Believe it or not, the soda industry is fertile ground for investor profits right now. Consumers are rapidly shifting their tastes around colas and sparkling water, and that move is opening opportunities for companies to launch major new brands -- or even entirely new business models -- for drinks that many people consume several times each day.
Below, I'll highlight a few of the most promising stocks in this attractive industry today. Between them, Coca-Cola (NYSE:KO), SodaStream (NASDAQ:SODA), and National Beverage (NASDAQ:FIZZ) offer a nice mix of growth and income that should serve most long-term investors well.
Coca-Cola isn't just the top dog in this sector, it's also arguably the most dominant company in any retailing industry. After all, the soda titan controls the world's largest beverage distribution system, and, through top soda brands like Coke, Diet Coke, Fanta, and Sprite, that network delivers 1.9 billion servings -- or over 3% -- of all drinks consumed globally each day .
Coke's massive scale has contributed to a challenging operating environment for the company over the past few years. It takes time for a $200 billion business time to shift strategies, and the consumer stampede away from ingredients like aspartame caught management by surprise. Its volume rose by just 1% last year and is running flat through the first nine months of 2017 as consumers gravitate toward sparkling water brands in particular.
Coke has made formula changes throughout its portfolio of over 200 drink franchises, and executives are encouraged by the early success of brands like Coke Zero. Growth in that product nearly offset sharp declines in Diet Coke sales in the markets it has entered so far, and the company is hoping for a similar result in the core U.S. market through 2018.
While they wait for new and improved products to return the company to faster growth, investors can collect a 3%-plus dividend yield that's also one of the market's longest-running payouts. That income stream should be well funded in the years ahead, too, as Coke's profitability rises thanks to its aggressive refranchising initiative.
SodaStream predicted the fundamental consumer shift away from traditional sodas in late 2015, and that posed a massive problem for the at-home beverage machine maker. Its entire business model was built around letting consumers produce their favorite soda flavors more cheaply at home. If those drinks were going out of style, its growth plan would be toast.
SodaStream then embarked on what amounts to a complete reinvention of its business by scratching its product line and rebranded itself as a sparkling water maker. The aggressive shift added to a brutal two-year operating stretch for the company that saw revenue dive to $413 million in 2015 from a peak of $562 million two years before. It also forced the company to slash costs, including by rearranging its entire manufacturing process.
The company is now just beginning to reap the benefits of all of those successful initiatives. Sales are rising thanks to robust demand for its sparkling water machines. Profitability also notched a new record, leaping to 53.5% of sales from 51.8% last quarter as lower costs combined with increased selling prices to send net income higher by over 30%.
SodaStream is on pace to increase sales by 13% in 2017, which would still leave it below its record 2013 fiscal year. However, because of its much-improved profit margins, the company should earn around $2.90 per share to easily eclipse the previous record it set of $2.09 per share back in 2012.
National Beverage's drink portfolio is anchored by the La Croix sparkling water brand. As such, it is ideally positioned for today's consumer tastes. That's no accident, given the company's focus on disrupting the biggest soda brands. "In a beverage industry that is dominated by 'cola giants'," management explains in the 10-K report, "we pride ourselves on our ability to respond faster and more creatively to consumer trends than competitors." These rivals, executives go on to say, "are burdened by production and distribution complexity as well as legacy costs" whereas National Beverage is free from those challenges.
This competitive advantage has allowed the soda specialist to tilt its portfolio toward sparkling water and energy drinks at a time when rivals were just beginning to notice shrinking demand for their core products. Traditional cola drinks account for about 50% of the industry today but make up just 12% of National Beverage's business.
That focus has led to awesome growth as consumers embraced non-traditional drinks over the past few years. National Beverage posted a 17% spike in volume last year to mark a big acceleration over the prior year's 9% gain. Investors love the fact that average prices are marching higher at the same time, leading to far higher profitability. Gross margin soared to 39% of sales last year from 34% in 2015.
National Beverage's challenge now is to keep that momentum going through continued flavor innovations while using its growing scale as a platform to launch additional brands that can claim the type of wide appeal that La Croix has earned.
While each of these stocks is attractive for different reasons, SodaStream appears best positioned to continue growing through 2018. Its sales rebound looks solid given that it is anchored on a steadily rising customer base for its beverage machines. And the adjustments management made in response to the sharp business slump they recently experienced have resulted in a more flexible operation with a far lower cost structure. That should power significant earnings growth if consumers continue shifting their drinking habits away from traditional sodas and toward sparkling water.