Would you prefer an adult beverage or something milder in your portfolio?
That’s the question before us as we pit soft-drinks and snacks giant PepsiCo (NASDAQ: PEP) against beer master Anheuser Busch InBev (NYSE: BUD) in this battle of giant beverage stocks. Here’s my take on whether the soda star or the brewing bigwig is the more advantageous stock to buy right now.
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The trend isn’t their friend
Despite the name it takes from its signature product, PepsiCo isn’t entirely built on a foundation of beverages. For many years, it’s also had a thriving business in snack foods — namely, its Frito-Lay and Quaker portfolios. In contrast, AB InBev is laser-focused on the production and sale of beer.
Despite their vast sizes and global reach, PepsiCo and AB InBev are both experiencing difficult times right now. U.S. consumers, in particular, have been opting more for healthier and/or more satisfying products than soda, traditional snack foods, and mass-market beer.
To its credit, PepsiCo has attempted to address this changing attitude toward its signature product line. For example, in 2001 it acquired Quaker, maker of the famous oats and owner of popular sports drink brand Gatorade. More recently, AB InBev has devoted more resources toward promoting its premium beer brands in an attempt to head off the craft-beer trend. Both efforts have had mixed success.
It says something about the managerial talent at both companies and the power of their most familiar brands that each company is still managing to grow its business while facing these headwinds. In fiscal 2018, PepsiCo’s organic revenue increased by nearly 4% year over year, while AB InBev’s was a bit higher at almost 5%.
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Flat drinks
On average, analysts tracking PepsiCo and AB InBev are forecasting growth over the next fiscal year for both companies.
The prognosticators believe PepsiCo will increase its per-share net profit by a relatively strong 8%, although headline revenue is only projected to rise by 4%. These numbers are pretty good for an old-line business with a big basket of un-hip products.
The same goes for AB InBev. Analyst estimates project the mighty brewer will lift its fiscal 2020 earnings per share (EPS) by 4% on the back of a rise in revenue at approximately the same rate.
Both companies pay out a dividend, with PepsiCo serving up an annualized dividend of $3.71 per share (a yield of 3%) and AB InBev paying out an annualized dividend of $2.23 per share (a yield of 2.74%). PepsiCo’s dividend rate got a bump up this past quarter, while AB InBev’s rate was down significantly this past year.
The EPS and dividend rate differences between the two are not vast. What is significantly different is the PEG ratio. The forward five-year PEG for PepsiCo is 4.7, according to Yahoo! Finance, while that for AB InBev is 1.5. As PEG ratios go, neither stock is considered undervalued, but AB InBev is much closer to what would be considered fair value. This can be explained, in part, by the fact that PepsiCo’s stock is up by 26% over the past year (although the price has come down considerably from its mid-2018 peak). AB InBev’s stock price, meanwhile, has sagged by 13% over the same stretch.
Future prospects point down
To be honest, I’m not excited about the stock prospects of either company. U.S. consumers are more sophisticated and discerning these days, and are thankfully finding alternatives to cheap beer, ultra-sugary soft drinks, or unhealthy snacks.
Overall U.S. beer sales, in terms of volume, dropped 1% in 2018 against a rise of 4% in the craft-beer category (AB InBev’s ever-rising competition). Also, in terms of volume, soft drinks have declined every year since 2004, a long losing streak.
These trends aren’t going to reverse for any reason, no matter how much marketing power is devoted to Pepsi, Doritos, or Budweiser. And the two companies are playing a tough, seemingly eternal game of catch-up with healthier and/or more premium products.
Both beverage makers have been around for decades and have many of the typical slow-growth characteristics found in mature companies. Between the two, I’d pick AB InBev over PepsiCo, largely due to the disparity in the PEG ratio. But I’m not sure I’d rush to buy the shares.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.
