Coke And Pepsi: The New Big Tobacco?
Charles Sizemore | Apr 24, 2013 11:44AM ET
Earlier this year, I commented that semiconductor titan Intel (VIG ).
But what about price? Coke and Pepsi have both seen price/earnings multiple contraction since the go-go days of the 1990s; for that matter, so has the entire U.S. stock market.
Yet both sport current multiples well above the market average of 17, making them too expensive to be “tobacco stocks.” (Of course, tobacco stocks are too expensive to be “tobacco stocks” too, so at least they have something in common.)
Pricing here is complicated. Coke has what is by most accounts the most valuable brand in the world, and Pepsi’s brands are also quite valuable. It is the value of these brands that allows the stocks to trade at premiums to the market even while their core products are seeing weak demand. But then, 20 years ago, I might have said the exact same thing about the branding power of the Marlboro Man. Altria still has branding power relative to its Big Tobacco rivals, but this has to be viewed within the context of a shrinking industry.
In other words, I don’t expect Coke’s brand, as iconic as it is, to justify a premium valuation forever.
Bottom line: It would appear that Coke and Pepsi are slowly transitioning into vice stocks, though they are not quite there yet based on valuation. Both stocks pay solid dividends and have a history of growing their dividends. But at current prices, I wouldn’t expect either to outperform the market by a wide margin.
And on a final note, I’m going to be a proper Texan by enjoying a Dr. Pepper with my lunch.
Sizemore Capital is long VIG
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