If you're thinking about adding non-alcoholic beverage stocks to your portfolio, you're probably aware that this sector isn't quite the safe, almost boring proposition it was just a few years ago. Consumers' dwindling thirst for sweetened carbonated soft drinks, especially diet soft drinks, has forced traditional beverage companies to rethink the offerings that ultimately end up on retail shelves and in restaurant fountains.
As a result, it's important to feel comfortable with the beverage business models you choose to put your money behind. To obtain some clarity, let's look at three companies that provide compelling, if very different, reasons to invest in the non-alcoholic beverages space. I've excluded Starbucks (NASDAQ:SBUX) and PepsiCo (NYSE:PEP) from consideration as both have a significant food component in their revenue mix; in this article we'll focus on pure beverage operations.
1. A stealth growth company
The Coca-Cola Co. (NYSE:KO) was one of the first beverage companies to feel the pinch of changing consumer tastes, and it has reacted by expanding its portfolio, purchasing promising brands in growth categories such as ready-to-drink tea and coffee as well as bottled water and juices. Coke now has 20 brands that each generate more than $1 billion in U.S. dollar sales annually.
Coke's global strength is often obscured stateside for lack of visibility. For example, billion-dollar revenue generator "Georgia" coffee is the No. 1 Japanese drink in a category that barely exists in the U.S: ready-to-drink canned coffee.
While it invests in brands across a wide range of categories, and partners with beverage innovators like Keurig Green Mountain, Coke is reducing its ownership stakes in its bottlers, preferring to set up joint ventures with the companies that propel its vast distribution system.
This step should help Coca-Cola become a more nimble company going forward. In the company's most recent conference call with analysts, CEO Muhtar Kent confirmed that the company was on track to achieve its goal of having two-thirds of North American bottling and can volume distributed by independent bottlers by 2017.
To fortify its business, Coca-Cola has reduced headcount and initiated productivity gains and cost cutting to save $3 billion annually by 2019. The company is channeling realized savings into a greater investment in marketing. This strategy seems to be paying off, as Coke has managed to grow organic revenue by 6% through the first two business quarters of 2015.
As The Coca-Cola Co's investments begin to mature, the company may surprise investors with a return to palpable growth, versus the flat to declining revenue of the last two years. In the meantime, investors get a bonus in the form of Coke's safe and attractive dividend, currently yielding around 3.3%.
2. Stable, steady profits
If stability of earnings and top-line growth is important to you, Dr Pepper Snapple Group (NYSE:DPS) is the sleeper stock you may have been searching for.
The irony of recommending Coca-Cola as a growth play and Dr Pepper Snapple, which, at $6.1 billion of annual revenue, is roughly one-seventh Coca-Cola's size, is not lost on me.
Yet it's true: Dr Pepper Snapple is the quintessential portfolio of successful brands that may not be positioned for explosive growth, yet return predictable profits with modest revenue increases year after year. Since its spinoff from Cadbury Schweppes in 2008, the company's annual revenue has only increased 10.7% in total. Annual net income has grown in aggregate over the same period by just 26.7%. But each of these trends exist without much volatility to speak of.
Dr Pepper Snapple Group manufactures and sells concentrates and packaged beverages under a number of well-known brands, including Dr Pepper, Canada Dry, A&W Root Beer, 7UP, Sunkist, Snapple, and Hawaiian Punch. The company counts competitors Coca-Cola and Pepsi-Co as major customers, as the two beverage giants pay for the right to distribute the popular Dr Pepper soft drink.
Like Coca-Cola, Dr Pepper Snapple offers an attractive dividend, 2.5% in this case, with even lower volatility: The stock sports a current beta of 0.68, meaning it trades at 32% less volatility than the broader market.
Dr Pepper Snapple's recent challenges include consumers' loss of enthusiasm for diet soft drinks because of concerns over sweeteners and artificial flavorings, which has pressured sales of Diet Dr Pepper. Yet strength in 2015 in the Schweppes and Canada Dry brands appears to be offsetting diet softness.
Let's view those stable, if unexciting, revenue and profit trends alongside the stock price increase since 2009, the year after the spinoff:
Dr Pepper Snapple's stock has achieved impressive gains for a beverage company as investors have embraced the virtue of its steady business results. For all of the appreciation, however, it's still reasonably valued, trading at a forward price to earnings (PE) multiple of 20, the same forward P/E ratio as Coca-Cola.
3. An energetic investment
For those who want to participate in the beverage sector and don't mind a dose of risk, there's Monster Beverage Corporation (NASDAQ:MNST) to take into account. Monster formerly sold a broad mix of energy and juice drinks, but in a 2014 deal that was completed last month, the company transferred its non-energy drink portfolio -- including Hansen's Natural Sodas, Peace Tea, and Hubert's Lemonade -- to Coca-Cola, receiving in return Coke's energy drink portfolio, comprised of brands such as NOS, Full Throttle, Burn, and Relentless.
The $2.2 billion deal gives Monster access to Coke's global distribution system; in return, Coke gets an equity stake of 16.7% in Monster.
Selling into Coke's massive distribution system means Monster can potentially expand revenue at a much faster rate than it could previously. Yet the deal has also turned Monster into a more narrowly focused company: It now has a revenue concentration in the energy drink sector.
At the moment, that's not a bad place to be concentrated, as the energy drink category is growing faster than every other non-alcoholic beverage segment. According to market research company Euromonitor, global energy drinks volume expanded by 9.8% in 2014. For comparison, bottled water, the category with the next-highest volume growth, expanded by 6.1%.
Unlike Coca-Cola and Dr Pepper Snapple, Monster Beverage Corporation's sales are climbing briskly. First-quarter 2015 adjusted revenue, for example, increased nearly 9.2% versus the prior year, although the company's net income dropped drastically because of distribution termination charges as it exited previous distribution relationships to join Coke's system.
The potential for fast expansion has caused Monster's stock to more than double in the year since the Coke deal was announced. The company's forward P/E ratio of 44 is now over twice that of Coke's and Dr Pepper Snapple's forward PE. Monster shows much promise, but valuation and a concentration in a single segment of the beverage industry are two factors that should caution investors into patience, to wait for an appropriate entry point in the MNST ticker.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Monster Beverage. The Motley Fool owns shares of Monster Beverage and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.