No list of top corporate brands is complete without Coca-Cola (KO). Even though it is rated a "strong buy" on the Street, I find better risk/reward - however limited - at its rivals. Coca-Cola has a lower dividend yield than both PepsiCo (PEP) and Dr. Pepper (DPS) at 2.8%.
From a multiples perspective, all three of the soft-drink competitors have little room for expansion. PepsiCo trades at a respective 16.9x and 14.4x past and forward earnings versus corresponding figures of 12.4x and 16.5x for Coca-Cola and 15.7x and 13.3x for Dr. Pepper. All of the firms are relatively safe from a double dip given that the most volatile of the three, Dr. Pepper, is still 30% less volatile than the market.
And on the third quarter earnings call, Dr. Pepper's CEO, Larry Young, noted strong momentum and corporate focus:
"Our teams remain committed to executing our focused strategy. We're building per-capita consumption and gaining distribution in core packages, with 23 cold drink placements - 22,000 cold drink placements and 23,000 new fountain valves year-to-date. We're driving priority brand execution in the cola system with tie-in rates, up double-digit. We're turning around our business in Mexico and seeing margin trend improvement. And we continue to deliver above-category trends in CSDs, teas and shelf-stable juices. We're committed to always delivering value to our customers and ensuring we're investing wisely in this business for long-term sustainable growth.
We're winning with RCI, with increasing levels of activity and engagement and delivering cash productivity savings. And finally, we remain committed to returning excess cash to our shareholders with a view of providing very attractive shareholder returns."
Consensus estimates for Dr. Pepper's EPS forecast are that it will grow by 13.3% to $2.72 in 2011 and then by 7% and 9.6% more in the following two years. Assuming a multiple of 16x and a conservative 2012 EPS of $2.85, the rough intrinsic value of the stock is $45.60, implying 17.8% upside - not enough, in my view, to justify opening a long position.
PepsiCo has its own strength, particularly the market dominance in the Middle East. Third quarter global snack volumes were up 8% while Frito-Lay North American had operating profit growth of 6% following successful pricing decisions. With that said, the company is highly leveraged with net debt standing at roughly one-fourth of market value.
Consensus estimates for PepsiCo's EPS forecast are that it will grow by 6.3% to $4.39 in 2011 and then by 3.9% and 7.7% in the following two years. Assuming a multiple of 16x and a conservative 2012 EPS of $4.49, the rough intrinsic value of the stock is $71.84, implying 9.2% upside. Even if the multiple were to fall to 14.5x and 2012 EPS turns out to be 5% below consensus, the stock would barely fall.
Coca-Cola, on the other hand, has greater downside based just on earnings expectations. Third quarter results were nevertheless strong despite a challenging business environment - it was the sixth straight quarter that objectives were met. In addition, the half-interest investment in Saudi Arabia's Aujan Industries helps increase the competitive pressure on PepsiCo. Again, however, earnings expectations suggest that the company will actually struggle to outperform.
Consensus estimates for Coca-Cola's EPS forecast are that it will grow by 9.5% to $3.82 in 2011 and then by 7.3% and 10.7% more in the following two years. Modeling a CAGR of 9.2% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $57.94, implying 14.1% downside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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