Is Coca-Cola the Best Beverage Bet?

At the end of the second quarter of 2013, beverage giant Coca-Cola (NYSE: KO  )  reported a decline in its profits, citing economic doldrums.. Three months later, the company's profits rose despite a slow economy and were in line with Wall Street's expectations.

The question right now is, will Coca-Cola continue with its strong performance or will it face difficult times as economic conditions remain challenging? Let's see where the company is heading and how it stacks up with rivals PepsiCo (NYSE: PEP  ) and Dr Pepper Snapple Group  (NYSE: DPS  ) .

Third-quarter analysis
In the third quarter, Coca-Cola reported earnings per share of $0.54, which were slightly better than the comparable quarter last year. Despite a negative currency effect, the company was able to grow its comparable earnings by 5%, while the year-to-date earnings increased by 4%. Earnings for the quarter were in line with Wall Street's expectations as the company sold more of its products. Revenue grew by 4%, while operating income increased by 8%; this is attributed to the company's excellent performance in key markets that include China, India, and some European regions.

Coca-Cola effectively managed to withstand the adverse affects hitting the soda industry as the company's North American operations saw the Coca-Cola brand grow an impressive 2%. This spearheaded the company's total beverage portfolio to 2% growth worldwide. The company holds a distinct advantage over its competitors as teenagers prefer Coca-Cola with a margin of two to one with any other CSD (carbonated-soft-drink) brand.

Coca-Cola holds a number of renowned non-CSDs in its product portfolio which have also shown promise as more consumers shift away from CSDs. As a result, sales volume for the company's still-beverage category in North America  also saw an increase of 5% in the latest quarter. 

What is Coca-Cola up to?
Coca-Cola has identified Asia as a region with great potential from an investment perspective. The company is set to invest $5 billion in India to capitalize on the growing middle class with its higher disposable incomes. When it comes to investments, Coca-Cola regards China as a particularly high-growth region. China has a $69.1 billion soft-drink market, which is considered to be one of the biggest beverage markets in the world--that's why the company will be investing $5 billion to build new plants in China between 2015 and 2017. This new investment will be in addition to the $4 billion the company has already planned on investing between 2012 and 2014.

The beverage giants are facing increased competition in the Chinese markets as they are competing against very well capitalized local players, such as Jia Duo Bao and Ting Hsin. For this reason, Coca-Cola is open to acquisitions and deals with local manufactures so that it can cater to the localized needs and preferences of Chinese consumers. On the whole, this strategy will ensure that the company's growth in China remains on track.

Coca-Cola recently acquired ZICO Beverages, producer of ZICO Pure Premium Coconut Water. The coconut-beverage category has seen immense growth, with revenue doubling every year since 2004. The company's venturing and emerging brands unit identified ZICO as a potential market leader and took a stake in ZICO back in 2009. Now Coca-Cola plans to expand the distribution of ZICO and make it reachable nationwide to fully capitalize on the trend of consumers moving towards natural and healthy beverages.

Competitors
PepsiCo, Coca-Cola's biggest competitor, has a large geographical presence and holds a well-diversified product portfolio. The greatest advantage that PepsiCo holds over Coca-Cola is the presence of sweet, salty, and grain snacks in its product portfolio.

In the last quarter, the company beat Wall Street earnings estimates by 5% and reported earnings per share of $1.23, which was largely attributed to growth in the company's food division. Sales volume in the food sector increased by 3% in the Americas and by 4% in Europe, the Middle East, and Asia. 

PepsiCo has also identified Asia as a high potential market, which is why it is investing heavily in India to increase its product range, production capacity, and distribution network. The year-over-year return for PepsiCo has been 26%, and the company's new investments and fast-growing food sector indicate that the company will continue to perform well in the future. For these reasons, I believe that PepsiCo provides a superior investment opportunity compared to Coca-Cola.

Owing to its limited geographical presence, Dr Pepper Snapple Group has been exposed to the adverse effects of the US soda market. The company did beat its earnings estimates in the latest quarter by 6%, but that was due to a positive pricing mix rather than volume growth.

Moreover, Dr Pepper Snapple isn't very optimistic about its full-year earnings growth, which is why the company expects its 2013 EPS to remain flat. The company's year-over-year return has been 15%, far less than its rivals. Considering all of this, Dr Pepper Snapple doesn't appear to be as valuable as PepsiCo and Coca-Cola.

Final thoughts
The Coca-Cola Company continues to see volume growth across the globe. Even when the CSDs are declining in the US, Coca-Cola saw a 2% increase in its volume, highlighting the company's dominance in the CSD market. The company met its earnings target this quarter, which it had previously missed, indicating that the company is on the right track. Furthermore, the company is rightly investing in the emerging markets to reap benefits of a growing middle-class population with higher disposable incomes.

All in all, Coca-Cola looks to be a great investment at this stage. However, I rank Coca-Cola second to PepsiCo but above Dr Pepper Snapple Group. 

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