Investment Analysis of Coca Cola and Pepsi - Essay Example

? You Are an Investment Analyst Answer PepsiCo Inc. is an American multinational company which makes food and beverages. It is headquartered in Purchase, New York, United States. It was first developed as Pepsi in 1880s by a pharmacist and industrialist based in New Bern, North Carolina named Caleb Brandham. Later he formed Pepsi-Cola Company in 1902. In 1965, Pepsi-Cola Company was merged with Frito-Lay, Inc. which created PepsiCo, Inc. PepsiCo. has expanded to include various range of foods like snack foods, health drinks, etc. Their current head is Indra Nooyi who is the Chairman and CEO (Penzkofer, 2007). The major customers of the company are the young generation of people and also include the sportsman. They use mainly Sustainable Sourcing program which leads to improved performance. Coco-Cola is a carbonated soft drink company headquartered in United States. It was introduced in the year 1886. It was intended to be a patent machine; this company was bought out by Asa Griggs Candler. Through his marketing tactics, Coke became a giant Soft-drink company. The company products are sold through license Coca-Cola bottlers. The bottlers basically hold contracts to produce the cold drink and package them in cans and bottles using sweeteners and filtered water (Pendergrast, 2000). They are then sold through merchandise Coco-Cola stores and also through the vending machines. The Company also sells soda fountains to the major restaurants and food service distributors across the world. Currently Muhtar Kent is the Chairman and Chief Executive officer of the company. Answer 2 Seeing the trend we conclude that the price of Coca Cola since its incorporation in 1962 has fallen to Rs. 57.16 and then has risen to Rs. 70.71 in 2012. It shows that that the price level is slowly increasing with each passing day. This shows that the company is performing well. Seeing the trend we can tell that since the initial date of Incorporation in the year 1977, there has been a downward trend in the price level of the stock due to major economic downturn faced by US. From the year 2010 to 2012 the price level has risen. It also shows that the price level is rising and the company is earning profit. Answer 3 Two Major events of PepsiCo In February 2011, PepsiCo acquired two-third stake in Wimm-Bill-Dann Foods. It is a Russian juice producer and Dairy company. Through this PepsiCo increased its stake in the company by 1.37% by buying 601.948 WBD shares. Thus they acquired overall 98.63% stake in the company. PepsiCo had to pay 3.884 roubles per share and also $32.7 per depository receipt. With this acquisition, PepsiCo has expanded their market positioning and hence it has given them a competitive leading position in the market. The share price increased as a result of the acquisition. In February 2012, Indra Nooyi took the decision of restructuring the company by cutting down 8,700 jobs. It equalled to roughly 3% of PepsiCo’s global workforce. This enabled them to increase the amount they allocated to the branding activities. PepsiCo was facing increased costs in their operation. The company first wanted to increase the prices of their products at first. But then they recognized the fact that consumer may not accept the price rise. Hence they started to do the restructuring plan. Pepsi made the tough decisions because they expected that the companies will face higher input cost of the raw materials as compared to other previous years. Indra Nooyi the CEO of PepsiCo said that the reduction will affect over 30 countries. There major reason was that they wanted to increase the allocation towards the branding activities like advertising, marketing etc. They wanted to increase the expenditure from $ 500 million to $ 600 million in the year 2012. Their major focus was on North America, where they wanted to invest about $100 million in displays, storing racks etc.Indra Nooyi pointed out that by doing this restructuring PepsiCo wanted to save about $1.5 billion by 2013. They took this step because of economic uncertainty which persisted during that time. The stock price also increased after this move which supported the action taken by the company. Two major events of Coco Cola In August, 2013 Coca-Cola acquired the Brazilian company Companhia Fluminense de Refrigerantes. It was all-cash transaction. This acquisition helped Coca-Cola FEMSA increase its stake in Leao Alimentos from 19.7% to 21.8%. This increased their presence in Brazil, which re-in forced their commitment of the beverage industry in Brazil. It led to increase in market share of the stock of Coca Cola. Coca Cola has acquired beverage business of Fraser & Neave in 2013. This will enable their company to become a dominant market player in Singapore and Malaysia. This will improve the Coca Cola’s dairy portfolio so that they can keep up with PepsiCo. Answer 4   PepsiCo   Coca-Cola   29-Dec-12 31-Dec-11 25-Dec-10   31-Dec-12 31-Dec-11 31-Dec-10 Current Ratio 1.1 1.0 1.1   1.1 1.0 1.2 Quick ratio 0.89 0.75 0.89   0.97 0.92 1.02                 Return on Asset 0.08 0.09 0.09   0.10 0.11 0.16 Return on Equity 0.08 0.09 0.09   0.10 0.11 0.16                 Debt Ratio 0.70 0.72 0.69   0.62 0.60 0.57 Debt Equity Ratio 2.34 2.53 2.21   1.63 1.53 1.35                 Fixed Asset Turnover 3.42 3.38 3.03   3.32 3.12 2.38 Current ratio is one of the most popular financial ratios which are used to test a company’s liquidity position. It is calculated by the current asset with current liability (Fridson, CFA and Alvarez, 2011. Through this ratio we can know if the company has enough short term asset like cash, cash equivalent, receivables, marketable securities, inventories and receivable available to meet her current liabilities like current portion of the term debt, payables, notes payables, accrues expenses etc. The higher the current ratio the better it is for the company. Here the current ratio of Coca Cola is higher than Pepsi which indicates that the have high capacity to pay their current liability with the current assets they have. Industry experience says that the current ratio should be around 1.5, which state states that both PepsiCo and Coca Cola has lower current ratio and hence needs to improve on it. A quick ratio is a more accurate indicator of liquidity position of a company. It basically ensures the most liquid form of current assets by eliminating the inventories. Hence this ratio eliminates the current assets which are difficult to be converted to cash. The industry average of the quick ratio is 1.0. This shows that the both the companies have low quick ratio as compared to industry average. Coca Cola has higher Quick asset ratio as compared to PepsiCo. It shows that the CocaCoal has higher liquidity as compared to PepsiCo because this excludes the inventory. Hence Coca Cola can quickly payoff its current liabilities as compared to PepsiCo. This ratio indicates how profitable the company is as compared to the total assets. This indicates how well the management employs the total asset to earn profits with higher return on asset it shows that the management is more efficient it using the total asset. The industry average of ROA is around 1.5%. This shows that both the companies shave low ROA as compared to industry average. Return of Asset on Coca Cola is higher than Pepsi. This shows that Coca Cola utilizes their Asset is more efficient way than Pepsi in generating profits. Hence they are much more efficient than Coca Cola. Return on equity indicates how the equity shareholder’s money is utilized in earning the profit of the companies. Investor’s wants to see the return on equity to be high so that they can ensure that the capital is in better hands and is being utilized efficiently. The industry average of beverage industry is 22%. This shows that both the companies shave low return on equity as compares to industry. Return on Equity is better for Coca Cola as compared to PepsiCo. This shows that the shareholders get better return in Coca Cola than PepsiCo. The debt ratio basically compared total debt to total assets. It gives the basic idea of how much debt a company uses. A low percentage indicates that the company is using low debt as compared to using equity and hence has a strong equity base. The Debt Ratio of PepsiCo is more than Coca Cola. This shows that PepsiCo is more leveraged than Coca Cola. Hence Coca Cola has stronger equity position as compared to PepsiCo. This ratio is also similar to debt ration which compares the company’s total asset to the total equity shareholder’s money. This is a basically a measurement how much the company has to pay to the lenders, suppliers, creditors and obligors. The industry average is 3%. This shows that they have much lower debt equity ratio. PepsiCo has higher Debt-Equity ratio than Coca Cola. This also shows that PepsiCo is more leveraged than Coca Cola. This ratio is a measure of productivity of how well the company is able to generate profit from the company’s fixed assets. For most companies it represent he single largest measurement of investment. Industry average of beverage companies is 3. Hence both the companies have achieved this figure. Pepsi has higher Fixed Asset turnover ratio than Coca Cola. This shows that PepsiCo. is more efficient in managing their fixed asset as they can generate more revenues as compared to Coca Cola is managing their operation.   PepsiCo   Coca Cola Period Ending 29-Dec-12 31-Dec-11 25-Dec-10 CAGR 31-Dec-12 31-Dec-11 31-Dec-10 CAGR Total Revenue 65,492,000 66,504,000 57,838,000 6% 48,017,000 46,542,000 35,119,000 17% Cost of Revenue 31,291,000 31,593,000 26,575,000 9% 19,053,000 18,215,000 12,693,000 23% Gross Profit 34,201,000 34,911,000 31,263,000 5% 28,964,000 28,327,000 22,426,000 14% Operating Income or Loss 9,112,000 9,633,000 8,332,000 5% 10,779,000 10,173,000 8,413,000 13% Earnings Before Interest And Taxes 9,203,000 9,690,000 9,135,000 0.4% 12,206,000 11,875,000 14,940,000 -9.6% Net Income 6,178,000 6,443,000 6,320,000 -1% 9,019,000 8,584,000 11,787,000 -13%                   Total Current Assets 18,720,000 17,441,000 17,569,000 3% 30,328,000 25,497,000 21,579,000 19% Total Assets 74,638,000 72,882,000 68,153,000 5% 86,174,000 79,974,000 72,921,000 9% Total Current Liabilities 17,089,000 18,154,000 15,892,000 4% 27,821,000 24,283,000 18,508,000 23% Total Liabilities 52,344,000 52,294,000 46,989,000 6% 53,384,000 48,339,000 41,918,000 13% Total Stockholder Equity 22,417,000 20,704,000 21,273,000 3% 32,790,000 31,635,000 31,003,000 3% The CAGR for Total Revenue is 6% for PepsiCo as compared to 17% for Coca Cola. Hence Coca cola is generating more revenues as compared to PepsiCo. The gross profit is grows at a rate 14% for Coca cola as compared to 5h% for PepsiCo. Tis show that Coca Cola is more profitable than PepsiCo. The Operating Income of Coca Cola is also more than that of PepsiCo with the former achieving a growth rate of 13% as compared to 5% in PepsiCo. The Growth in Stock holder equity is same for both the companies The Liabilities for Coca Cola is increasing at a faster pace than PepsiCo. Answer 5 The financial statements which are provided in the annual statement of both the companies PepsiCo and Coca Cola indicate that both of the companies can provide the data accurately and hence they are reliable (Drake, Fabozzi, and CFA. 2012). Financial statements are developed in cooperation and coordination with professionals who have experience in this field for a long of time. In the present day most of the authorities and even the public claim that the financial information presented are in line with the accounting rules which are to be followed. Constant efforts are been made by professionals so that the accounting procedures can be improved and the data can be more accurately presented to the shareholders and the general public. Though accounting is not an exact science and there are no precise formulas like mathematics to guide it and large accounting decisions are based on judgments, but this re changing with change in the accounting procedure which are followed in the world. Answer 6 All the liquidity ratios of Coca Cola is more than PepsiCo with both the current ratio and quick ratio showing more figure for the former as compare dot the later. Again the efficiency ratio of Coca Cola is more as compared to PepsiCo with ROE and ROA both being large for Coca Cola. Again the CAGR of Revenues and net profit for Coca-Cola is more as compared to Pepsi CO. Hence for these reasons I would recommend to invest in Coca Cola as compared to PepsiCo. References Drake, P.P., Fabozzi, F.J. and CFA. (2012). Analysis of Financial Statements. New York: John Wiley & Sons. Fridson, M.S., CFA and Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. New York: John Wiley & Sons. Pendergrast, M. (2000). For God, Country and Coca-Cola: The Definitive History of the Great American Soft Drink and the Company that makes it. New York: Basic Books. Penzkofer, A. (2007). The Market of Pepsi / PepsiCo. Berlin: GRIN Verlag. Read More