Coca-Cola (NYSE: KO) stock is believed to be a better pick than its sector peer Costco (NASDAQ: COST) due to its better prospects and higher profitability. Despite both companies being in the Consumer Defensive sector, KO stock trades at a higher valuation multiple of 5.9x revenues compared to 1.4x for Costco. In an analysis of Coca-Cola vs. Costco, factors such as historical revenue growth, returns, and valuation were considered, leading to the conclusion that KO will offer higher returns than COST in the next three years.
Costco stock has outperformed Coca-Cola in recent years, with KO stock seeing gains of 20% and COST stock experiencing a strong 110% increase over the last three years. However, returns for KO stock were inconsistent, while COST stock delivered more robust returns over the same period. Despite this, beating the S&P 500 has been challenging for individual stocks, including heavyweights in the Consumer Staples sector. The Trefis High Quality Portfolio, consisting of 30 stocks, has consistently outperformed the benchmark index over recent years.
Costco’s revenue growth has been better than Coca-Cola, with the former seeing an average annual increase of 13.4% compared to 11.6% for the latter. Coca-Cola’s growth has been primarily driven by solid pricing trends in both at-home and away-from-home channels, with North America and Latin America markets leading the way. Costco’s strong growth can be attributed to factors such as its membership income and high membership renewal rates, which ensure a steady revenue stream and increase the lifetime value of each customer.
Coca-Cola is more profitable than Costco, with a higher operating margin and stronger profitability metrics. However, Costco offers lower financial risk, with a lower debt-to-equity ratio and a higher cash cushion compared to Coca-Cola. Despite these differences, using P/S as a base for prospects, it is believed that Coca-Cola will offer better returns in the next three years due to its better valuation and growth potential.
Looking at the current valuation multiples compared to historical averages, it is evident that Coca-Cola’s stock is undervalued, with a higher growth potential if valuation multiples were to return to their historical averages. While KO may outperform COST in the next three years, it is essential to consider how Coca-Cola’s peers fare on metrics that matter. Investors can find more valuable comparisons for companies across industries at Peer Comparisons and use tools such as the Trefis Market Beating Portfolios for investing decisions.
