Is PepsiCo, Inc. (PEP) Poised for a Bubbling 2013?

One of the best things about the US economy is that it fosters an environment of intense competition, both on the shelves of stores and in the boardrooms. There is probably no better personification of this competitive environment than the centuries-old rivalry between The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). Whether it’s waged by the legions of die-hard fans of these soda empires, or in the office towers where company moves are closely monitored, these two companies have had ups and downs that routinely make front-page news all over the world.

While both stocks have posted increases in share value since 2011, they haven’t really been a part of the “raging bull” environment that we’ve seen so far in the markets. Both companies are flirting with 52-week highs in share price, with Coke at around $42.38 and PepsiCo, Inc. (NYSE:PEP) getting to $82.59, and analysts are predicting both will see lower price-to-earnings ratios by about 18% by 2014. However, these may not be a sign of improving strength. In Coke’s case, a two-year improvement of 24.1% has only just kept pace with the S&P 500 over this time frame, while Pepsi’s 15.8% improvement is lower.

Part of the reason these companies have struggled to keep up with the market trends may have to do with their declines in operating income as well as increasing liabilities. Coke’s equity holdings have dropped to $32.5 billion, according to the company’s 1Q reports. This represents the fourth straight quarter of declining equity holdings, while increasing liabilities by $31.1 billion, mostly in terms of income tax deferral. This has led to a drop in operating income to $2.4 billion after the first quarter of 2013, a roughly $300 million drop from September 2012. This did end a three quarter run of declines, but still results in a 15% net income drop year-over-year due to the increased liabilities, even though the operating income drop is only 4% over the same time frame.

As for PepsiCo, Inc. (NYSE:PEP), the profit decline is similar to Coke’s, though the company has been better able to boost equity holdings to limit liability holdings. Compared to September 2012, Pepsi’s operating income has fallen by $1.1 billion. This could be due to the nearly 35% drop in gross profits compared to the last quarter of 2012, resulting in operating and net income decreases. Nevertheless, things may still be looking up for Pepsi, as unlike Coke, they have boosted their equity holdings to $22.5 billion, which is only a $100 million increase from the last quarter, but still represents a full year of equity growth, whereas Coke has seen three straight quarters of decline.

The reasons for the profitability downturn seems to be PepsiCo, Inc. (NYSE:PEP)’s cost increases. According to the company’s latest filings, marketing and administrative expenses have risen by 6%, and interest payments on debt have climbed by 8% year-over-year. This could be more of an investment on Pepsi’s part, and not indicative of a long-term problem, which should show up in future earnings reports. They do have one thing they can boast about though: 41 straight years of dividend increases for shareholders. This shows reliability and stability for one of America’s most iconic companies, even if gross profits took a beating earlier this year.

Even with PepsiCo, Inc. (NYSE:PEP)’s equity stability and consistent dividend returns, it’s still underperforming vs. the S&P 500, while Coke is more in line with the index, though neither are particularly good investments right now for those that want to see big, fast returns on investment. If I had to recommend one of these companies, Pepsi looks like the better long-term bet right now because Coke has taken on more debt and liabilities this past year, which has hurt the company’s equity figures. Pepsi’s boost in marketing investment could be a sign of a long-term push for the company, which appears necessary given a huge gross profit drop last quarter, though the effect on net and operating incomes was minimal. Still, you can’t beat a 41 year run of dividend increases, and if the profit decline is only due to added investment, rather than added debts and liabilities, PepsiCo, Inc. (NYSE:PEP) can be a safe investment opportunity, even though it will take a lot to outperform the S&P, and gains will be on the low side, making it a stable stock, but by no means exciting. Coke will have some problems in the future if it doesn’t bring its liabilities down, especially with deferred debt payments.

It will be an interesting earnings season for these two companies after lackluster years for both companies. Will Pepsi get more fizz as Coke goes flat? That is the question.

John McKenna has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo.

The article Is Pepsi Poised for a Bubbling 2013? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.