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No, this post isn't about taste preferences. Personally, I don't care for either Coke or Pepsi (I'm not really a soda person at all). What I'm trying to figure out is how the two companies compare in terms of durable competitive advantage. For those of you who have read "Warren Buffett and the Interpretation of Financial Statements," you'll recall that the authors regularly use Coca-Cola, Moody's, and Wrigley's as examples of companies with durable competitive advantages in their industries. I completely agree with their assessment of Coke, and it's clear that Warren's opinion of the company is equally high, since last I checked KO made up 17% of his portfolio, making it Buffett's single largest holding.

I'm confused, though, because it seems that Pepsi is an equally high-caliber corporation, yet it isn't mentioned in the book, and Buffett has never (to my knowledge) owned a stake in PepsiCo. I found this excerpt in an MSN Money article, and it pretty much summarizes what I suspected about Pepsi.

While its name may not be quite as famous as Coke's, Pepsi's is close, and its products -- Doritos, Gatorade and its cola -- are also known across the globe, a Buffett-type quality. In terms of quantitative factors, Pepsi also shines. Over the past decade, its EPS have dipped just twice, growing from 95 cents to $3.34 during that time and showing steady, predictable earnings growth.

In addition, Pepsi's average return on equity over the past decade is 29.2%, nearly doubling my Buffett-based model's 15% minimum, and its ROE over the past three years is an even-better 31.1%. Management appears to be doing a great job with shareholders' money.

One more reason my Buffett-based model likes Pepsi involves its debt. Buffett likes companies that are financed conservatively, and the model I base on his approach requires that a company could, based on its earnings, pay off its debts within two years. Currently, Pepsi has $4.2 billion in debt but annual earnings of $5.6 billion. It could use those earnings to pay off its debts in less than a year, which this model considers to be exceptional.


So my question is: is there anything that would disqualify Pepsi from having a true durable competitive advantage, and if not, how does this mesh with Warren Buffett's outspoken loyalty to Coke? As rare as it may be, could it be that two direct* competitors in the same industry both have significant durable competitive advantages?

*Note: Coca-Cola is significantly larger in terms of market share (43.1% vs. 31.7% for Pepsi) and has a much larger international market. However, Pepsi has diversified much more into snack foods, restaurants (until it spun off YUM Brands), and other types of drinks. So while they have different focuses, most consumers would agree that Coke and Pepsi are direct competitors.

What do you all think?
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