Overview of Companies The Coca-Cola company is a non-alcoholic beverage company with world wide

headquarters located in Atlanta, Georgia. The company owns and markets over 500

beverages. Four of these beverages are within “the world’s top five nonalcoholic

beverage brands.” (2012 10-k p3). Coca-Cola’s 2020 vision is to “double the size of our

business- and the value we create- during this decade.” (annual review p12). Coca-Cola

is expecting “rising economic vitality in the developing world, a billion people joining

the global middle class this decade and rapid urbanization” (p10). Pepsico is a nonalcoholic beverage and snack company that serves customer in

over 200 countries. Pepsico owns 22 brands that each separately generate $1 billion in

estimated retail sales. (Pepsi 2012 Annual report p11). Pepsi is transforming its business

to “reinforce its existing value drivers”, move its portfolios “towards attractive

high-growth spaces,” increase the benefits of “one PepsiCo,” aggressively build “new

capabilities,” strengthen the team culture, and support sustainability. (2012 annual report

2-33)Coca-Cola’s acquisition of Coca-Cola Enterprises

Coca-Cola Enterprises is one of Coca-Cola’s major bottling companies. In

October 2010, The Coca-Cola Company purchased the business of Coca-Cola

Enterprises. The acquisition would “better serve the unique needs of the North American

market.” (2010 10-k p104). Although the CCE transaction was structured to be primarily

cashless, Coca-Cola assumed “approximately $8.9 billion of CCE debt.” (p103) The acquisition has made serious changes to Coca-Cola’s financial statements.

First of all, since the acquisition of CCE, Coca-Cola’s “inventory turnover” increased

from 4.88 to 6.00. This means that Coca-Cola should be able to move its inventory

through production in a shorter amount of time. This encouraged Coca-Cola’s “inventory

purchase” to almost double between 2009 and 2010. Second, “The Company recorded

$8,050 million of goodwill” and increased 1 billion since. (P40). The goodwill primarily

increased the synergistic value of the company by creating “a unified operating system”

(p103). Third, Coca-Cola’s sales increased about 18 billion dollars (or 50%), net income

increased 3 billion, and cash flow from operations increased 2 billion. Although Coca-Cola received many benefits from the acquisition of CCE, the

fallout from the acquisition poses challenges. The purchase of CCE almost tripled

long-term debt and increased cost of goods sold. Further, the company’s long-term debt

increased almost 400% since 2007. Current liabilities almost doubled between 2009 and

2012. The acquisition has not yet improved the company’s asset turnover rate, return on

assets, or profit margin ratio. The company’s cash flow ratio also decreased since the

purchase. Instead of using equity to finance debt, Coca-Cola issues debt “to lower our

overall cost of capital and increase our return on shareowners’ equity.” Coca-Cola issued

42 billion and paid 38 billion in debt in 2012. Coca-Cola’s return on equity and profit margin ratio for return on equity

decreased since the CCE purchase. The company’s “capital structure leverage” increased

from 1.98 to 2.58 between 2007 and 2012. The company assets have grown at a faster

rate than equity and possibly increased risk. In 2012, Coca-Cola made equity more

accessible to investors by announcing a two-for-one stock split in July of 2012. Over the

last three years, Coca-Cola has continued to report current ratios above 1. Coca-Cola

maintains a quick ratio above .75 (the industry standard is about .50). Coca-Cola also

continues to pay dividends to shareholders. Coca-Cola’s stock currently trades at about

$37.00. The company’s Price to Earning ratio is 19.37. Pepsico’s Acquisition of Pepsi Bottling Group and PepsiAmericas.

The Pepsi Bottling Group was the world’s largest bottler of Pepsi beverages.

Pepsico purchased The Pepsi Bottling Group and Pepsi Americas in 2010. “The total

purchase price was approximately $12.6 billion, which included $8.3 billion of cash and

equity and the fair value of our previously held equity interests in PBG and PAS of $4.3

billion.” (2010 10-k p 118). The acquisition included 9 billion in debt 8 billion in

goodwill, and 5 billion in property plant and equipment. (note 15)After the acquisition, Pepsi’s inventory turnover rate increased substantially from

6.23 to 8.45. The company increased its sales by over 20 billion, almost doubled its

inventory purchase, and increased its accounts receivable turnover rate. The company’s

cash flow from operations has increased over 1 billion dollars since the acquisition.However, Pepsi’s long-term debt increased almost 20 billion between 2007 and

2012. At the same time, the cost of goods sold has almost doubled. During this period

the company reported decreases in “return on assets” and “asset turnover rate.” This has

resulted in the company’s profit margin ratios decreasing. The company has not used

large amounts of debt financing to generate cash for repayment of its debt.Pepsico’s liquidity has generally decreased since the acquisition. The current

ratio hovers around 1 and the quick ratio steadily decreased to .74. The company’s cash

flow ratio has continually decreased to .48. The company’s “capital structure leverage”

increased from 2.40 to 3.42 between 2007 and 2009. Pepsi’s stock trades about $79.00.

The company has a P/E ratio of 18.76. Assessment

In assessing the two companies, Coca-Cola is most likely a better investment than

Pepsi. With that said, both companies have not had incredible performance recently.

Both company’s ROA and ROE have decreased, their long-term debts have increased,

and they have become less liquid.

However, Coca-Cola is the best for four reasons. First, Coca-Cola’s net income is

about 3 billion dollars more than Pepsi, Coca-Colas has more than 1 billion more in

retained earnings and pays higher dividend rates than PepsiCo. Coca-Cola achieves this

even though it makes fewer purchases and makes 20 billion dollars less in sales. This can

be attributable to Coca-Cola’s higher return on asset rates. Although PepsiCo has higher

turnover rates and higher levels of sales, the company is selling its products at lower costs

with higher costs of goods sold and is therefore not making very high profits. Second, Coca-Cola has about 10 billion dollars less in long-term debts than Pepsi.

This makes Coca-Cola a safe bet for a long term investment. Coca-Cola is actively

financing its debt by issuing larger amounts of debt than Pepsi. Coca-Cola will be able to

generate cash by collecting more interest payments. Third, Coca-Cola’s “Cash Flow From Operations” is almost 2 billion dollars more

than Pepsi. Coca-Cola is making more money from its essential operations and the

company is moving towards its “2020” goal. Pepsi is not successfully utilizing its vast

array of products and revenue. Pepsi’s beverage and snack segments may be too large for

the company to make substantial profits in the future Finally, Coca-Cola’s stock is more affordable and pays higher dividends than

Pepsi. Investors will make more from dividend payments with Coca-Cola.