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Coke vs. Pepsi: Which Consumer Defensive Stock is a Better Buy?

Barchart - Wed Aug 9, 10:40AM CDT

The stock market rally is starting to run out of steam, thanks partly to a one-two hit to the gut from the credit agencies. Last week, the U.S. credit downgrade from Fitch sparked an initial wave of selling pressure. This week, Moody's (MCO) followed up on Fitch, with credit rating downgrades affecting 10 U.S. banks

These credit downgrades seem to have curbed investor enthusiasm in a hurry. Indeed, rates on the 10-year Treasury note have been creeping higher again, thanks in part to the surprising credit downgrades. Higher rates are bad news for stocks, especially high-multiple technology stocks that have been off to the races this year. Various experts, including U.S. Treasury Secretary and former Federal Reserve chair Janet Yellen and JPMorgan (JPM) CEO Jamie Dimon, seem “puzzled” by the Fitch downgrade in particular. Yellen thinks it's “unwarranted," while Dimon believes it's “ridiculous" and “doesn't matter.” 

Of course, whether the recent 2% slip in the S&P 500 Index ($SPX) marks the start of a correction to much lower levels remains to be seen. Regardless, as investor sentiment threatens to take another 180-degree turn, it seems only wise to give consumer defensive juggernauts like Coca-Cola (KO) and Pepsi (PEP) a closer second look.

Fitch and Moody's Downgrades May Not Be a Big Deal. But Markets are Getting a Tad on the Expensive Side

Though I do think the downgrades aren't as big a deal as the immediate negative reaction suggested, I continue to view markets as overdue for a bit of a mild correction, given frothy valuations on certain names - especially those in the tech space. If it weren't for Fitch and Moody's credit downgrades, it probably would have been some other headline catalyst to reintroduce investors to that old friend that is volatility.

Whether tech stocks lead the next downward charge remains to be seen. In any event, I continue to view Coke and Pepsi shares as great places to seek shelter - especially as the stock market's least favorite month (September) comes rolling in, and with credit downgrades fresh in the minds of market participants.

Coke and Pepsi are some of the highest-quality consumer defensive stocks out there. They're bitter (or should I say sweet?) rivals that have numerous ways to one-up one another. Though both companies are best known for their flagship colas, the shares of each company differ by quite a bit. Most notably, Pepsi has skin in the snack food game, while Coke has mostly stayed within its circle of competence in beverages. 

Coke Stock Goes Flat, But Probably Not for Long

Coke is looking to expand its footprint into other corners of the beverage space, most notably energy drinks. So far, Coke has had limited success branching out into energy drinks. Still, I continue to view Coke as one of the most innovative companies in the beverage scene, as it looks to take its powerful brand strength into new, “growthier” product categories.

Coke has demonstrated impressive resilience in this high-inflation environment (revenues and adjusted earnings per share rose 11% and 17%, respectively, in the second quarter). Management also seems confident about the second half following its full-year guidance hike, with expectations for 8-9% in top-line growth, up a percent from the original sales forecast. 

Despite the positives, Coke stock has struggled to break out past its all-time high of $65 and change. At the time of writing, Coke stock is only 1% higher than its pre-pandemic peak. 

Indeed, investors seem content with Coke's resilient cash flows, but they probably want to see more growth. If the company can keep innovating on the beverage front, I do think Coke stock will be able to get its fizz back. For now, the stock's gone flat - but appears like a compelling value option, at 26.8 times trailing price-to-earnings.

Pepsi Stock: A Sweet Stock Ahead of a Bitter Month

Pepsi has been a much better performer than Coke since the pandemic struck. Shares are now up an impressive 38% since their pre-pandemic peak. 

Like Coke, Pepsi has been a resilient performer that's been able to hike prices without heavily impairing demand. Further, Pepsi has invested quite a bit in innovation and other growth endeavors. Though I'm a big fan of Pepsi's snack business, so are many investors. Some seem more than willing to pay a hefty premium for the broader exposure. The stock trades at a hefty 32.24 times trailing price-to-earnings, making it a pricier play than Coke.

Recently, Pepsi stock was hit with a downgrade from Morgan Stanley (MS) over its premium valuation. Though people like Jim Cramer viewed the move as unwarranted, I think the rich multiple works against Pepsi stock in a side-by-side battle with Coke. Yes, Cramer is a big fan of Pepsi's management team. But with such a high bar in place, it can be challenging to surpass expectations - even for a legendary leadership group.

Better Buy: Coke or Pepsi?

I'm a bigger fan of Coke, both the beverage and the stock. Coke's cheaper, and could be on the cusp of a breakout as its management continues to invest in the right places. 

On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.