Healthy Alternatives to Support Soft Drinks Industry Growth
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.
Let’s take a look at the industry’s major themes:
Increase in the number of health-conscious consumers and shift in preference from sugary sodas have dealt a great blow to sales of carbonated soft drinks over the past few years. According to IBIS World's recent report, the soft drink manufacturing industry has grown at a modest annual rate of 1.7% over the past five years.
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 to be 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. Pepsi’s ready-to-drink coffee portfolio has offerings like Pepsi Café, Pepsi Kona and Pepsiccino. Meanwhile, the success of Coca-Cola Plus Coffee, followed by the launch of Coca-Cola With Coffee intensifies its competition with Pepsi. Additionally, the two companies are contesting to promote sports drinks brands like Powerade by Coca-Cola and Gatorade by Pepsi. Further, the tussle is intensifying for the top spot in the energy drinks market, with Monster Beverage having an upper hand while Pepsi and Coca-Cola continue to strengthen foothold with new offerings.
A major concern for the industry is escalating input costs and higher packaging costs. These along with higher advertising and promotional expenses as well as increased SG&A costs are weighing on margins. Additionally, companies in the space are experiencing the negative effects of increased tariffs (due to the U.S.-China trade war) and adverse foreign currency movements. Also, rising demand for non-carbonated drinks calls for huge investments in data analytics, technology, marketing and supply chain as well as product innovation, which might weigh on margins. Although soft-drink makers are resorting to cost-containment efforts and price increases, these bottlenecks will continue in the near term. Furthermore, the concerns related to the global coronavirus outbreak, resulting in closure of offices and factories as well as supply-chain disruptions might hurt performance.
Zacks Industry Rank Indicates Strong Prospects
The Zacks Beverages - Soft Drinks industry is housed within the broader Consumer Staples sector. It carries a Zacks Industry Rank #82, which places it in the top 32% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential.
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 but outpaced the Consumer Staples sector in a year’s time.
While the stocks in the industry have collectively declined 19.7%, the S&P 500 has lost 18.2%. Meanwhile, the sector has registered a decline of 21.9% in the said time frame.
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 16.64X compared with the S&P 500’s 13.75X and the sector’s 14.68X.
Over the last five years, the industry has traded as high as 23.2X and as low as 16.64X, with a median of 21.39X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Bottom Line
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. Constant efforts to add healthier beverages through innovation and brand buyouts are likely to favor the soft drinks industry. However, higher costs, tariffs and slowdown in the CSD category cannot be ignored. Despite resorting to cost-containment efforts and price increases, these bottlenecks are likely to continue in the near term.
We have one stock in the Beverages – Soft Drinks industry currently sporting a Zacks Rank #1 (Strong Buy) and two stocks with a Zacks Rank #2 (Buy). We have also highlighted two 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. (FIZZ): This producer and distributor of waters, juices, energy drinks, and carbonated soft drinks primarily in the United States and Canada has witnessed a decline of 35.2% in a year. The Zacks Consensus Estimate for this Zacks Rank #1 company’s EPS has been revised 2.1% upward in the past 30 days.
Price and Consensus: FIZZ
Monster Beverage Corporation (MNST): This Corona, CA-based company is a leading distributor of energy drinks and alternative beverages. It carries a Zacks Rank #2 and the stock has declined 6.5% in the past year. The Zacks Consensus Estimate for the company’s current-year earnings has moved up nearly 1% in the past 30 days.
Price and Consensus: MNST
Embotelladora Andina S.A. (AKO.B): Shares of this producer and distributor of Coca-Cola soft drinks in Chile, Brazil, Argentina, and Paraguay have declined 47.5% in the past year. Moreover, the Zacks Consensus Estimate for this Zacks Rank #2 company’s EPS has been stable in the past 30 days.
Price and Consensus: AKO.B
The Coca-Cola Company (KO): Shares of this soft-drinks behemoth have declined 18.4% in the past year. The Atlanta, GA-based global beverage giant’s portfolio includes more than 4,700 beverage products (and more than 500 brands), spanning sodas (or sparkling beverages) to energy drinks. Moreover, this Zacks Rank #3 company has an expected long-term earnings growth rate of 6.2%.
Price and Consensus: KO
PepsiCo Inc. (PEP): The stock of this Purchase, NY-based company has declined 12.9% in the past year. It is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company has an expected long-term earnings growth rate of 6.5%. It carries a Zacks Rank #3.
Price and Consensus: PEP
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