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5 Top Soft Drinks Stocks to Watch as Industry Gains From At-Home Sales

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·10 min read
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Despite the pandemic-led disruptions in the away-from-home channels, companies in the Zacks Beverages – Soft Drinks industry have witnessed a spike in at-home channel sales of beverages and coffee. This is expected to support the sales trends in the near term. Further, the companies stand to gain from a growing preference for healthy drinks. Moreover, increased investments in the expansion of digital presence are likely to benefit the players due to consumers’ growing preference for online shopping.

The industry players have been steadfastly investing in product innovations to include healthy ingredients in beverages and introduce ready-to-drink variations. These investments in the product portfolio bode well for players like The Coca-Cola Company (KO), PepsiCo Inc. (PEP), Monster Beverage Corporation (MNST), Keurig Dr Pepper Inc. (KDP) and National Beverage Corp. (FIZZ).

About the Industry

The Zacks Beverages - Soft drinks industry comprises companies that manufacture, source, develop, market and sell non-alcoholic beverages. Soft drinks mainly include sparkling soft drinks, natural juices, enhanced water, sports and energy drinks as well as dairy and ready-to-drink tea and coffee beverages. Notably, some of the industry players like PepsiCo produce and sell handy food with flavored snacks, which complement their beverage portfolio.

These companies sell products through a network of wholesalers and retailers that include supermarkets, department stores, mass merchandisers, club stores, and other retail outlets. Additionally, some of them offer products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

What’s Shaping the Future of Beverages – Soft Drinks Industry

Innovation Drives the Industry: Continuous innovation of products, in terms of ingredients, formulation, and packaging, acts as one of the prime catalysts for the soft drinks market. Health-conscious consumers are switching to healthier alternatives like energy drinks, sports drinks, low-or-no-sugar carbonated drink variants, sparkling water, dairy, iced tea, juices and ready-to-drink coffee. Particularly, in the United States, cold brew coffee is perceived as healthier than energy drinks and sugary sodas. Therefore, the biggies in the industry — PepsiCo and Coca-Cola — are putting their best foot forward to grab a bigger share of the cola-coffee market. Notably, ready-to-drink coffee and energy drinks are among the best-performing categories amid the pandemic.

Rise in At-Home Consumption: The coronavirus pandemic has led to an increase in at-home consumption for soft drink lovers, which has led to a splurge in at-home channel sales. Moreover, the work-from-home trend and inability to visit coffee shops have increased in-home coffee consumption, which is likely to beef up market share for this category. Higher in-home beverage and coffee demand is likely to compensate for the sluggishness in the away-from-home channel due to the pandemic. Further, beverage companies are increasingly investing in digital platforms, as consumers’ have shifted to more online purchases. This should bolster the industry players’ online presence, which is likely to create a win-win situation not only in the near term but also in the long run. Additionally, the aggressive cost management initiatives adopted by the industry players are expected to support margin and bottom-line growth in the near term. Apart from these, the companies are renewing focus on streamlining their portfolio of brands to exit unproductive brands and divert resources toward brands with more growth potential.

Pressures on Away-from-Home Channel Sales: Beverage companies are likely to continue witnessing declines in the convenience and gas, and away-from-home channels like restaurants, sporting events, and movie theaters. The softness in these channels is hurting volumes due to a negative channel mix. Notably, the away-from-home channel accounts for the majority of revenues for the players in the soft drinks industry. Further, supply chain disruptions and delayed shipments have been detrimental to the top line, which is expected to continue exerting pressure in the near term.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Beverages - Soft Drinks industry is housed within the broader Consumer Staples sector. It carries a Zacks Industry Rank #214, which places it in the bottom 16% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for 2020 has declined 16.7%. Moreover, earnings estimates for 2021 have moved down 12.2% in a year’s time.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Beverages – Soft Drinks industry has underperformed the S&P 500 Index and the Consumer Staples sector in a year’s time.

While the stocks in the industry have collectively gained 1.6%, the S&P 500 and the sector have witnessed growth of 18.1% and 1.9%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing soft drinks stocks, the industry is currently trading at 24.02X compared with the S&P 500’s 22.9X and the sector’s 20.51X.

Over the last five years, the industry has traded as high as 24.02X and as low as 18.48X, with a median of 21.9X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Soft Drinks Stocks to Keep a Close Eye On

None of the stocks in the Beverages – Soft Drinks industry currently sport a Zacks Rank #1 (Strong Buy). However, we have one stock with a Zacks Rank #2 (Buy). We have also highlighted four stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look.

National Beverage Corp: The consensus fiscal 2021 EPS estimate for this Fort Lauderdale, FL-based company, which sells sparkling waters, juices, energy drinks, and carbonated soft drinks in the United States and Canada, has remained unchanged in the past 30 days. The company is gaining from creative product designs, innovative packaging, and imaginative flavors. Its focus on developing healthier beverages in response to the global shift in consumer buying habits and lifestyles position it for growth. Its innovative LaCroix offerings, LimonCello, Pastèque and Hi-Biscus are aiding volumes and provide an edge over competition in the current health-conscious environment. Shares of this Zacks Rank #2 company have advanced 62% in the past year.

Price and Consensus: FIZZ

The Coca-Cola Company: The soft drinks behemoth is poised to gain from the streamlining of portfolio and accelerating investments to expand digital presence due to the shift in consumer preference. It expects to offer a portfolio of 200 master brands, which indicates a 50% reduction from the current portfolio of 400 brands. The company is in the process of phasing out products with less potential, including ZICO and TaB. Additionally, this Atlanta, GA-based company is committed to exploring new markets and products categories, including innovations like Coke Energy, AHA and Topo Chico Hard Seltzer.

Coca-Cola has been witnessing a splurge in e-commerce with the growth rate of the channel doubling in many countries. The company has been accelerating investments to expand presence in this channel compared with the pre-crisis levels. Its focus on accelerating footing in digital channel is likely to be sustainable, positioning it for long-term growth. The Zacks Consensus Estimate for next financial year earnings has been stable in the past 30 days. The Zacks Rank #3 company’s shares have increased 4.4% in the past three months.

Price and Consensus: KO

PepsiCo Inc: The stock of this Purchase, NY-based leading soft-drinks company has risen 6.3% in the past year. Despite the pandemic-related challenges, resilience and strength in the global snacks and foods business as well as gains in the beverage category have been aiding the company. The snacks/food business is benefiting from increased at-home consumption trends, while the beverage business returned to growth in the third quarter of 2020. Moreover, its strong portfolio of brands, a responsive supply chain and flexible go-to-market systems have helped maintain continued supplies amid the pandemic.

PepsiCo expects strong growth and market share gains for the energy drinks category driven by the increased depth and breadth of its portfolio and improved distribution capabilities. It expects to particularly benefit from the Rockstar acquisition and expanding the distribution of Bang, along with improving execution in the marketplace; and unlocking the potential for Mountain Dew in the energy category. The company has reported positive earnings surprise of 6%, on average, in the trailing four quarters. The company’s consensus 2021 EPS estimate has remained unchanged in the past 30 days. It carries a Zacks Rank #3.

Price and Consensus: PEP

Monster Beverage Corporation: The leading marketer and distributor of energy drinks and alternative beverages, based in Corona, CA, remains committed to product launches and innovation to boost growth. In fact, management remains on track for several launches in 2020, including expansion in newer markets. Also, it is optimistic about strength in the energy drinks category with the Monster Energy brand growing significantly. Product launches across the Monster family are expected to drive the company’s overall top and bottom lines in coming quarters. The company’s top-line is gaining from increased at-home consumption trends owing to a shift in consumer preferences for shopping channel and packaging options.

Moreover, its supply chain remains unaffected, with no major impact on raw material and finished product shortages. The company is also continuously managing its aluminum can requirements to meet the growth in volume, despite the current industry-wide supply constraints for aluminum cans. The Zacks Rank #3 stock has advanced 40.8% in the past year. The Zacks Consensus Estimate for its next-year earnings has moved up 0.7% in the past 30 days.

Price and Consensus: MNST

Keurig Dr Pepper: The consensus 2021 EPS estimate for this beverage and coffee company in the United States and Canada has remained unchanged in the past 30 days. Keurig’s Packaged Beverages and Coffee Systems businesses have been driving sales. The Packaged Beverages segment is witnessing improved volume/mix due to the coronavirus pandemic-led spike in at-home consumption. Moreover, increased coffee consumption due to the work-from-home trend is aiding the coffee business.

The company expects increased household penetration across both hot and cold beverages portfolio to continue in the future. Moreover, the company’s market share growth is being supported by efficient marketing and product innovation strategies. Also, it is investing in boosting distribution platforms and e-commerce operations. Shares of this producer, distributor and seller of a range of non-alcoholic ready-to-drink beverages have increased 5% in the past year. It carries a Zacks Rank #3.

Price and Consensus: KDP


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