Why Pepsi's a Better Buy Than Coke

Shares of soda and snack giant PepsiCo (NYSE: PEP  ) soared after the company announced earnings this morning. The stock is up 3.1% as of 2:30 p.m. EDT. But even with Pepsi having fared well relative to what Wall Street's finest expected to see, the big question remains: Will Pepsi ever pass rival Coca-Cola (NYSE: KO  ) to become the giant of the industry?

The results behind Pepsi's pop
At first glance, Pepsi's earnings results didn't look too exciting, as net income fell by more than $50 million compared with the year-ago quarter. But much of the earnings damage came from a one-time hit due to Venezuela's decision to devalue its currency; excluding other unusual items like restructuring charges, adjusted earnings rose 12%, topping expectations by a wide margin. Sales rose by about 1%.

But the real advantage that Pepsi has over Coke is its product diversification, which really showed in the report. The PepsiCo Americas Foods division saw strong 6% organic revenue growth, with its North American and Latin American divisions both contributing to rising sales. Frito-Lay's U.S. market share also climbed despite increasingly strong competition.

Moreover, Pepsi's emerging-market performance underscored how important the international markets are for the company. Adjusting for the impact of corporate structural changes, revenue in its fast-growing Asia, Middle East, and Africa segment rose 15%, with strength on both the snack side and the beverage side of the business. Even struggling Europe posted some impressive gains in sales and profits.

Source: Pepsi by john kovacich.

The troubles at home
Unfortunately, the U.S. beverage market continues to be a drag on the company. The PepsiCo Americas Beverage unit suffered volume and net revenue declines, which is consistent with what we've seen from Coke. In particular, cola has been a challenging product for the entire industry as consumers gravitate more toward water, tea, and sports-performance drinks.

Nevertheless, Pepsi has seen good results from its increased marketing. The challenge the company faces is figuring out how to allocate limited marketing resources, because the last thing it wants to do is to cannibalize its own business in pushing too many different products within the same market. Moreover, with different products offering varying levels of profit margin, Pepsi has to maximize profit at the same time it tries to meet the demands of its customers.

The smarter buy
Both Pepsi and Coke sport extremely high share valuations right now, especially given their U.S. growth woes. But Pepsi's exploitation of its distribution network to deliver its wider variety of beverages and snack foods -- largely to the same retail customers -- is more efficient than simply focusing on one set of products. With so many different ways of appealing to billions of customers around the world, Pepsi has the better growth potential, and in my eyes, that makes PepsiCo a smarter investment.

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