It’s hard to replace products that people love to consume. Even if those products are not healthy, people tend to reduce their intake but seldom do they completely abstain from them. No, I’m not talking about tobacco or alcohol. Its carbonated beverages that are in focus and the question being asked is, whether the rally of PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) sustainable or not.
A soda pop?
Shares of PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) have appreciated 23% and 14% over the last year, whereas Monster Beverage Corp (NASDAQ:MNST) has lost nearly 16% of its market cap. As a matter of fact, Coca-Cola has been growing organically without any major shift in core strategy. But, PepsiCo has been making strides with its ground breaking “fat fighting soda”. I admit I got carried away, just like the crowd.
Health concerns regarding carbonated beverages have been around for years, and health experts have been discouraging soda openly. A diet coke may not make a person chubby and the revolutionary soda by PepsiCo may even absorb fat, but that does not make these sodas fit for everyday consumption. According to PepsiCo, Inc. (NYSE:PEP), its latest soda contains a fiber called dextrin, which absorbs fat without any side effects. It has been marketing the soda as “Pepsi Special” in Japan, calling it a nutritional beverage.
But, according to doctors, heavy consumption of dextrin causes stomach ache and bloating in a matter of days. I fail to understand why is it being called a “nutritional product” when it does not contain any nutrients. According to this news source, models eat tissue paper to beat hunger and stay in shape, so does that make tissue paper nutritional?
Furthermore, there are weight loss pills that often have severe side effects and are never called nutritional. But somehow, PepsiCo has a self-proclaimed nutritional soda and the Street has been rewarding it for its breakthrough.
As of now, Monster Beverage operates in only 70 countries, while PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) have a geographical presence in over 200 countries. Going by geographical reach, PepsiCo and Coca-Cola are comparable, but Monster Beverage is not. Currently, PepsiCo has a market share of 29.9%, while Coca-Cola enjoys over 41.9% share. If PepsiCo is to surpass Coca-Cola, its fat fighting soda needs to be sold around the globe, but I doubt if that will ever happen.
An impending crash?
Attached below are some key metrics of Monster Beverage, PepsiCo, and Coca-Cola.
| Company | Net Profit Margin | Forward P/E | PEG |
|---|---|---|---|
| Coca-Cola | 18.92% | 17.47x | 2.31x |
| PepsiCo | 9.49% | 16.6x | 2.77x |
| Monster Beverage | 16.5% | 19.73x | 1.48x |
Over the last five years, shares of PepsiCo have under performed The Coca-Cola Company (NYSE:KO), but over the last six months, PepsiCo has been able to deliver twice the returns of Coca-Cola. Sure, PepsiCo has delivered impressive growth, but analysts at UBS believe its fair price should be $75. According to a consensus of 12 analysts following PepsiCo, its fair price should be $81 and at the current price of $80, there isn’t much room to grow.
