Beverage companies are introducing a number of changes to their products in response to the varying needs of consumers and shift in preference toward healthier beverages.

Two soft drink giants, The Coca-Cola Company (KO Quick QuoteKO - Free Report) and PepsiCo Inc. (PEP Quick QuotePEP - Free Report) have recently introduced changes in their product line, coming up with a “good-for-you” range.

As Coca-Cola and PepsiCo are in close competition, let us analyze the factors to determine which company is a better investment option.

As both the companies currently carry a Zacks Rank #3 (Hold), we need to delve deeper into the factors beyond rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
Market Capitalization: Coca-Cola has a market cap of $180 billion whereas PepsiCo’s market cap stands at $151.8 billion. Market cap largely defines the size of a company. While picking stocks, solely on the basis of size, it is always safe to opt for a larger company, as they get usually give consistent returns. Clearly, on this front, Coca-Cola has an edge over PepsiCo.

Price Performance: In terms of stock price performance, PepsiCo seems to be in a better position. The company’s 4.9% growth is better than the Zacks categorized Beverages/Soft Drink industry’s year-to-date decline of 3.6%. Meanwhile, Coca-Cola has registered a decline of 3% over the same time frame. PepsiCo has also gained more than Coca-Cola over the last six months.
 

Valuation Metrics: But both stocks are a tad overvalued, as is evident from their unfavorable forward Price to earnings (P/E) ratios compared to the industry. P/E ratios for PepsiCo and Coca-Cola are 21.9 and 21.8, respectively industry’s 19.8. PepsiCo’s shares look a little more expensive compared with Coca-Cola.

Estimate Revision: Upward estimate revision reflects bullish prospects for a stock. However, both these companies’ estimates have remained stable over the past month. Current-year earnings estimates project growth of 5% for PepsiCo while Coca-Cola is expected to see a 4.6% decline in earnings. Moreover, PepsiCo has a positive earnings surprise history for the trailing four quarters, with an average beat of 5.35%. The same for Coca-Cola stands at 2.63%.

Margins: Core gross margin expanded 82 basis points (bps) and core operating margin expanded 85 bps for PepsiCo in the first nine months of 2016. But for Coca-Cola comparable gross margin declined 40 bps and comparable operating margin declined 20 bps over the same period.

Return on Equity: There is a stark difference between the return on equity (ROE) of the companies. PepsiCo boasts a ROE of 56.16%, while the same for Coca-Cola is 32.47%.

Dividends: Coca-Cola has a slight advantage over PepsiCo in terms of dividend payouts. Dividends are usually, but not always, an indication of solid financial health. Coca-Cola has a current dividend yield of 3.36%, better than PepsiCo's 2.86%.

Final Thoughts

Going by the statistics, PepsiCo sure enjoys an edge over Coca-Cola in terms of ROE, margins, earnings growth and price performance. However, the difference in the companies’ key metrics is quite marginal.

PepsiCo has outperformed our earnings estimates by a higher percentage and is expected to register positive earnings growth in 2016. Again, both the companies boast strong brand recognition, focus on product innovation and has a huge international presence, which will likely drive growth, going forward.

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