PEP vs. KO earnings pairs trade: valuation gap and spread scenarios

The pair is at an extreme. Coca-Cola (KO) has run far ahead of PepsiCo (PEP). KO reports tomorrow, Oct 27, before the open, so the long-PEP/short-KO side of the spread carries event risk. All figures are as of Oct 26, 3:23 PM EDT unless noted.

PepsiCo (PEP): $135.32 || Fwd P/E 16.1x || Div yield 4.4% || 6M: -10.8% || 1Y: -6.8%

Coca-Cola (KO): $92.42 || Fwd P/E 28.0x || Div yield 2.3% || 6M: +22.5% || 1Y: +36.5%

Why the gap exists

• PEP earnings: Q3 (Oct 8) beat, with EPS $2.34 vs $2.30 and revenue $25.27B vs $24.97B. The stock rose 1.81%. The catch is that consensus EPS is down about 8% over 90 days, so guidance is still being reset.
• KO momentum: KO has beaten EPS in each of the last four quarters. The last two beats were +4.3% and +6.2%, and the stock rose about 6% and 4.6% on those releases.
• Share shift: KFC US (about 3,700 locations) is moving to Coca-Cola from 2027. TD Cowen sees only a 10–20 bp revenue benefit for KO, but the headline hurts PEP’s sentiment (Oct 16, 2026).
• PEP pressure: CEO Laguarta said margin recovery is taking longer than planned. Activist Elliott is also involved (Oct 15, 2026).

KO print tomorrow

Consensus is EPS $0.88 on revenue of $12.91B. KO’s bar is high. UBS notes its valuation is above historical averages, and the options-implied move is about 2.9%. Analysts such as RBC, UBS, TD Cowen ($100 target) and Piper Sandler ($102 target) are bullish.

Scenarios for the spread

• Mean-reversion case (long PEP / short KO): KO trades at 28x forward earnings against 16x for PEP. A KO miss or soft guidance could make the premium contract quickly. PEP also pays a 4.4% yield, which offsets carry on the long side.
• Momentum case: KO’s beat streak and rising estimates have kept the premium intact. Another beat could push the spread wider before it mean-reverts. Meanwhile PEP’s estimates are still falling, and cheap stocks with falling estimates can stay cheap.
• Timing: PEP’s next report is tentatively Feb 11, 2027, so tomorrow’s KO print is the only near-term catalyst. Some traders wait for the reaction before putting the spread on. Others size down going into the print.

The valuation gap is large, but it has been driven by diverging earnings revisions. It is not a mispricing in isolation. The ratio’s own history would help show how extreme this is.