The key elements that drive and influence demand in the US beverage market are quickly changing. Consumers are taking a visible inclination towards healthier, natural options. The continued decline in sales for diet soda in the past several years is a good indication of this--consumers are significantly reducing intake of diet soda because of the artificial sweeteners used to produce them. In the past year alone, dollar sales of low-and zero-calorie soda dropped 6.8%, compared with the 2.2% dip in regular soda.
The shift in key market factors (elements that drive and influence demand) in the US beverage market has had a visible impact on Coca-Cola (NYSE:KO). In the second quarter of 2013, for instance, it posted a 1% dip in North American sales followed by a 2% incline in the subsequent third quarter. This teetering movement in sales in part reflects the fast-changing consumer habits and attitudes in the US market.
PepsiCo (NYSE:PEP), Coca-Cola's closest competitor, has also been compelled to adjust to changes in consumer attitudes. The New York-based beverage heavyweight is working on alternative sweeteners drawn out from natural sources like stevia. PepsiCo has also continually grown its US snack business to hedge against headwinds in the beverage industry. In the third quarter of 2013, for instance, sales volumes in the snack business were three times greater than volumes in the beverage business.
In light of the continued shifts in major market factors in the US beverage market as well as Coca-Cola's disappointing Q3 earnings, a section of investors have minimized exposure to Coca-Cola in favor of PepsiCo, which seems to have a better handle on things. Indeed, Coca-Cola's stock appreciated only 11.7% in the past year compared with PepsiCo, which rose 21% for the same period. However, picking PepsiCo over Coca-Cola for the long term is the wrong play. Coca-Cola presents far greater rewards for a long-term buy-and-hold investor.
PepsiCo's share price movement a red flag
On the surface, PepsiCo is a better investment than Coca-Cola. Its dividend of $2.27 a share is notably higher than Coca-Cola's $1.12 a share. To sweeten the pot, PepsiCo's yield, which is the dividend as a percentage of the share price, matches Coca-Cola's 2.8%.
However, PepsiCo's share-price movement in the past year is a red flag. PepsiCo's shares have a 52-week price range of $67.39-$87.06. This is a far wider than Coca-Cola's 52-week price range of $35.58 - $43.43.
Although PepsiCo is currently trading at around $82, which is intimately close to its 52-week high, its relatively wide 52-week range suggests a level of elasticity that can easily reverse its bullish run. Unlike Coca-Cola, which has a heavier presence in global markets, PepsiCo is overly exposed to the US market.
Given the elasticity of its share price relative to Coca-Cola's, the ongoing shift in major market factors in the US is likely produce greater up and down movements in its stock relative to Coca-Cola's going forward.
Coca-Cola's emerging market strategy reassuring
Coca-Cola's performances in China and India are reassuring. Emerging markets not only present great upside, but the market factors, or elements that steer demand, are far simpler and rarely change. For most of Africa, for instance, the greatest market factor has for a long time remained the high population growth rate.
China remains a key focal point in Coca-Cola's global strategy. The beverage market potential, or the total addressable market for beverages, is expected to expand 40% in the next five years in China, the world's second-largest economy. Inline with this, Coca-Cola has been aggressively increasing its presence in the country. It invested $3 billion in China between 2009 and 2011, and recently set up its 43rd bottling plant in the country as part of the larger $4 billion investment plan for 2012-2014. In addition, it has announced plans to invest a further $4 billion for 2015-2017.
Coca-Cola can leverage its strong distribution networks to support its expansion into global markets. Its strong cash position also allows it to hire locals and conduct corporate social-responsibility programs in emerging markets, enabling it to fill crucial technical and cultural gaps. Capitalizing on untapped potential in emerging markets not only offsets swings in the US market, but also provides a crucial lift for the entire business.
Although PepsiCo looks attractive, its share price movement, coupled with its heavier exposure to the highly-dynamic US food and beverage market, presents too much uncertainty to make a solid long-term decision. Coca-Cola, on the other hand, despite slower share price growth in the past year, presents more clarity into the future.
The current bearishness surrounding Coca-Cola presents the perfect entry point for investors. At around $40 a share, it is relatively cheap, presenting both modest upside in the near time and far greater upside in the long-term.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and 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.