COMPETITORS-PEPSICO AND COCA-COLA 1

Competitors- PepsiCo and Coca-Cola

LaKeisha Warnsley

Dr. Stuart Gold

The Business Enterprise

December 12, 2010

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Using the current ratio, discuss what conclusions you can make about each companys ability to pay current liabilities (debt).

Based on the 2009 Annual Reports PepsiCo has a Current Ratio of 1.44 and CocaCola Company has a Current Ratio of 1.13. Based on December 2010 data, PepsiCo has a Current Ratio of 1.05 and Coca-Cola has a Current Ratio of 1.34.

The Current Ratio is defined as the financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firms current assets to its current liabilities. (WIKI) This ration gives a view of company liquidity and is an indicator of the short-term debt paying ability of the firm. (English) Also, Current Ratio is defined as current assets divided by

creditors falling due within one year. The ratio is designed to assess the solvency of a company in the short term.

2009 Annual Reports Current Ratio=current assets/current liability Current Ratio(PepsiCo)=12571/8756=1.44 Current Ratio(Coca-Cola)=5170/4588=1.13

YCharts Current Data

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Coca-Cola Company Current Ratio= 1.34 37th Percentile Overall (2774 of 4428) 19th Percentile Sector (308 of 382 in consumer goods) 21st Percentile Industry (11 of 14 in beverages and soft drinks)

PepsiCo Current Ratio=1.05 26th Percentile Overall (3270 of 4428) 4th Percentile Sector (363 of 382 in consumer goods) 12th Percentile Industry (34 of 39 in processed and packaged goods)

A Current Ratio of 1 means that book value of current assets is exactly the same as book value of current liabilities. In general investors look for a company with a current ratio of 2:1, meaning it has twice as many current assets as current liabilities. A Current Ratio less than one, indicates the company might have problems meeting short-term financial obligations. If the ratio is too high, the company may not be efficiently using its current assets or short term financing facilities. Investors like to see Current Ratios of 1.5 or above. Companies that have ratios around or below 1 should only be companies which have inventories that can immediately be converted into cash.

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According to the above information both Coca-Cola and PepsiCo are above 1. The Annual 2009 data shows PepsiCo at 1.44, very close to 1.5, which is very favorable for investors. Although the Current Ratio is down at 1.05 for the current data, PepsiCo is one of those companies that have inventories that can immediately be converted into cash, so the close proximity to 1 is not too much to cause alarm. Coca-Cola is very similar to PepsiCo, but the current trends for Coca-Cola are better than the 2009 trends. Again, Coca-Cola is a company that has inventory that can immediately be converted into cash, so the 1.13 is not a cause for alarm. The current 1.34 is favorable because it is closer to the 1. 5. The Current Ratios for both PepsiCo and Coca-Cola Company indicate they would easily be able to pay off current liabilities. Inventory is included in the Current Ratio, and both companies are able to turn credit sales into cash quickly to not over extend their credit.

Using the profitability ratios, discuss what conclusions you can make about each companys profits over the past three years.

Profitability Ratios measure the companys use of its assets and control of its expenses to generate an acceptable rate of return. Return on Assets (ROA) and Return on Equity (ROE) fall under the Profitability Ratios.

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Return on Assets (ROA) measures how profitable a company is relative to its total assets. In turn, it measures how efficiently a company uses it assets. Generally, ROA should be used to compare companies in the same industry. Everything else being equal, a higher ROA is better as it means that a company is more efficient about using its assets.

ROA=Net Income/Total Assets ROA for PepsiCo (WIKI ROA) 2007=18.2 2008=15.5 2009=16.7 2010=13.3(3rd quarter)

ROA for Coca-Cola Company (WIKI ROA) 2007=17.6 2008=14.9 2009=16.1 2010=15.6(3rd quarter)

As seen in the data above PepsiCo has been the stronger of the two companies from 2007 through 2009. PepsiCo significantly dropped in profits from 2007 to

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2008, making a climb back up in 2009. Unfortunately, PepsiCo is trending toward a record low in 2010 according to data from the 3rd quarter. Like PepsiCo, Coca-Cola Company dropped from 2007 to 2008, and made a climb back up in 2009. Coca-Cola dropped in 2010, but not as drastic as PepsiCo is trending to drop. Both companies need to go back to 2007 to gain ideas on how to better use their assets. As an investor, PepsiCos December trend may cause concern.

Return on equity, ROE, measures the rate of return on the ownership interest(shareholders equity) of the common stock owners. ROE is viewed as one of the most important ratios. It measures a firms efficiency at generating profits from every dollar of net assets (assets minus liabilities), and shows how well a company uses investment dollars to generate earning growth. ROE is equal to the net income divided by total equity. The higher the ratio, the better. (WIKI)

ROE=Net Income/Total Equity(shareholders equity) ROE for PepsiCo (WIKI ROE) 2007=34.5 2008=34.8 2009=40.9 2010=36.1(3rdquarter)

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ROE for Coca-Cola (WIKI ROE) 2007=30.9 2008=27.5 2009=30.1 2010=29.2(3rd quarter)

PepsiCo looks much more attractive to investors over the three years of data than the Coca-Cola Company. In 2008, 2009, and thus far in 2010 PepsiCo has some large marginal gaps of higher percentages than Coca-Cola. PepsiCo is really showing its investors that they know how to generate earning growth based on their uses of the investment dollars.

Using the cash flow indicator and investment valuation ratios, discuss which company is more likely to have satisfied stockholders.

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends. Ideally, an investor is looking for a dividend payout ratio between 40-60%. This allows a good portion of the profits to be paid to the shareholder as well as allowing for some of the profits be put back into the company to create more internal growth. The higher the dividend payout ratio, the less profits are invested back into the business to created future growth. PepsiCos dividend payout ratio is 47.7% and Coca-Colas dividend payout ratio is 54.15%. Coca-

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Cola is slightly higher than PepsiCo but not by much. This could be good or bad to some investors. They may look at the higher of the two lesser likely to be able to payout and put back into the company. But because the ratios are so close, they are both likely to be able to payout to the shareholders as well as put back into the company for another growth that will bring about another payout for the shareholders.

The price earnings ratio is a measure of the price paid for a share relative to the annual net income or profit earning by the firm per share. (WIKI) When the P/E is high, that means investors are paying more for each unit of net income, which makes the stock more expensive than one with a lower P/E ratio. The P/E of PepsiCo is 18.3 and the P/E for Coca-Cola Co is 19.45. Once again, this metric is very similar among the two.

Both companies are sure to have satisfied shareholders because their numbers are so very similar to one another. PepsiCo is more likely to have happier shareholders because the Dividend payout ratio is slightly lower, the consistency of both a payout and a put back in may be more likely. Also, because the P/E is lower shareholders are paying less for the stock. PepsiCo has a slightly better Cash Flow Indication Ratio and Investment Valuation Ratio.

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As an investor, discuss which company you would choose to invest in and provide a rationale for your decision.

PepsiCo and Coca-Cola Company are very similar in all financial aspects. CocaCola has a slightly higher dividend yield than PepsiCo. When looking at the dividend payout of the two stocks, Coca-Cola seems more sustainable and more systematic. But, looking at the company metrics, PepsiCo has better sales growth, earnings growth, generates 40% more revenue, lower P/E, a lower payout ratio, and a great return on equity. Both companies are strong and I would choose to invest in both of the companies. But if I had to choose one, I would choose PepsiCo because it appears to be a safe dividend stock with strong growth potential.

Discuss what non-financial criteria you would consider when choosing between these two investment options?

When choosing between these two investments, a consideration should be made about the market and past trends performance. Using market trends and past performances is critical to predicting the future success of a company. What a person is willing to risk is also a criteria for investing, what will a person be

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willing to loose, based on doing adequate research on the company that they are considering for investment. If there is an uncertainty, this is an indication, which they may need to look into another type of investment. In addition when looking for non-financial criteria for investing, A person should look into what are there investment goals or needs. There should be a clear idea of where you want to be at the end of the investment period. People tend to invest for different purposes. Lastly, a person should be clear on what they are expecting in return off the investment as compensation for the risk involved. Also what role does, the company play in the community. When a company has great presence in the community, this tends to drive sales and stock up. It also shows, that company is interested in hearing what the consumers and community have to say about the different products that they have.

Appendix i Financial Ratios for PepsiCo and Coca-Cola

PEPSICO
LIQUIDITY MEASUREMENT RATIO Current Ratio PROFITABILITY INDICATOR RATIO Return on assets(ROA) Return on equity(ROE) DEBT RATIO Debt Ratio OPERATING PERFORMANCE RATIO Fixed asset turnover ratio CASH FLOW INDICATOR RATIO Dividend payout ratio INVESTMENT VALUATON RATIO Price/Earnings ratio 1.44 14.92 35.38 0.56 1.0 47.73 18.3

COCA-COLA
1.34 14.0 27.2 0.48 0.6 54.15 19.45

**This chart is from my own calculations. Some of the ratios used in the paper are from other sited sources so they may be different.

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