The coronavirus pandemic has led to high-quality companies with competitive advantages having their share prices slashed. Is this an opportunity to buy?
Coca-Cola (NYSE: KO) and Pepsi (NASDAQ: PEP) are two behemoths of the consumer sector. Their products and brands are extremely popular on a global level and they both have large levels of cash reserves and access to debt if needed.
Impact of the Coronavirus
Just like the analogy that rising tides lift all boats, the opposite is also true. The likes of Coke and Pepsi saw their prices fall along with the rest of the financial markets as liquidity was sought.
Of course, there were strains on supply chains that led to some manufacturing plants struggling to get ingredients delivered and then getting products to the shelves. This will likely be an issue for both companies as long as this pandemic continues. However, consumers stocking up their cupboards and refrigerators will help offset potential drops in earnings somewhat.
Coca-Cola: Bull vs Bear
With lower consumer consumption and spending, it was inevitable that Coke was going to take a hit with the pandemic.
The company certainly has a very strong balance sheet ($1.56 billion in cash reserves) and a competitive advantage to withstand significant drops in revenues in Q1 and Q2 of 2020. It has a well-diversified selection of brands under its umbrella. The company has achieved decent levels of growth in the past few years, along with a x7 increase in its net income margin to $8.9 billion last year from just $1.2 billion in 2017. The 8% forecasted growth in operating income for 2020 has been withdrawn as it deals with the impact of the pandemic.
One other area of note is that Coke derives more than 70% of its profits from the North American market. The lack of geographical diversification could have an impact on profits if a post-pandemic U.S. recession sets in as people shore up spending.
Pepsi: Bull vs Bear
Pepsi is another well-diversified company that has strong fundamentals (more than $5 billion in cash and significant access to credit) that will allow it to see out this crisis.
The company is not going overly defensive during this period, recently announcing its acquisition of Rockstar Energy in a deal worth $3.85 billion. This creates a whole new market for Pepsi which had previously been blocked from this sector by Rockstar. The global market of energy drinks is expected to see 7.2% CAGR through 2026 which should bring its market size to $86 billion by 2026.
With 23 different products already under its umbrella that earn at least $1 billion each year, Pepsi is well-diversified in the snacks and beverages markets with access to 200 national markets. About 58% of the company’s total revenue comes from North America, with the remaining 42% coming globally.
Its snacks division has the higher side of the revenue split (54%) than beverages (46%) in terms of revenue. With products flying off the shelves with the ongoing pandemic, Pepsi brand staples will likely see solid results despite ongoing supply chain strains.
Which stock should I buy?
Both companies are defensive stocks that can play a key part in an investor’s portfolio in turbulent times to protect funds. The share prices for both companies initially saw significant drops when the virus hit, recovering somewhat since. Decent dividend yields are available, but there may not be too much capital appreciation in the near future.
Pepsi is less reliant on its North American operations, with its geographical diversification being preferred by many investors. It also has a better split between its snacks and beverage businesses. Coca-Cola has dramatically improved its profit margins in recent years and it looks set to overcome this temporary blip with ease. At the right price, both of these companies are great additions to add stability to a portfolio.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.