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Opening Segment 1
Title: |
'Flat Or
Sparkling?' |
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Featured Stock(s): |
Pepsico, Inc. (PEP)
See PEP*'s official
investor relations' site
here.
See the Yahoo!
Finance profile for
PEP*
here.
See Opening Segment 2,
below...
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After this segment, you
can see Jim's Lightning
Round picks
here... |
Jim:
This is head-to-head week!
I'm stacking up the
biggest brand name stocks
against their iconic
competitors, in order to
teach you the single most
important skill to being a
great investor... how to
compare stocks so you know
which one is cheaper...
which one is the better
value... which one we
believe will go up the
most... the better buy...
This is a gigantic
project... the ultimate
Mad Money educational
guide to evaluating
stocks...
We've already done
McDonald's versus Burger
King... and
Coach versus Tiffany...
. . . .
.
Now we're going to use
that same 10-point scale
that I introduced
yesterday to judge a real
clash of the stock
titans...
Coca-Cola (KO)
versus
Pepsico, Inc. (PEP)...
What's cheaper?... What's
the better buy?...
And don't think KO,
because it's a $54 stock
and PEP* is a $70 stock...
The share price means
nothing...
. . . .
.
First on the Mad Money
checklist... it has to be
the sector...
Since a stock's sector
accounts for 50% of its
performance, the comany's
sector is worth up to 5
out of 10 points on the
Mad Money stock scale...
So where do KO - a
beverage company... and
PEP* - a food and beverage
company... stack up based
on their sector?
In an environment where
inflation has peaked, we
just got I believe the
last bad consumer price
index number, and the last
bad producer number, but
the economy still has not
at all rebounded. The
playbook that all the
managers use says buy
safety... buy something
defensive... which is why
PEP* and KO bucked today's
awful downturn...
Normally, you'd give food
and beverage companies a 5
for sector in this kind of
environment - remember, 5
being the best - because,
when people think defense,
they think KO and PEP*...
but, remarkably, KO has
actually seen some
economic pressure... You
have to understand that
that's close to unheard
of... but they talked
about it on their
(earnings' conference)
call... particularly on
convenience store
purchases...
So, instead of 5, I'm
giving KO 4 points... this
is the sector weighting...
and PEP*?... 4.5...
because it was KO and not
PEP* that said the economy
was causing some pain...
. . . .
.
After you look at the
sector, you can compare
the stocks head-to-head...
and there I say the first
and most important thing
that managers care about
and you should care
about... is growth...
On the growth front, KO
seems tapped out...
Other than its bolt-on
acquistion of Vitamin
Water, which looks to be a
brilliant, brilliant
move... KO is already
though in a lot of
countries, getting 81% of
its operating profit from
overseas, and needs to
reignite growth to make
money... historically, a
very hard thing to do...
Carbonated drinks in the
U.S. are a flat
category... no pun
intended... and, in fact,
sparkling beverage sales
were down 4% for KO last
quarter... plus PEP* and
KO are locked in an
endless price war...
Doesn't it seem like we've
been paying the same price
for these drinks for
years?...
PEP*, which gets only 29%
of its operating profit
from outside the western
hemisphere, has a lot more
room for international
growth... much more than
KO... We give PEP* 1 point
for growth prospects...
and KO earns no points...
bringing the score to...
PEP*, 5.5... KO, 4...
. . . .
.
Next strategy...
Controlling your own
destiny!... Here PEP* has
clearly figured out that
the soft drink category
can be a long-term
loser!... So PEP* is now a
snack food company with a
soda arm... while KO is
soda...
Witness the battle
mentioned in the very
front section of The Wall
Street Journal today,
about KO's massive
olympian spending to blunt
PEP*... to which I say,
come on man... they're
both commodities!...
KO has innovated though,
coming up with Coke Zero,
trying to take the
inevitable shelf space
from PEP*... hey, that's
brilliant right?... But
PEP* says, wait a second,
the soda aisle is the
bloody war between the
states... How much better
is it to be the
Spanish-American war...
which is what the snack
aisle feels like...
PEP*'s acquisition of
Quaker Oats, which brought
both Gatorade - a huge
franchise - and snacks, to
augment PEP*'s Frito-Lay
division, sure beats KO
buying 50 cent out of the
Vitamin Water
acquisition...
PEP* doesn't want to waste
time fighting for the soda
aisle... Instead, we're
getting real innovation
from them in the snack
aisle, where they're
taking shelf space from
Rold Gold, Herrs, and
Utz... a whole lot easier
than taking it from KO...
Another point for PEP* and
I'm willing to give KO
half a point for the
winning ways of Coke
Zero... even though
they're fighting the wrong
war.
PEP*'s lead now widens to
6.5 to 4.5...
. . . .
.
You have to look at
management next...
To me, this is a big
X-factor... harder to
value this than some of
the other things...
At PEP*, you have Indra
Nooyi, cementing her
leadership... she's been
there for a little bit
now...
At KO, Neville Isdale, a
Cramer favorite, has been
replaced with first-year
CEO, Muhtar Kent... We
don't like first-year
CEOs, because they tend to
either mess up or
obliterate earnings... but
the
Buffett
factor... the fact that
Berkshire Hathaway Inc. (BRK-A)
owns 200 million shares of
KO gives the stock a big
halo effect versus PEP*...
People love... they love
Buffett so much that they
forget about KO's meager
growth, so I'm giving a
half a point to each...
PEP* still leads 7 to 5...
. . . .
.
All right, now...
dividends...
KO is higher at 2.8%. PEP*
is a 2.4% yield... but
maybe that's because KO's
down a lot... I mean PEP*
has a better record of
dividend increases...
Let's give a point each
here...
Okay, 8 (for PEP*) and 6
(for KO)...
. . . .
.
Next, we look at raw
costs...
Six weeks ago, with grain
skyrocketing and gasoline
going to $5 smackers, it
was easy... KO, with costs
locked in, was best of
show... PEP* has more
exposure to trucks driving
Frito-Lay snacks to stores
everyday than KO does...
Remember, Fritos need to
be replaced constantly...
it's a great generator of
cash for supermarkets...
plus Frito-Lay has a lot
of expensive
ingredients...
But with gasoline and
grain prices falling, PEP*
is now the better play...
KO deserves a half point
for locking its prices in,
right?... They have very,
very good commodity
costs... PEP* also gets a
half point... let's call
it the "dumb luck
factor"...
8.5 to 6.5... PEP* is one
top...
. . . .
.
All right... let's call
it... let's call it right
here...
PEP* wins on points. It
also wins on valuation...
Both KO and PEP* trade at
about the same
price-to-earnings
multiple, versus next
year's earnings... even
though KO is growing at 9%
and PEP* at 11%...
I say game over!...
I believe PEP* deserves a
higher multiple and,
therefore, a higher price.
Here's the bottom line!..