During Monday’s show, Cramer explained how the big money managers value stocks when they’re looking to add names to their portfolios. He put that same thesis to work today in a comparison between Coke and Pepsi.
Cramer’s taken this valuation strategy one step further, adding a novel 10-point rating system to quantify how much sector, growth, consistency, raw costs and other factors add to a stock’s worth. (Read more about this strategy and who won in match-ups between McDonald’s and Burger King and Tiffany and Coach.)
Since a sector accounts for 50% of a stock’s performance, Cramer gives up to five points on his 10-point scale for companies operating in good industries. This peaked-inflation environment with an economy still yet to rebound calls for a classic defensive approach to stock-buying. Normally in these conditions Coke and Pepsi would be the perfect plays, but Coke admitted to feeling some economic pressure recently. So Cramer’s only willing to give that company four points, and Pepsi 4.5. Score: 4.5-4, Pepsi.
Then we have to look at growth. Coke already gets 81% of its operating profit from overseas, while Pepsi gets only 29%. So there’s still plenty of room to grow for PEP. Score one point for this company, bringing the total up to 5.5 to 4.
When it comes to strategy, Pepsi might have won out again. Figuring being a beverage-only company was a dead-strategy, the company moved into snack food. As Cramer pointed out, it’s much easier to take market share from Rold Gold, Herr’s and UTZ than it is from Coke. So that’s where Pepsi’s been focusing on innovation. Granted, Coke gets kudos for Coke Zero, but the winner here is Pepsi. One point for Pep and a half point for Coke. Score: 6.5-4.5, Pepsi..
Now take a look at management. Coke’s got a first-year CEO in Muhtar Kent, and Cramer’s always said that you never invest with rookies. They make too many mistakes. But since Warren Buffett’s Berkshire Hathaway owns 200 million shares of Coke, Cramer’s willing to break the rules a bit. Pepsi has solid leadership in Indra Nooyi. A half point for each. Score: 7-5, Pepsi..
Both companies get a point each for their dividends. Coke’s is higher at 2.8% versus Pepsi’s 2.4%, but the latter has a better record of increases. Score: 8-6, Pepsi.
Lastly, we figure in raw costs. Not too long ago when oil and grain prices were up, Coke, with its locked-in costs, was the better play. But as commodity inflation comes down, Pepsi’s the better play, Cramer said, even with its expensive ingredients and transportation costs (Frito-Lay chips need to be shipped more often than beverages). Cramer gave the companies a half point each. Final score: 8.5-6.5, Pepsi.
Pepsi wins on points, but it also wins on valuation. Both companies trade at about the same multiple versus next year’s earnings estimates even though Pepsi’s growing at 11% to Coke’s 9%. Pepsi deserves a higher multiple, Cramer said, and therefore a higher price.
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