EC Pepsi Continues Distancing Itself From Coca-Cola

PEP reported quarterly results last week, beating expectations and reinforcing the key reasons why we have like the stock. We continue to believe PEP has a clearer and, as of today, brighter future than Coca-Cola (KO). The ongoing trends that drove PEP’s strong quarter suggest that the strategic differences between PEP and KO will only become more important going forward. For these reasons, PEP remains one of our favorite dividend stocks.

Before we get into another PEP vs KO debate, let’s quickly review the points from PEP’s quarter that stood out to us. PEP’s organic sales grew more than 7% (compared to 5% growth last quarter), with strength in both snacks (+10%) and beverages (+5%). Earnings per share, excluding currency effects, grew 14% compared to the prior year’s third quarter.

While both companies are one of the 52 dividend aristocrats, recall that PEP is quite different from KO as it relates to its mix of carbonated beverages (<30% of volume vs 70%+ of KO's volume) and snacks (30-40% of PEP's sales vs 0% for KO). PEP also has 22 brands with sales greater than $1 billion compared to KO's 20 billion-dollar plus brands.

PEP noted that beverage volumes were up 3% in Q3. However, carbonated soft drinks volume was down 1.9%, and non-carbonated beverages saw volumes rise nearly 10%. PEP's CEO stated, "Clearly the big story here is non-carbs and the non-carbs are really what's driving all of the growth in the whole industry…Regarding North American beverages, today more than ever, the portfolio is shifting to non-carbs. Innovation is becoming more fragmented and the life cycle of innovation is being shorter and the trade becoming more and more complex."

Clearly PEP is seeing and responding to the strengthening consumer trend away from carbonated soft drinks and toward "healthier" beverages. While many perceive the beverage industry to be slow-changing, we found PEP's comment that "the life cycle of innovation is being shorter" especially interesting. The CEO's remark on how to analyze the beverage market's growth really drove these points home:

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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