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Big Soda Giants Excel in H1; Will They Fizz On in H2?

Soda giants– The Coca-Cola Company KO, PepsiCo, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS – outperformed expectations in the first half of the year. In spite of significant currency headwinds, rising volatility in global markets and declining demand for their calorie loaded sodas, this outperformance was driven primarily by aggressive marketing initiatives, cost containment and productivity improvements. The shares of these three bellwethers witnessed a decent run too.

Cola Giants Fizzed and Bubbled in H1

Pepsi

Pepsi has delivered positive earnings and sales surprises for six straight quarters. The ongoing global macro challenges notwithstanding, Pepsi did well in 2014 and continued to perform well in 2015thanks to its strong snacks business, increased pricing, better execution, cost savings/productivity gainsand brand building investments.Moreover, Pepsi raised the full-year earnings guidance along with the second quarter release, encouraged by strong year-to-date performance and a positive outlook.

The maker of Pepsi soft drinks and Lay’s chips is boosting in-store merchandising capabilities, the effectiveness of go-to-market systems in the international markets and identifying new productivity projects. The company has increased investments in social and digital marketing as well as advertising efficiency by focusing more on consumer-facing activity.

The company’s advertising and marketing plans and innovation efforts are paying off. These initiatives helped the company to deliver an overall healthy performance in 2013 and 2014 — either achieving or exceeding most of its financial goals — despite the tough macroeconomic environment. The momentum continued in the first half of 2015 with the company performing well in both the quarters.

The share price of this Zacks Rank #3 (Hold) company has soared more than 15% year to date. Pepsi enjoys a competitive advantage over rivals Coca-Cola and Dr Pepper, as it sells both snacks and beverages which are complementary food categories.

Dr Pepper Snapple

Sustaining its exceptional 2014 performance, Dr Pepper delivered solid top- and bottom-line results in the first half of 2015 on the back of pricing gains, innovations, powerful marketing programs and productivity improvements. Ignoring currency headwinds, the company raised the 2015 sales and earnings expectations on the second quarter conference call, backed by a stronger-than-expected first-half performance.

The share price of this Zacks Rank #2 (Hold) company also rose more than 15% year to date. With a strong dollar reducing the value of international currency, Dr Pepper’s relatively less exposure to foreign markets insulates it from a volatile currency environment, though only for the short term.

Coca Cola

Coca-Cola delivered positive earnings and sales surprises in both the first-half quarters.

Better-than-expected sales and profits in the first half were backed by early signs of improvement from its aggressive cost-cutting/productivity and strategic initiatives. Savings from its productivity programs are being used to fund marketing programs and innovation, which in turn is slowly but steadily re-accelerating top-line growth, expanding margins and boosting returns on capital.

The Zacks Rank #3 (Hold) company’s disciplined quality advertising investments led to improved volume growth in the first half of 2015, especially in North America.

A Not-so-Sweet H2?

Amid a volatile macroeconomic environment and significant currency headwinds, the soda biggies are expected to hold their own in the second half given consumer focused innovation, brand building investments, better marketplace execution, pricing actions and productivity gains.

Having said that, weakening international currencies and economic slowdown in some countries will continue to weigh upon the macroeconomic environment. With a significant portion of their revenues coming from outside the U.S., sales/profits of Pepsi and Coca-Cola are being affected by the weakening of many emerging market currencies against the U.S. dollar.

Persistent challenges in many key emerging/developing markets like Brazil, Russia and China will dampen to an extent the strength of the U.S. economy.

Moreover, headwinds from the carbonated soft drink (CSD) category are expected to continue. Soda giants are being held morally responsible over the role their carbonated sugary drinks have played in increasing the nation’s obesity rates. These companies have been witnessing declining sales of CSDs over the past few years.

Diet drinks haven’t escaped the scanner either due to increasing consumer concern regarding the use of artificial sweeteners.

As consumers grow more health conscious, the companies are also realizing the need to move beyond the sugar-laden fizzy can. So beverage companies are shifting away from high-calorie carbonated beverages toward healthier products like juices, energy and sports drinks.

Moreover, these companies are offering more choices in package sizes, sweeteners and beverages, including low- and no-calorie selections. They’re making drinks with evolutionary natural sweeteners and flavorings to cut calories. Coca-Cola has launched Coca-Cola Life, a naturally sweetened mid-calorie cola, across the U.S. and certain markets in Europe. Pepsi also has plans to launch lower calorie, naturally sweetened non-cola products in the U.S. this year. Additionally, an aspartame-free Diet Pepsi product is expected to be launched this month to meet the growing demand for food/drinks without artificial sweeteners.

Soda companies are also buying equity stakes in smaller companies in order to diversify and grow positions in beverage categories. Coca-Cola has made a 16% equity investment in specialty coffee retailer, Keurig Green Mountain, Inc. GMCR and bought a 16.7% stake in energy drink maker, Monster Beverage Corporation MNST. Very recently, Dr Pepper agreed to purchase an almost 12% equity stake in BA Sports Nutrition, which owns the premium sports drink brand Bodyarmor to enter the fast growing sports drink market.

Conclusion

Though we are encouraged by the overall growth of these beverage makers in the first half, sustaining the momentum through the rest of the year will largely depend on how they deal with the rising global uncertainty, increasing negative currency impact and CSD category headwinds.

As a reminder, the soda biggies outperformed in the first half of 2014 as well. While Pepsi and Dr Pepper could sustain the momentum in the second half, Coca-Cola failed to do so due to volume deceleration in key international markets like China and Europe.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
COCA COLA CO (KO): Free Stock Analysis Report
 
DR PEPPER SNAPL (DPS): Free Stock Analysis Report
 
PEPSICO INC (PEP): Free Stock Analysis Report
 
KEURIG GREEN MT (GMCR): Free Stock Analysis Report
 
MONSTER BEVERAG (MNST): Free Stock Analysis Report
 
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