Pause and Refresh With These Stocks

It's tough to invest when the stock market appears hellbent on rising, even as the consumers on whom our economy depends continue to tread water. Nurturing a large cash position may make sense, but you don’t want to miss out on additional gains, either. If you're parched by this drought of good investments, Fools, grab a frosted glass. The non-alcoholic beverages industry may strike the perfect balance between portfolio offense and defense.

Pop, fizz, and fizzle, too?
Does Coca-Cola (NYSE: KO  ) beat PepsiCo (NYSE: PEP  ) ? Is Dr Pepper Snapple (NYSE: DPS  ) the new real thing? We’ll get to that, but first, let's start with a few gulps of big-picture perspective.

First, recognize that soda, bottled water, and energy drinks -- as popular as they may be -- are not consumer staples in the same way food is. When's the last time you heard of someone heading for the soup kitchen because they couldn’t get their hands on a Red Bull or Gatorade?

Second, U.S. carbonated soft drink consumption has been declining for years since peaking in 2004. U.S. consumers' concern for their flabby midsections plays a role in that phenomenon, but the recession has also probably sapped demand, especially in terms of pricey vending machine sales. Non-carbonated drinks haven't fared much better, as the recession weighs heavily on U.S. bottled water sales as well. By contrast, the world's developing regions saw the bottled water business grow briskly in 2008, while volumes across ready-to-drink categories effervesced well into the double digits, in certain cases.

In short, a company's geographic exposure is crucial in determining just how much risk a particular beverage stock involves. Furthermore, a U.S. economic recovery offers plenty of potential upside to industry results, which in turn could lift share prices.

On that note, let's take a peek at the geographic mix for the three biggest industry names, and then dive into company details.

Company

Market Cap

Dividend Yield

Profit Margin (TTM)

% North America Sales*

% Ex-North America Sales*

Coca-Cola

$119.4 B

3.2%

20.3%

34.2%**

65.8%**

PepsiCo

$91.6 B

3.1%

11.9%

>45.8%***

54.2%***

Dr Pepper Snapple

$6.9 B

N/A

(4.0%)

100.0%****

N/A

Data from Yahoo! Finance, company reports, and Capital IQ, on Sept. 14.
*Based on data for the 12 months ended July 3, 2009.
**Calculation excludes the Corporate segment, which is reported as a single geographic unit.
***Calculation excludes the Americas Beverages segment, which represents 24.3% of reported net revenue but includes North and South America as a single unit.
****Mexico and the Caribbean represent 7% of sales.

Does "biggest" mean "best?"
The world's largest beverage company, Coca-Cola, will get our analysis flowing. Even though the company's carbonated soft drink market share slipped in 2008, it's still the top U.S. player by a wide margin. Across beverage categories, Coca-Cola's 2008 volume decline of 1.6% bested weaker performances by Pepsi and Dr Pepper Snapple. "Less bad" is good, of course, but it's hardly synonymous with growth. That's why I get all bubbly about the company's international business.

Coca-Cola's worldwide unit volume grew 5% in 2008, on top of a 4% five-year average. Developing regions and bottling investments powered that growth, and the company expects more of the same over the next 12 years. Nonetheless, I remain cautious: As emerging-market consumers become more health-conscious, will soda consumption eventually spiral downward, a la the U.S. trend? If so, it's encouraging to know that Coca-Cola has doubled the presence of non-carbonated beverages in its portfolio since the year 2000, from 11% to 22%.

Finally, Coca-Cola trumps the competition on profit margin. Unsurprisingly, that dominance extends to North American bottling heavyweight Coca-Cola Enterprises (NYSE: CCE  ) and emerging-market-focused bottler Coca-Cola Hellenic (NYSE: CCH  ) .

Two more for the road
While Coca-Cola may be my favorite offense/defense mix, its market position is not unchallenged. And that's where PepsiCo comes in, brandishing its 18 $1 billion-plus brands versus Coca-Cola's 13. First, let's note that Pepsi is really two businesses -- beverages and snacks. Brands such as Quaker Oats and Sabra dips may add stability to the portfolio, but they also expose Pepsi to a fuller range of commodity costs and industry competitors. Furthermore, 2008 companywide volume was up a meager 1%, raising the question of whether mixing chips and drinks makes a worthwhile recipe.

However, Pepsi does lead Coca-Cola in non-carbonated beverage market share. In view of healthy living trends, I'd say that's a clear positive. Whether that edge is diminished by Pepsi's exposure to snack foods such as Lay's and Cheetos, you'll have to be the judge.

Finally, our sip-test brings us around to Dr Pepper Snapple. Spun off from Cadbury (NYSE: CBY  ) in 2008, its smaller size hasn’t been a disadvantage. In 2008, the company actually captured market share by 0.3 percentage points, even as volume slipped. Also, its 2008 profit margin was artificially depressed by a large non-cash impairment charge.

On the business side, Dr Pepper Snapple is something of a niche player, boasting six of the top 10 non-cola carbonated brands, including 7UP and Canada Dry. Management is particularly keen on tapping underpenetrated markets, although this strategy assumes that brands such as Dr. Pepper can move beyond a strong regional base and capture similarly strong national appeal. All in all, the company looks like the riskiest bet.

Bottoms up!
Clearly, this hasn’t been a comprehensive survey. We haven’t discussed a potential government soda tax, for instance. Nor have we hit all the industry players, although I purposefully excluded the fast-growing Hansen Natural (Nasdaq: HANS  ) -- with over 90% of its sales levered to energy drinks, the company is short on defensive characteristics.

That said, additional research could go a long way in satisfying your thirst for an investment that can outperform during a broad sell-off, yet benefit significantly from economic upside.

Related Foolishness:

Coca-Cola and PepsiCo are Motley Fool Income Investor recommendations.  Coca-Cola is also an Inside Value pick. Hansen Natural is a Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak owns shares of Coca-Cola but no other company mentioned. The Fool's disclosure policy offers a steady pour, despite having gone cold turkey on high-fructose corn syrup.


Read/Post Comments (1) | Recommend This Article (5)

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  • Report this Comment On September 15, 2009, at 7:16 PM, Varchild2008 wrote:

    Having to generate growth in volume size each year when you're beverages are far reaching across Planet Earth is a lot more "high risk" than having a smaller playground to shop your drinks.

    Not that I am biased for taking offense to DPS getting the "Highest Risk" award by the author or anything..*ahem* *ahem* 526 shares of DPS and counting *ahem*

    But still..sheesh...4 earnings beats out of the last 5 and DPS gets a "RISKY" label?

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