PepsiCo (NASDAQ:PEP) announced its third-quarter results on Oct. 4. They were healthy enough that I’ve put the beverage and snack food company on my list of seven beverage stocks to buy now.
But before I get into the seven names on my list, I thought I’d explain why I’m so high on beverage stocks.
The truth is, a lot of interesting stuff is happening in the beverage world at the moment, not the least of which is a fight by traditional beverage makers, non-alcoholic and alcoholic alike, to get into cannabis-infused drinks. The payoff could be enormous for those brands that resonate with the public.
Furthermore, long-time partnerships seem to be fracturing as larger beverage businesses look to find growth wherever they can. The gloves have come off.
Big or small, you’ve got to have a vision for sustainable growth or you’re going to be left in the dust.
Here are the seven beverage stocks I believe will do just that.
Beverage Stocks to Buy: PepsiCo (PEP)
PepsiCo released its Q3 2019 results Oct. 3 and they were very healthy.
On the top line, Pepsi had organic growth of 4.3%. In terms of profits, Pepsi generated $2.86 billion in operating profits in the quarter, $11 million higher than the same quarter a year earlier. This is despite PEP spending $2 billion on its business through the first nine months of the year and an estimated $4.5 billion for the entire fiscal year.
“While adverse foreign exchange translation negatively impacted reported net revenue performance, organic revenue growth was 4.3% in the quarter,” stated CEO Ramon Laguarta. “We are making good progress against our strategic priorities and our businesses are performing well … Given our performance year-to-date, we now expect to meet or exceed our full-year organic revenue growth target of 4%.”
One of the big reasons for its success so far in 2019 are the sales from Bubly, the sparkling water brand it launched in 2018.
According to Bloomberg Intelligence, it is taking market share from LaCroix, which saw its sales fall by 14% in the four weeks ended July 14, compared to a 96% increase for Bubly in the same period.
Pepsi is investing in the brand and LaCroix is feeling the heat.
Over the past year, Bubly has generated more than $170 million in revenue and grabbed 7.7% of the sparkling water market in short order.
With free cash flow expected to be $5 billion or more in 2019, look for the company to buy back more than $3 billion of PEP stock.
Canopy Growth (CGC), Constellation Brands (STZ)
If you blinked, you probably missed the news Oct. 2, that Canopy Growth (NYSE:CGC) was buying 72% of BioSteel Sports Nutrition, a company that specializes in sports nutrition and hydration products for high-performance athletes like Dallas Cowboy running back Ezekiel Elliott.
With an option to buy the remaining 28% of BioSteel in the future, I see this acquisition as a no-brainer for the Canadian cannabis company backed by Constellation Brands (NYSE:STZ).
When the news first broke, I was all over the story because, unlike the $600 million Canopy spent on Hiku, BioSteel has “big” written all over it.
Not only does Canopy get a beverage and nutrition company that it could grow on its own, separate from its cannabis business, but BioSteel is also a great vehicle to roll out CBD-based products to athletes and non-athletes across North America.
The CBD industry is projected to grow to $17.3 billion over the next seven years. Add these drinks to the CBD-infused chewables and chocolates and you’ve got a recipe for significant revenue generation.
Take Constellation’s distribution reach, Canopy’s understanding of cannabis and hemp and BioSteel’s market leadership, and this investment seems like a slam dunk.
Boston Beer (SAM)
The good news for owners of Boston Beer (NYSE:SAM) stock is that it’s up 54% year-to-date through Oct. 8. The bad news is that it was as high as $445 in early September.
Not to worry. Just when you think CEO and founder Jim Koch is down and out, he figures out how to keep Boston Beer growing.
Are you familiar with White Claw?
It’s the leading hard seltzer in the U.S., brought to consumers by the same people who sell Mike’s Hard Lemonade, and outselling Budweiser and every craft beer in the process.
A fad, you say. Don’t tell that to Koch. He’s got Truly, the second-place brand in terms of market share at 30%, half White Claw’s, but still pretty darn impressive.
On Oct. 4, thanks to the company finding the internal capacity to produce Truly in-house instead of using third-party co-packers, UBS Group analyst Sean King upgraded his rating on the stock from $305 to $390.
“Truly’s stellar growth in fiscal 2019 failed to translate into meaningful earnings growth year-to-date as the company’s heavy reliance on co-packers weighed on margins,” King wrote. “We now believe that this headwind will ease into fiscal 2020 with greater internal capacity coming. The extent of vertical integration and outlook for Truly growth will be key determinants of earnings growth for Boston Beer in fiscal 2020.”
Here’s what I know.
I live on Canada’s east coast. You can’t find either product on store shelves. Down in the U.S., it’s estimated that only 20% of restaurants and bars carry White Claw indicating just how much business is still on the table.
I see $400 again soon.
What would a list of beverage stocks be if it didn’t contain the world’s biggest coffee company.
Starbucks (NASDAQ:SBUX), like Boston Beer, always seems to find a way to reignite growth at precisely the right time, and in doing so, keep the SBUX share price moving higher. In 2019, it’s up 34% YTD, including dividends.
As if you needed another reason to own SBUX stock, I’ve come across a real doozie.
According to Schaeffer’s Investment Research, Starbucks is one of only two S&P 500 stocks that have moved higher in the fourth quarter for 10 consecutive years, averaging a Q4 return of 10.6%.
While there are other S&P 500 stocks that have better average returns in the fourth quarter — Delta (NYSE:DAL) has an average return of 16.6%, delivering positive returns in nine out of the last 10 years — its consistency is important as we approach the 11th anniversary of the latest bull market.
Sure, the company’s admission that its 10% growth rate forecast probably won’t carry into 2020 due to some one-time, tax-related issues but unless people stop drinking coffee, it will continue to do just fine.
Down from its 52-week high of $99.72 reached in July, any future weakness should be met with increased buying.
As beverage stocks go, Starbucks is a must-own.
Most people wouldn’t consider luxury goods conglomerate LVMH (OTCMKTS:LVMUY) a beverage company. However, given the “MH” in its name stands for Moet-Hennessy, which merged with Louis Vuitton in 1987 to form LVMH, I would beg to differ.
If there were a consumer goods company that is too big too fail, I would go with LVMH every day of the week and twice on Sunday. That’s why I recommended LVMUY stock in September as part of my article about one-stock portfolios to own.
As I said then, LVMH generates almost $53 billion in annual revenue from more than 70 different brands including makers of wine, champagne, cognac, and whiskey.
In the first half of 2019, its Wines & Spirits group generated 6% organic growth, with its cognac and spirits business accounting for 61% of sales and champagne and wine the remaining 39%.
Although LVMH believes its Wines & Spirits group is facing a difficult business environment, Hennessey managed to grow volumes by 8% in the first six months of the year thanks to strong sales of its VS and VSOP cognac.
It pays to own quality.
Molson Coors (TAP)
Molson Coors’ (NYSE:TAP) Canadian division opened a new brewery in Chilliwack, British Columbia, in September. It was built to replace its Vancouver brewery that was sold in 2015. Three years in the making, it’s a $300-million facility located on 36 acres, and employing 100 people.
More importantly, it is the company’s most modern brewery, that will reduce energy and water use by 20% and 40%, respectively. In terms of capacity, it will be able to brew more beer in a year than all of the craft beer sold in B.C. in its most recent fiscal year.
While the recent resignation of Hexo (NYSE:HEXO) CFO Michael Monahan has some worried about the cannabis company’s future, MKM Partners analyst Bill Kirk remains bullish about its stock. Kirk rates it a buy with a target price of $9.02.
I mention Hexo because it is the company that Molson Coors Canada has partnered with to produce cannabis-infused drinks for the Canadian market. Named Truss Beverages, Molson Coors owns 57.5% with Hexo owning the rest.
Molson Coors believes that the Canadian cannabis beverages market could be worth between $1.5 billion and $3.0 billion. With legalization of cannabis-infused drinks to take place on Oct. 17 and allowing for another 60 days to get the appropriate licensing, Truss should have products in stores as early as mid-December.
Molson Coors might be a beverage underdog, but if you can afford to risk a few dollars, its gamble on cannabis that might well pay off handsomely.
I didn’t want to pick Coca-Cola (NYSE:KO) when Pepsi’s already on the list but the fact that it’s launching its own energy drink in the U.S. makes it noteworthy.
Investors already knew about Coca-Cola Energy because the line of drinks has already launched in Spain, Hungary and 25 other markets in Europe and Australia. In addition to Coca-Cola Energy, the lineup includes a zero sugar version, a cherry flavor and a zero sugar cherry offering.
Coca-Cola already had a partnership with Monster Beverage (NASDAQ:MNST) that was signed in 2015 that gave Coke a minority position in the energy drink maker and made Coca-Cola its preferred distribution partner.
In addition, Coca-Cola transferred its energy drink assets to Monster and Monster gave Coke its non-energy business.
It was a marriage made in heaven until Coke decided it wanted back in the energy drink game.
The two parties went to arbitration in October 2018. The arbitration tribunal ruled in July that Coke could continue to sell Coca-Cola Energy because it fell under the Coca-Cola brand name and didn’t violate the non-compete clause.
Coca-Cola has brought a number of interesting products in the past year and Coca-Cola Energy is certainly one of them. Add to this its entry into the coffee market through Costa Coffee and its growth engine might rev up its share price.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.