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Coke and Pepsi

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Financial Analysis: Coke vs Pepsi

Computed 2009 Ratios and Commentaries (see table)

Coke has higher operating and profit margin compared to Pepsi. The share price of Coke reflects a higher Price to Earnings ratio 18.4x compared to Pepsi 14.2x. This is likely due to the equity market having more confidence in the continuation and sustainability of Coke’s earnings than Pepsi.

However, the equity market had priced a discount on Coke’s market capital structure compared to Pepsi. This can be seen from the market to book ratio where investors value Pepsi's balance sheet structure more than Coke. Pepsi is priced 5.5x of equity value compared to Coke which is priced only at 5x.

Having a higher operating and profit margin, Coke is more likely to be able to sustain any shocks in the market (eg. from lower sales). The sustainability of Coke’s earnings are also helped by more efficient tax structure seen from lower effective tax rate compared to Pepsi. Its Selling General Administration expenses are also within the industry norm (compared to Pepsi).

Coke’s has room to further improve its efficiency by improving its balance sheet structure. This includes a more efficient use working capital (eg. reducing receivables and inventory days), using higher leverage to attain higher return on equity and optimizing/sweating the assets more to generate higher asset turnover.

Coke’s acquisition is substantially cashless. It exchanged $3.4bn of equity investment it had in CCE and assumed $9.5bn in debt and obligations to control CCE’s North American bottling operations. This will impact Coke’s financials in a few ways: i) With the acquisition, there could possibly be synergies and cost reduction which would benefit Coke’s bottom line. The resultant Coke’s earnings could improve with the consolidation of North American bottling earnings. This will then improve EPS....

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