Pepsi's Challenge: Battling A Stronger Coca-Cola
PepsiCo has a new challenge: battling a stronger Coca-Cola.
In recent years, investors have tended to favor Pepsi over Coke, but tastes could be changing.
Over the past five years, Pepsi has shown itself to be a faster growing company, with its earnings growth rate outpacing that of its rival in Atlanta. The earnings performance, which has consistently met or topped analysts' estimates has been catalyst for the company's stock.
Pepsi has benefited from its diverse portfolio, which includes Pepsi-Cola, Gatorade sports drinks, Aquafina water, and Frito-Lay snacks, and its strong management team, which has been quick to capitalize on consumer trends such as an increased appetite for healthier snacks and beverages.
At the moment, however, Pepsi's earnings growth rate may be about to slow. Looking at Wall Street's estimates for 2007 earnings, Pepsi is expected to post its lowest level of year-over-year growth in 15 years. This trend could make it difficult for investors to drum new excitement about the company’s prospects.
By contrast, Coca-Cola has shown progress since Neville Isdell was named to the company's top job in 2004. Most notably, earnings growth has become more consistent, even in the face of challenges in key markets such as the U.S. and Japan.
Isdell also admitted Coke failed to respond to market demands for new beverages, and he has given the company the freedom to try new ideas with the understanding that some will fail and some will succeed. This is noteworthy because Coke has traditionally shied away from trendy categories, and ceded the territory to either Pepsi or smaller competitors.
This effort has already had some success. Coke has made significant inroads in the fast-growing energy drink market with Full Throttle.
Both Coke and Pepsi reaffirmed their financial targets Thursday and announced they would introduce fortified versions of their diet colas.
Coke's announcement that it will introduce a new version of its Diet Coke fortified with vitamins is yet another example of how the company is testing out new ideas.
“Pepsi is in a stronger structural position in North America, but we are seeing signs of Coke’s ability to narrow the gap,” said Stifel Nicolaus analyst Mark Swartzberg, in an interview with CNBC.com. Swartzberg doesn’t own either stock, but earlier this month he downgraded Pepsi shares to hold, citing the expected slowdown in Pepsi’s profits.
One area of weakness is Pepsi’s North American beverage unit, where it goes head-to-head with Coca-Cola. Profits at the Pepsi’s North American business fell 4% in third quarter and 9% in the fourth quarter.
“We think we are seeing evidence that Gatorade, the distant leader of the sports drink category, is simply facing increased difficulty building on its success,” Swartzberg said.
That could be the big difference between the two stocks. Pepsi's past success has set the bar high, while Coke may not have to aim as high to see significant results.
“Very big changes still need to be done in Atlanta, but the market has been appreciative of the small changes that the have been made already,” said Tom Pirko, president of BevMark LLC, a food and beverage industry consulting company.
PepsiCo expects to earn at least $3.30 a share this year, with revenue and volume up at a mid-single digit percentage rate. According to Thomson Financial, analysts expect PepsiCo to earn $3.32 a share.
Meanwhile, Coca-Cola, which doesn't provide annual earnings forecasts, said it continues to expect long-term growth of 3% to 4% in volume and 6% to 8% in revenue.
At an industry conference, Isdell said it would achive that growth despite headwinds in the North America.
Christina Cheddar Berk is a news editor at CNBC.com. She can be reached at firstname.lastname@example.org.