For years -- ever since I can remember -- my family's gatherings have been laced with beverages made by Coca-Cola or PepsiCo. Recently, however, there has been a shift. On two separate occasions I have noticed family members drinking Reed's, (NYSEMKT: REED), a maker of natural soft drinks, including its Original Ginger Brew, Culture Club Kombucha, and Virgil's Rootbeer. The appearance of such beverages at a family gathering would mean little to me except for two things. One, I fondly remember sipping Original Ginger Brew as a kid, and two, Reed's is a publicly traded company, which naturally intrigues me. With that said, as an investor, it is vitally important to separate business from pleasure, or in my case, childhood nostalgia. Although Reed's may make tasty beverages, you should definitely consider the company's financial and operational performance beforing buying.
With Reed's' small, health food store roots, most people may fail to note the company's public trading status. Well, except that it says so right on the bottle. Interestingly enough, you don't see Coca-Cola (NYSE:KO) or PepsiCo (NASDAQ:PEP) with their ticker name printed on the can, but then again, they don't need to. Whether Reed's ticker name printed on the packaging comes off as desperate, or savvy, is entirely up to the investor, and well, the consumer. Personally, I would hold off on Reed's, or at least compare the company to competitors, both large and small. Let's see if there is something more to the flavored beverage maker than just sugary soft drinks.
Reed's vs. larger competitors
From a performance standpoint, comparing Reed's to Coca-Cola or PepsiCo, may not seem like a fair match-up. Despite the differences in the companies, most notably in their business models, it is still useful to analyze certain aspects. For instance, PepsiCo's profit margin is 10.07%, compared to Coca-Cola's at 1.73%, and not surprisingly, Reed's under both at -5.23%. The discrepancy between the three soft drink companies is a good indicator of how well each is performing within the industry. In this case, the figures suggest that PepsiCo is the most profitable at the moment, and perhaps more so, that Pepsi monitors its costs more effectively. While Pepsi may overshadow its competitors in this regard, as mentioned it is important to keep in mind the differences in each company.
PepsiCo, for example, has a business model that is strikingly different than both Reed's and Coca-Cola. More specifically, the company puts considerable focus on the sales of its other divisions, such as snacks, which surely contributes to PepsiCo's larger profit margins. In contrast, Reed's strictly sells soft drinks, but still incurs negative margins due to high expenses and operating costs.
Another reason for PepsiCo's superior profit margin is due to its efficiency in operating costs, which at the moment appear to be managed more effectively than Reed's and Coca-Cola. Conversely, Reed's inefficiency with operating costs could be one reason why its profit margins are currently in the red.
Reed's vs. smaller competitors
Cott Corporation (NYSE:COT), which is one of the largest private beverage brands in the U.S., has a profit margin of 1.53%. Although more favorable than Reed's aforementioned profit margin, Cott's performance in this regard is much more comparable with the natural beverage maker than it is with PepsiCo or Coca-Cola. Furthermore, Cott has a gross profit of $289.50 million and revenue of $2.17 billion, whereas Reed's has revenue of $33.28 million and gross profit of $9.14 million. Using this metric, there is still a large margin between the two companies, which seems to point to Cott being the more promising stock. Additionally, Reed's has revenue per share of 2.76 and Cott has 22.85, which again points to the latter outperforming.
Compared to soft drink giants like Coca-Cola and PepsiCo, Reed's definitely does not seem appealing. Similarly, when contrasted with a relatively smaller natural beverage maker like Cott, Reed's still doesn't appeal to me. So, despite my fond memories of sipping a Reed's, and the drinks continually popping up at my family gathers, I would hardly consider such things to be an omen. If you are looking for a bargain in the beverage sector, in my foolish opinion I would avoid Reed's, even despite its tasty Original Ginger Brew.
Jamison Hill has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.