Investment Analysis
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Investment Analysis
Introduction
Pepsi and Coca-Cola are among the leading companies that an investor should consider investing in due to their rapid growth and promise of better returns in future. The two companies are controlling a significant share of the global beverages market, enjoying monopolistic control across various continents. Owing to the growing demand for refreshment products, there is a high probability of the beverage industry experiencing exponentially high returns in the coming years. In recognition of the high potential for growth, rational investors should consider investing in the beverages industry to enjoy high returns of their capital investment both currently and in the future. Owing to the need for diversification of investments to spread risks, a person should invest in one of the two beverage companies listed. Determining the company to invest in is derived from a comparative analysis of the various companies under consideration. This paper has undertaken a comparative analysis of Pepsi versus Coca-Cola in determining the company that has the high possibility of increasing the wealth of an investor.
History of the Two Companies
Pepsi Company
Pepsi was founded in 1965 in New Bern, North Carolina, by Herman Lay and Donald Kendall. Currently, the firm has its headquarters in Purchase, New York City, and publicly listed in the NYSE. Pepsi is a multinational beverage corporation that is involved in production, distribution, and marketing of non alcoholic beverages, snack foods, and other edible products. In 2012, the organization had been able to generate retail sales exceeding $1 billion in each of its product lines since its inception. In addition, the company has been able to expand its operations to over 250 overseas countries, recording net revenue growth to $43.3 billion.
Pepsi’s main consumers are distributed in America, Europe, Asia, Africa, and the Middle East. Owing to its expansive net revenue base, the organization is ranked the second largest one in the global beverage and food industries. The current leadership of the organization is headed by Indra Nooyi as the Chief Executive Officer and chairman with a workforce of 297,000 workers. To ensure efficiency and timely bottling and distribution of beverages across the various global markets, Pepsi has strategically licensed bottlers across specific regions to ensure customized production for different types of customers. Many years of high level performance placed Pepsi among the S&P500 companies and SIC 2080 companies in the beverages industry.
The Coca-Cola Company
The Coca-Cola Company was founded in 1886 by John Pemberton and Asa Candler in the United States. The firm is publicly listed at NYSE as a leading beverages industry player. Coca Cola manufactures concentrates of its brands and sells them its licensed bottlers globally to package and distribute its final products. In addition, the firm sells soda fountains concentrates to food service distributors and restaurants. Given its expansive market coverage, Coca Cola has been able to establish its presence in more than 200 countries across the globe, reaching out to over 1.8 billion consumers. Consequently, the organization has been ranked as the best brand globally by the Interbrand agency. The company is currently headed by Muhtar Kent as the C.E.O and chairman.
Stock Price Analysis
One of the comparative financial tools that should be considered in determining the optimal investment company to undertake is stock price analysis. This involves analyzing the historical movement of the stock prices of the two businesses in the capital market. Stock analysis is vital in enabling an investor to identify the organization that has the high expected capital returns due to stock price changes in the recent past (Brigham & Houston, 2009). A stock that has higher capital gain trend from historical stock prices analysis should be considered viable for investment by the prospective investors.
The stock price analysis of the two organizations has been undertaken by comparing the price movement at the initial public offer to January 1, 2010, January 1, 2011, and January 1 2012. The graphs below depict the share prices return that an investor should expect from change in prices of the shares in future at the stock market.
Coca-Cola Stock Price Return (IPO Date 1962)

PepsiCo Stock Price Return (IPO Date 1977)

The graphs above indicate that the stock prices return of the two beverage companies had a sharp decline from the initial price offer to the price at January 2010. However, the stock prices return for the two beverage firms started to decline from January 2010 to January 2011. The upward trend of the two firms’ stock price returns slowed down from 2011 towards 2012 as reflected in the graphs above. This implies that investing in the two firms has the potential of lowering the expected capital gains in future (Brigham & Houston, 2009).
Even though the two shares have a downward trend on stock price return, the Coca-Cola Company has a lower risk of declining expected capital gains compared to Pepsi Co’s downward trend as depicted in the graph (Moyer & McGuigan, 2012). Consequently, a rational investor seeking the company to invest in to earn capital gains in future should consider investing in Coca-Cola shares. This is because the firm’s share returns have a lower risk of declining in future compared to PepsiCo’s shares. The investor has a lower possibility of experiencing capital losses by selling his or her shares in Coca-Cola investment in future.

Events that have Potential of Affecting Stock Prices in Future
The Case of Coca-Cola
The management of Coca-Cola Company recently announced that the organization has acquired Zico Beverages Corporation. Zico Beverages is involved in packaging, value addition, and distribution of pure premium water in the North America region. This acquisition has the potential of allowing Coca-Cola to expand its revenue generation and profitability by a significant margin in future. The demand for coconut across the beverage market has recently gained momentum due to the natural nutrients it gives to human body. Consequently, the acquisition of Zico by Coca-Cola Company has the potential of enabling the firm to capture the demand of the new product in the market due to its extensive market coverage and customer loyalty.
Coca Cola’s acquisition of Zico is also important in allowing a company to gain from the demand boom as the expanded outlet has the capacity to efficiently respond to the rising consumer demand. Coca Cola’s financial performance is expected to increase significantly in future. This raises high expectations among potential investors who will be attracted to invest in the firm in anticipation of high returns. The rise in demand for Coca Cola’s shares in the stock market will set the company’s share prices on an upward trend due to forces of supply and demand. The upward rise in the Coca-Cola stock will result in higher capital gains for its investors in future.
The rising concern in the beverage market on the effect of soda in causing obesity crisis in the global market has the potential of affecting the stock prices of Coca-Cola negatively. Owing to the concern by analysts on the link between soda and obesity, a number of European and Asian countries have demanded beverage firms to detail their ingredients to enable consumers to be aware of the dangers of consuming the products. This legal and political dimension in the beverage industry has the potential of affecting Coca-Cola’s traditional trade privacy that has allowed it to avoid stiff competition. Coca-Cola has been operating under privacy of its ingredient content to protect close competition from its rivals in developing products that have close taste to its superior beverages. Consequently, the new development in European and Asian countries that make the biggest proportion of the Coca-Cola market will force the management of the firm to disclose its ingredient content, and it is certainly going to dilute its privacy asset to its rivals and lead to possible information espionage and unfair competition.
A possible disclosure by soft drink manufacturers like Coca Cola on the ingredients of the brands will allow the competitors to produce products that have close similarity. To compete in the market effectively, the organization will be forced to lower its products prices. Consequently, the net revenue will significantly go down stifling the profit levels in future. This will cause the dividends issued to shareholders to decline due to decreasing profitability. The decline in dividends will cause investors in the market to avoid investing in Coca-Cola due to the declining expected return. Accordingly, the price of the Coca-Cola brands will go down as the demand of the shares starts to decline due to forces of demand and supply. The capital gains for investing in Coca-Cola will decline as the prices of the shares continue declining.
PepsiCo
The recent decision by the shareholders of PepsiCo to split its North American business structure has the potential of affecting the share prices in future. A spilt in the business structure will mean the capital structure of the parent company will reduce. Consequently, the parent company’s share prices will decline by the proportion of the splitting percentage undertaken. This will cause the current investors to lose their capital gains due to sharp decline in share prices. Furthermore, the split will cause the net revenue currently being generated to decline, stifling the profitability of the organization in future. Therefore, the dividend amount issued to shareholders will decline as the profitability declines. A lower dividend payout will cause investors to avoid the share due to low expected returns in future. This will cause the prices of the shares to decline due to the forces of demand and supply. The capital gains of the share will decline in future.
Financial Analysis
A financial analysis of the firms has been undertaken through financial ratios to determine the favorable investment option for the investor. Financial ratio analysis is crucial since it enables an investor to identify the financial performance and financial position (Fridson & Alvarez, 2011). Consequently, the financial ratio analysis of the two firms has been undertaken by using the recent financial statements as reflected in the table below.

Liquidity Analysis
The liquidity ratios reflected above illustrate the ability of the two firms to service their current obligations when they fall due. The current ratios indicate the ability of the firms to service their current financial obligations through current assets. Consequently, current ratios indicate that Pepsi and Coca-Cola have $1.09 and $1.68 respectively of current assets for every $1 they owe to current creditors (Gibson, 2012). This implies that Coca-Cola has a better financial position to service its financial position compared to Pepsi’s ability to service its current debts (Baker & English, 2011). Therefore, Coca-Cola will be able to access raw materials on credit from suppliers in a better position than Pepsi. This implies that Pepsi will be able to smoothly operate to maximize the returns of the investors in future (Brigham & Houston, 2009). Similarly, the quick ratio reflects that Pepsi has a lesser ability to service its current financial obligation since it has $0.89 of immediate assets for every $1 it owes. In contrast, Coca-Cola has $1.28 of immediate assets for every $1 it owes to current creditors.
Profitability Analysis
The profitability ratios computed above depict the ability of the two diverse firms in generating returns for the investors (Sinha, 2009). Consequently, the profitability ratios reflect that Coca-Cola has a higher expected return for the investors. This is due to the higher operating profit margin, return on equity, net income margin, and return on assets (Chandra, 2008). Coca-Cola is the optimal consideration for an investor due to its potential of generating better return for investors compared to Pepsi.
Efficiency Analysis
Efficiency ratios computed above indicate the efficiency of the management in managing the resources of the organization to realize the optimal benefit. It is a critical financial ratio analysis since it reflects the ability of the management in managing the resources efficiently to enhance the wealth of the investors. The receivable turnover implies that the management of Pepsi has the efficiency of collecting receivables by 9.3 times while management of Coca-Cola has efficiency of 5.31 times (Brigham & Houston, 2009). Similarly, the management of Pepsi has the efficiency of selling and restocking its inventories by 18.29 times while Coca-Cola has an efficiency of 7.45 times. The receivables turnover and inventory management of Pepsi are more efficient compared to Coca-Cola management in increasing the wealth of the investors by managing the available resources. In addition, the inventory days’ turnover implies that Pepsi takes 41.77 days while Coca-Cola takes 88.64 days to sell the inventory it holds on average (Moyer & McGuigan, 2012). The Pepsi is able to generate revenue efficiently compared to Coca-Cola that is critical in increasing the returns of an investor.
Recommendation
Owing to the financial ratios computed above, findings on the financial position and financial performance of the two firms, the optimal company the investor should consider investing in is the Coca-Cola Corporation. This is due to the ability of the firm to increase the wealth of the investor in future. Even though the efficiency ratios indicate that the management of Pepsi is efficient, the quick collection of receivables may indicate the firm is failing in building a good relationship with consumers in extending credit advantages. This has the potential of denying the organization the ability to sell its inventory more efficiently if its consumers shift their loyalty. However, the superior financial ability of the firm in meeting its financial obligations when they fall due indicates that the firm will create a good relationship with suppliers in accessing raw materials on credit to continue with its operations. In addition, the profitability ratios reflect the firm will generate high returns for the investors. Consequently, rational investor should consider investing in Coca-Cola compared to Pepsi.

References
Baker, H. K., & English, P. (2011). Capital budgeting valuation: Financial analysis for today’s investment projects. Hoboken, N.J: Wiley.
Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning.
Chandra, P. (2008). Investment analysis and portfolio management. S.l: Tata Mcgraw-Hill.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner’s guide. Hoboken, N.J: Wiley.
Gibson, C. H. (2012). Financial Reporting and Analysis. Boston: South-Western Pub.
Moyer, R. C., & McGuigan, J. (2012). Contemporary Financial Management. Boston: Cengage.
Sinha, G. (2009). Financial statement analysis. New Delhi: PHI Learning Pvt Ltd.