Take a Swig of Coke Stock on Next Market Swoon

PepsiCo (NYSE: PEP) was expected to report double-digit revenue growth Wednesday morning. But is that good enough to justify an investment or would your portfolio prefer Coca Cola (NYSE: KO)?

Analysts were expecting Pepsi to report EPS of $1.30 per share on revenue of $17.28 billion -- 11.4% higher than the year before. Moreover, there is a hint that Pepsi will report slower growth in North America than in emerging markets.

That's because, according to SeekingAlpha, PepsiCo CFO Hugh Johnston recently told a Barclay’s Back to School Conference that emerging markets generate over 30% of its total revenue -- partially offsetting "losses in North America and Europe."

And there are certainly risks to PepsiCo's business that are worth considering. For example, its stock has fallen over the last few months due to investor concerns about the outlook for the global economy and emerging markets, a strong dollar that would make it less competitive in global markets, increased competition, and higher prices for corn -- a key ingredient in many of its products.

Coke also faces headwinds. Bloomberg cited one analyst that lowered earnings estimates on the company. For the third quarter, a JPMorgan analyst lowered his EPS estimate 3% from $1.03 to $1.00; for 2011, he reduced it 1.5% from $3.86 to $3.80 and for 2012, he cut 4% from $4.23 to $4.06. While the analyst thinks Coke's fundamentals and growth potential rank high with peers, he thinks that foreign exchange and interest income changes will hurt future earnings.

The JPMorgan analyst thinks that Coke stock has had too good of a rise. Coke has gained almost 40 percent since July 2010 and that it's now over-priced. He lowered his 2012 target for the stock from $80 to $76.

Should you avoid Pepsi and Coke?

• Pepsi: growing, profitable company; over-priced stock. Pepsi revenues spiked 33.8% to $62.4 billion in the last year while its net income rose 6.3% to $6.3 billion yielding a wide 10.2% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is an over-valued 2.09 with a P/E of 15.7 on earnings forecast to grow 7.5% to $4.74 in 2012.
• Coke: growing, profitable company, slightly over-priced stock. Coke revenues are up 13.3% in the last year to $32.2 billion and its net income spiked 73% to $12.5 billion while it earned a whopping 29.8% net profit margin. And its PEG is reasonable 1.28 on a P/E of 12.5 with earnings forecast to grow 9.8% to $4.23 in 2012.

Coke looks like a much better bet than Pepsi. However, given concerns about its upcoming earnings, I would be inclined to wait until another market crunch to pick up Coke stock at a lower price.