PepsiCo and Coca-Cola Saw Diverging Fortunes in 2020

Ahead of earnings season, we thought it’d be useful to reflect on the past year for the two soft drink titans we cover as well as provide our early 2021 prognosis. Regarding valuation, we believe the unique backdrop that allowed PepsiCo PEP to deftly navigate 2020 is fully reflected in its stock price, trading in line with our $140 fair value estimate. Conversely, we see a compelling margin of safety in Coca-Cola's KO stock relative to our $54 fair value estimate--investor concerns around recent adverse tax judgements are misguided, in our view, and the commercial backdrop should be more favorable in 2021.

The two most salient differences between the two firms--portfolio composition and geographic footprint--will prove decisive for anyone looking to reconcile their divergent performances in 2020. For Coke, the coronavirus pandemic morphed its historic strengths (beverage portfolio and material non-U.S. exposure) into glaring weaknesses. Increases in off-premises consumption could not mask the on-premises decline, and when combined the off-premises skew to more commoditized categories, the result was a significant revenue drop (we forecast 8.5% organically). Still, margins were resilient (down an estimated 13%), and while the firm will still be leveraged to mobility trends and the viability of foodservice in 2021, we expect the confluence of weak comps, vaccination efforts, and innovation (like Topo Chico Hard Seltzer) will lead to a bounce-back year for Big Red.

For Pepsi, its stalwart snack portfolio (which benefited from new consumption occasions spurred by COVID-19) and preeminent North America exposure (60% of normalized sales) allowed it to post enviable 2020 organic growth (estimated over 4%) in line with its long-term algorithm and belying what was expected to be a tumultuous year. The firm will soon have to navigate more normalized consumer behavior, and we expect the beverage business--with its own set of idiosyncratic challenges--to return to focus in 2021.

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