PepsiCo, Inc. (PEP) in Harrison, N.Y., and Monster Beverage Corporation (MNST) in Corona, Calif., are two prominent players in the non-alcoholic beverage industry. PEP operates food, beverage, and snack businesses worldwide. It markets its products through a network of direct-store-delivery, customer warehouse, distributor networks, as well as through e-commerce platforms and retailers. MNST develops, markets, sells, and distributes energy drink beverages and concentrates internationally. The products are sold primarily to bottlers and beverage distributors and directly to retail grocery and specialty chains, wholesalers, merchandisers, convenience chains, e-commerce retailers, and the military.

Easing travel restrictions have of late helped the non-alcoholic beverage industry to benefit from rebounding demand for healthy, refreshing, and ready-to-drink beverages from both fountain retailers and e-commerce platforms. Although inflationary pressures have brought the industry increasing production costs, companies in the sector have raised their product prices to offset their heightened costs. Furthermore, as participants in a consumer defensive industry, non-alcoholic beverage companies have been witnessing increasing investor attention amid current market volatility. Indeed, the non-alcoholic beverages market is expected to grow at an 8.2% CAGR to $1.73 trillion by 2028. So, both PEP and MNST are expected to benefit.

But, while MNST's stock has declined 7.5% in price year-to-date, PEP has surged 7.1%. PEP is also a clear winner with 12.3% gains versus MNST’s 5.2% returns in terms of their past year's performance. But which of these stocks is a better pick now? Let’s find out.

Recent Financial Results

PEP’s revenues for its fiscal third quarter, ended September 4, 2021, increased 11.6% year-over-year to $20.19 billion. The company’s non-GAAP gross profit came in at $10.82 billion, representing a 9.2% rise from the prior-year period. Its non-GAAP operating profit was $3.24 billion, up 6.5% from the prior-year period. PEP’s non-GAAP net income came in at $2.48 billion, indicating a 7.4% year-over-year improvement. Its non-GAAP EPS increased 7.8% year-over-year to $1.79. The company had $6.51 billion in cash and cash equivalents as of September 4, 2021.

For its fiscal second quarter ended, June 30, 2021, MNST’s net sales increased 33.6% year-over-year to $1.46 billion. The company’s gross profit came in at $836.84 million for the quarter, up 26.9% from the prior-year period. Its operating income came in at $525.98 million, representing a 29.1% rise from its year-ago period. While its net income increased 29.7% year-over-year to $403.76 million, its EPS increased 27.1% year-over-year to $0.75. As of June 30, 2021, the company had $1.58 billion in cash and cash equivalents.

Past and Expected Financial Performance

PEP’s revenue and net income have grown at CAGRs of 5.9% and 18%, respectively, over the past three years. The company’s EPS has grown at a 19.2% CAGR over the past three years.

Analysts expect PEP’s EPS to increase 13% year-over-year in the current year and 7.9% next year. Its revenue is expected to grow 11.4% in the current year and 4.1% next year. The stock’s EPS is expected to grow at a 9.8% rate per annum over the next five years.

In comparison, MNST’s revenue and net income have grown at CAGRs of 12.8% and 19.3%, respectively, over the past three years. The company’s EPS has grown at a 22.2% CAGR over the past three years.

Analysts expect MNST’s EPS to increase 11.8% year-over-year in the current year and 13.2% next year. Its revenue is expected to increase 17.8% year-over-year in the current year and 10% next year. Analysts expect the stock’s EPS to grow at a 14.8% rate per annum over the next five years.

Valuation

In terms of forward EV/Sales, MNST is currently trading at 7.89x, which is 143.5% higher than PEP’s 3.24x. In terms of forward EV/EBITDA, MNST’s 22.44x compares with PEP’s 17.71x.

Profitability

PEP’s trailing-12-month revenue is almost 14.9 times higher than MNST’s. However, MNST is more profitable, with a 36.1% EBITDA margin versus PEP’s 18.1%.

Also, MNST’s 18.4% and 22.1% respective ROA and ROTC values compare with PEP’s 8% and 12.8%. 

POWR Ratings

While MNST has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, PEP has an overall B grade, equating to Buy. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both PEP and MNST have B grades for Quality, which is consistent with their higher-than-industry profitability ratios. PEP’s 53.9% trailing-12-month gross profit margin is 56.9% higher than the 34.4% industry average. MNST’s 57.9% trailing-12-month gross profit margin is 68.3% higher than the 34.4% industry average. 

PEP has a C grade for Value, which is consistent with its higher-than-industry valuation ratios. The company has a 3.24x trailing-12-month EV/Sales, which is 64.3% higher than the 1.97x industry average. However, MNST’s D grade for Value reflects its overvaluation. MNST’s 7.89x trailing-12-month EV/Sales is 299.3% higher than the 1.97x industry average.

Of the 38 stocks in the B-rated Beverages industry, MNST is ranked #21, while PEP is ranked #14.

Beyond what we’ve stated above, our POWR Ratings system has also rated PEP and MNST for Growth, Momentum, Stability, and Sentiment. Get all MNST ratings here. Also, click here to see the additional POWR Ratings for PEP. 

The Winner

The non-alcoholic beverage industry is witnessing rebounding demand with the easing of travel restrictions. Moreover, introducing new products from active collaborations with other leading companies should drive the performance of leading players PEP and MNST. However, a relatively lower valuation and larger market share we think make PEP a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Beverages industry.

PEP shares were trading at $158.22 per share on Monday afternoon, down $0.59 (-0.37%). Year-to-date, PEP has gained 9.07%, versus a 20.69% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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