PepsiCo, Inc. (NASDAQ:PEP) shares are down more than -12.88% this year and recently increased 1.23% or $1.27 to settle at $104.48. Activision Blizzard, Inc. (NASDAQ:ATVI), on the other hand, is up 19.93% year to date as of 06/12/2018. It currently trades at $75.94 and has returned 4.36% during the past week.
PepsiCo, Inc. (NASDAQ:PEP) and Activision Blizzard, Inc. (NASDAQ:ATVI) are the two most active stocks in the Beverages – Soft Drinks industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect PEP to grow earnings at a 7.69% annual rate over the next 5 years. Comparatively, ATVI is expected to grow at a 16.32% annual rate. All else equal, ATVI’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 28.72% for Activision Blizzard, Inc. (ATVI). PEP’s ROI is 16.40% while ATVI has a ROI of 7.60%. The interpretation is that PEP’s business generates a higher return on investment than ATVI’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. PEP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.97. Comparatively, ATVI’s free cash flow per share was +0.65. On a percent-of-sales basis, PEP’s free cash flow was -4.4% while ATVI converted 7.05% of its revenues into cash flow. This means that, for a given level of sales, ATVI is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. PEP has a current ratio of 1.30 compared to 2.20 for ATVI. This means that ATVI can more easily cover its most immediate liabilities over the next twelve months. PEP’s debt-to-equity ratio is 4.00 versus a D/E of 0.00 for ATVI. PEP is therefore the more solvent of the two companies, and has lower financial risk.Valuation
PEP trades at a forward P/E of 17.12, a P/B of 13.64, and a P/S of 2.32, compared to a forward P/E of 25.49, a P/B of 5.87, and a P/S of 8.02 for ATVI. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. PEP is currently priced at a -9.86% to its one-year price target of 115.91. Comparatively, ATVI is 0.08% relative to its price target of 75.88. This suggests that PEP is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. PEP has a beta of 0.70 and ATVI’s beta is 1.19. PEP’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. PEP has a short ratio of 1.36 compared to a short interest of 1.27 for ATVI. This implies that the market is currently less bearish on the outlook for ATVI.Summary
Activision Blizzard, Inc. (NASDAQ:ATVI) beats PepsiCo, Inc. (NASDAQ:PEP) on a total of 9 of the 14 factors compared between the two stocks. ATVI generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, ATVI has better sentiment signals based on short interest.