If you pay attention to these sorts of things, you probably noticed that there's been a lot of change happening in the soda aisle of your grocery store lately. The global brands that used to dominate that shelf space are losing ground as consumers increasingly choose new products like flavored sparkling waters over traditional soft drinks.
And even the big franchises that remain are seeing their formulas, branding, and serving sizes adjusted thanks to a rising preference for natural ingredients and lower calorie counts.
These changes create headaches for established players and for new entrants in the industry, but they also generate attractive opportunities for long-term growth. With that in mind, here's why SodaStream (SODA), National Beverage (FIZZ 0.54%), and Coca-Cola (KO -0.21%) should bubble up to the top of investors' 2017 soda stock buy list.
National Beverage is about as far away as you can get from your typical soda company. Its press releases read more like a theatrical scene than an SEC filing, for one. Here's a recent example: "Those of you who are joyous relative to our products and shareholders that rejoice in their appreciation and distributions -- we hold you all in high esteem." CEO Nick Caporella said that in its last quarterly report.
This unusual approach is also reflected in a portfolio that's dominated by the sparkling water brand LaCroix. Market share gains in this segment helped National Beverage improve sales by 15% over the past year as profits jumped 71% to $95 million. Rising average prices also generated the company's highest operating profitability figure yet -- over 18% of sales.
Bottled water is set to eclipse soft drinks as the leading beverage category in the U.S. in 2016. The sparkling water segment, meanwhile, is projected to pass $5 billion of annual sales by 2020. These major trends both point to continued industry-thumping volume growth for National Beverage.
Investors with lower risk tolerance might want to consider snapping up shares of the industry leader, too. Yes, Coca-Cola has suffered from declining demand for its core brands, especially Diet Coke. Overall sales fell in 2016 for the fourth consecutive year and the company produced $7 billion of earnings compared to $9 billion in 2012.
But Coke pays out an attractive 3.5% dividend yield, and executives demonstrated their commitment to that cash return channel by boosting the payout 6% in 2017 following an 8% hike in the prior year. The company aims to keep these returns flowing in part through a refranchising initiative that promises to raise profitability at the expense of sales gains.
Yet a Coke investment doesn't make sense unless you believe the company can ultimately adjust its formulas to keep pace with changing consumer tastes. Recent slips aside, its over 100-year track record, massive distribution network, and valuable global brand portfolio all suggest that the company will still be on top of its industry a decade from now.
At-home carbonated beverage specialist SodaStream is back in Wall Street's good graces after posting improving sales in 2016 following two straight years of brutal declines. The company has achieved its risky pivot away from a flavored drink focus to a sparkling water branding.
The results speak for themselves. Machine sales bounced 37% higher over the holiday quarter thanks to the combination of a 22% jump in volume and higher average prices. Carbon dioxide refills, which are an indication of the size of its active customer base, rose 10% to pass 7 million.
SodaStream paired those impressive operating wins with efficiency gains that allowed the company to book its highest annual operating and net income figures on record -- despite a revenue base that's well below the peak it set in 2014. Investors might be turned off by the fact that shares nearly tripled over the past year. But the outlook for future earnings growth is bright given that high-margin refill canister sales are set to grow to a greater proportion of revenue over time.