s revenue over the past 12 months is almost three times the revenue generated by KDP. KO is also more profitable, with an EBITDA margin of 35.7% versus 31.9% for KDP.
In addition, the ROE, ROA and ROTC values of KO of 37.3%, 7.8% and 10.4%, respectively, compare favorably with the values of 7%, 4% and 5.2% of KDP, respectively.
While KDP has an overall rating of C, which translates to a neutral rating in our proprietary POWR rating system, KO has an overall rating of B, which equates to a buy rating. POWR scores are calculated taking into account 118 different factors, each weighted to an optimal degree.
KO and KDP both have a B rating for stability, which is their lower volatility than the broader market. KO has a beta of 0.64, while KDP’s beta is 0.63.
KO has a B grade for quality, which is consistent with its industry-superior profitability ratios. The 12-month KO 40.7% common stock return is 251.7% higher than the industry average of 11.6%. However, KDP’s C rating for quality is in line with its lower profitability ratios than the industry. The last 12-month return on KDP common stock of 7% is 39.7% lower than the industry average of 11.6%.
Of the 38 B-rated beverage industry stocks, KDP is ranked 21st, while KO is ranked 13th.
Beyond what we have stated above, our POWR rating system also rated KO and KDP for growth, value, momentum and sentiment.
Get all KDP reviews here. Also click here to see additional knockout notes.
The growing demand for soft drinks with the easing of restrictions is expected to benefit both KO and KDP. However, relatively higher profitability makes KO a better buy here.
Our research shows that the odds of success increase when betting on stocks with an overall buy or strong buy POWR rating. Click here to access the top rated stocks in the beverage industry.
KO shares were trading at $ 53.16 a share on Tuesday afternoon, up $ 0.17 (+ 0.32%). Year-to-date, KO is down -0.78%, compared to a 17.30% increase in the benchmark S&P 500 over the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a particular interest in finding market inefficiencies. She is passionate about educating investors so that they can be successful on the stock market. Following…