Soda Stocks: 2 Winners, 2 Losers

Advertisement

Soda stocks have snagged their share of the headlines this year amid a wave of sweetener controversies and do-it-yourself carbonated soft-drink makers that have gripped industry players and consumers alike.

15Soda stocks generic 630 ISP

Source: ©iStock.com/rsi1986

Some trailblazers have emerged stronger, while others have seemingly been punished for missing the fill line.

Of the leading and emerging players in the soda industry, the stock market performances are split evenly between winners and losers, the results of which may surprise you.

The returns (or lack thereof) say a lot about how investors perceived these companies for much of 2014, but results might also set the tone for soda companies in 2015 — unless there is a stark shift in consumer behaviors and investor sentiment. Soda stocks have become a hotbed for growth, innovation and yield, but you want to bet on the winners.

To help, here’s a list of the best and worst of soda stocks.

Soda Stocks: Coca-Cola (KO)

Soda Stocks: Coca-Cola (KO)The Coca-Cola (KO) brand has in many ways become synonymous with carbonated beverages, which hasn’t worked in the company’s favor, especially of late. KO stock on Tuesday erased its modest gains for the year on the heels of a troubling earnings report, the result of which left the stock in the red year to date.

Consumers have demonstrated a distaste for sugary and diet beverages, evidenced by declining revenue and profits — including a double-digit EPS drop in the third quarter — and weak global volume at the global beverage powerhouse. This trend places Coca-Cola in a precarious spot that has been exacerbated by macroeconomic headwinds, not the least of which has been currency exposure weighing on operating income. As a result, the company revealed it would ramp up cost-cutting initiatives threefold to $3 billion through 2019 and warned it will miss its 2014 EPS target.

It’s not that Coca-Cola hasn’t shown a willingness to diversify, given its recent investments in Keurig Green Mountain (GMCR) and Monster Beverage (MNST). However, it seems intent on remaining a pure-play beverage company, having refused to expand beyond the beverage aisle and into snack foods, arguably much to its own detriment.

Coca-Cola is a defensive name that is looking more and more like a sin stock in today’s health-conscious society. And while the company isn’t going anywhere, it does seem to be looking far ahead  for growth.

Meanwhile, KO stock continues to grapple with getting shareholder value right. While it pays a dividend that yields a solid 2.8% and remains on course to repurchase $2.5 billion in stock by year-end, Coca-Cola has feverishly been trying to keep activist investors at bay, illustrated by its most recent decision to adjust its stock-rich executive pay model.

Unfortunately, in light of its long-term focus, the soda giant hasn’t given shareholders much to look forward to in the interim.

Soda Stocks: PepsiCo (PEP)

Soda Stocks: PepsiCo (PEP)PepsiCo (PEP), which is up more than 10% year-to-date, is a breath of fresh air compared to its larger aforementioned peer. The beverage and snacks company in recent days raised its full-year EPS growth target to 9%, the second such upward revision this year.

PepsiCo is not immune to the headwinds facing the rest of the soda industry, but an impressive snacks division — which activist investor Nelson Peltz has been fighting long and hard to separate from beverages to no avail — and pockets of strength in select emerging markets have offset developed market soda weakness. The shareholder activism is particularly curious in light of the $8.7 billion that PepsiCo will return to shareholders this year via stock buybacks and dividends.

The thing to note about PepsiCo is that it’s not just its beverage peers that it’s leaving in the dust. The company’s growth is also outpacing that of other packaged-foods companies, including the likes of Campbell Soup (CPB) and General Mills (GIS) — both of whose shares are down year-to-date — making it a particularly impressive stock.

PEP stock in recent days was approaching its 52-week high but has since pulled back somewhat amid the market volatility. Watch for an entry point, but don’t miss out on this success story.

Soda Stocks: Keurig Green Mountain (GMCR)

Soda Stocks: Keurig Green Mountain (GMCR)Keurig Green Mountain (GMCR) isn’t a soda stock, per se, but its Keurig Cold machine that makes carbonated beverages certainly gives it exposure to the category, not to mention the $10.5 billion partner it found in household brand Coca-Cola. However you parse it, GMCR stock has been a winner, returning a whopping 80.7% to investors year to date.

You’re probably wondering whether the stock has any room left to run given the sprint that it has completed in recent months. If you side with Goldman Sachs, then the stock is just getting started. Goldman analysts earlier this month launched coverage of the stock with a “buy” rating, placing a $166 12-month price target on shares, which represents upside of another 21% from current levels.

“We forecast a sales CAGR of 29.6% and EPS CAGR of 23.2% from FY14E-FY17E,” Goldman said (via Barron’s).

While some of that momentum will be a function of the single-serve coffee market, the company is also set to launch its long-awaited Keurig Cold machine, demand for which Keurig has been drumming up for months. Meanwhile, its relationship with Coca-Cola only seems to be getting more serious. You might want to think about getting in on this name before the next quarterly results are released in November, as the stock has a habit of climbing higher on earnings days.

Soda Stocks: SodaStream International (SODA)

Soda Stocks: SodaStream International (SODA)Unfortunately, in the case of SodaStream International (SODA), the best was not saved for last. With SODA stock down almost 60% year-to-date, shares have clearly lost their fizz.

Israel-based SodaStream is now a direct competitor to Keurig and has been struggling to grow its share in the U.S., which one could argue reflects a market share opportunity. However, the field in which demand for soda in general is waning has become more crowded.

If you’re going to own a stock in the at-home beverage segment, Keurig is a safer bet at the moment. It has the diversification of coffee on its side, and it has made its brand very clear to the market.

SodaStream, meanwhile, seems to be struggling with an identity crisis of sorts where it is attempting to redefine itself as a health and wellness play seemingly in an attempt to appease U.S. consumers, which according to SodaStream’s annual report is the “most important potential growth market.” If current trends are any indication, growing market share will be an uphill battle. From SodaStream’s preliminary Q3 results:

“While we were successful over the last few years in establishing a solid base of repeat users in the U.S., we have not succeeded in attracting new consumers to our home carbonation system at the rate we believe should be achieved.”

Aside from a possible takeover, there’s just no catalyst for SODA stock right now.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/soda-stocks-winners-losers-ko-pep-gmcr-soda/.

©2024 InvestorPlace Media, LLC