KO/PEP earnings spread: what changed and what didn’t after Coca-Cola’s beat
KO/PEP earnings spread: what changed and what didn’t after Coca-Cola’s beat
KO’s report changed the reason for the valuation gap more than the gap itself. The beat-and-raise makes the "KO is expensive, so fade it" version of the trade harder to defend on fundamentals alone. It didn’t close the spread.
What KO delivered
Coca-Cola (KO) reported Q3 on Oct 27, 2026. Adjusted EPS was $0.91 vs $0.88 expected, and revenue was $13.4B vs $12.93B.
- Quality of growth: Organic revenue rose 7% on 5% unit case volume growth. Management cited roughly 4 points of pricing in the call, while the news wire put price/mix at 1%. The two sources differ on this.
- Guidance raised: FY2026 EPS growth is now at least 11%, up from 9–10%. Free cash flow guidance rose to at least $13.0B from about $12.4B.
- Margins: Comparable operating margin was 32.9% vs 31.9% a year earlier.
- Weak spot: North America volume was flat. Latin America (+25% revenue) carried the quarter.
The stock was down 1.35% at $91.45 (as of Oct 27, 3:30 PM EDT). That means the good news was largely priced in.
PEP’s side of the ledger
PepsiCo (PEP) reported Q3 on Oct 8, 2026. EPS was $2.34 vs $2.30 expected, and the stock rose 1.81%. Its Q2 report, though, was a slight miss that sent the stock down 3.6%. Consensus FY EPS revisions show -8% over 30 days, which is worth checking against what’s driving it before leaning on it.
The spread after earnings
| Metric (as of Oct 27, 2026 unless noted) | KO | PEP |
|---|---|---|
| Forward P/E | 28.0x | 16.1x |
| Dividend yield | 2.3% | 4.4% |
| 1-year return | +35.8% | -7.7% |
| 6-month return | +24.4% | -10.2% |
| Fair value upside | -11.1% | +22.7% |
| Latest gross margin | 62.9% | 54.5% |
The forward P/E gap is about 12 turns. KO is also priced for perfection after a +35.8% year, while PEP is the laggard.
How to read the trade
- Bear case for KO relative to PEP: The premium is wide, the fair value model shows -11.1% downside, and KO’s earnings reaction was flat to negative despite a raise. A long PEP / short KO position bets on mean reversion in valuation and in the 1-year return gap.
- Bull case for KO (the counterweight): KO now has the stronger fundamentals. Organic growth is 7%, guidance is rising, and margins are about 8 points higher. The consensus revisions favor KO (+0.33% over 90 days) over PEP (-8.15%). A premium can persist while revisions keep diverging.
- What changed: The raise removes the "KO’s growth is about to stall" argument. It leaves a pure valuation and momentum bet, which can stay wrong for a long time.
- Key risk to watch: PEP’s next report is tentatively Feb 11, 2027. KO’s flat North America volume is the most likely place for its premium to be tested.
Net: the evidence supports the spread being justified in part. It doesn’t show it has stopped widening. A convergence thesis now needs a catalyst, such as a PEP estimate stabilization or a KO growth slowdown. Valuation alone isn’t enough.