PepsiCo PEP) delivered better-than-expected Q3 results on Thursday, but its reduced full-year earnings outlook highlighted the challenges that have caused the beverage and snack giant to significantly underperform rival Coca-Cola KO).
Year to date, PEP shares have fallen more than 10%, while KO stock has climbed 25%, reflecting investors' preference for Coca-Cola's stronger operating momentum, improving margins, and more encouraging earnings outlook.
With PepsiCo trading at a much lower valuation and offering a substantially higher dividend yield, the question is whether its turnaround efforts can eventually narrow the performance gap.
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Pepsi Tops Q3 Expectations Despite Lowered Guidance
PepsiCo reported adjusted Q3 earnings of $2.34 per share, exceeding the Zacks EPS Consensus of $2.29 and increasing 2% year over year. Revenue rose 5.6% to $25.27 billion, also topping expectations of $24.87 billion, with consolidated organic revenue growth accelerating to 3.1%.
International operations remained a bright spot, with organic revenue rising 8%. However, continued weakness in North American beverages and snacks, along with higher input costs, weighed on profitability.
More concerningly, PepsiCo lowered its projected 2026 core EPS growth to 2.5%-3.5%, down from its previous 5%-7% outlook. Management now anticipates organic revenue growth of roughly 3%, although inflation and continued investments in its domestic businesses are expected to pressure margins.
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Coca-Cola's Stronger Growth Outlook Gives KO the Edge
Unlike PepsiCo, Coca-Cola raised its full-year guidance following its most recent Q2 results, when organic revenue increased 6% and adjusted EPS jumped 11% to $0.97. Notably, Coca-Cola will be releasing its Q3 report at the end of the month on Tuesday, Oct. 27.
As of now, Coca-Cola expects approximately 5% organic revenue growth in 2026, with adjusted EPS projected to increase 9%-10%.
Coca-Cola's asset-light beverage concentrate and franchised bottling model has also supported stronger margins. In contrast, PepsiCo's extensive snack-manufacturing operations leave it more exposed to rising commodity and operating costs.
The Zacks Consensus Estimate currently calls for Coca-Cola's full-year EPS to climb nearly 10% to $3.29, considerably outpacing PepsiCo's projected growth.
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PEP Offers Better Valuation and Dividend Income
PepsiCo's underperformance has created a substantial valuation discount, with PEP trading at 14X forward earnings compared with 26X for Coca-Cola.
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PepsiCo also offers a dividend yield of 4.79%, nearly double Coca-Cola's 2.47%. Both companies have lengthy histories of annual dividend increases spanning more than 50 years, making them established income-oriented investments as “Dividend Kings”.
However, PepsiCo's discounted valuation and higher yield reflect concerns surrounding its slower earnings growth and margin pressures.
Conversely, Coca-Cola's premium multiple appears more justified by its stronger profitability and earnings trajectory.
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Conclusion & Strategic Thoughts
PepsiCo's Q3 earnings beat and attractive valuation offer some encouragement, but its reduced guidance suggests a meaningful recovery may take time. That said, PepsiCo has opportunities to close the gap with Coca-Cola through international expansion, productivity improvements, healthier snack offerings, and stronger energy drink sales.
Unfortunately, PEP currently carries a Zacks Rank #4 (Sell), reflecting unfavorable earnings estimate revisions, while KO sports a Zacks Rank #2 (Buy), supported by its stronger earnings outlook.
Although PepsiCo offers greater value and dividend income, Coca-Cola remains the more appealing near-term investment. PEP could eventually stage a rebound, but investors may want to see improving North American demand, stronger margins, and upward earnings estimate revisions before betting on a sustained turnaround.
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This article originally published on Zacks Investment Research (zacks.com).