The other major beverage company, Coca-Coal, is one of the dominant beverage leaders in the U.S. Its Coca-Cola beverages accounted for 48% of total U.S. unit case volume. Coca-Cola has been re-franchising its U.S. bottling operations, including five partnerships with five U.S. bottlers. These moves should help margins go higher, but I still see interim margin pressure related to the firm’s attempt to expand its international presence in faster-growing emerging markets.
One of the benefits of investing in the more stable soft drink companies is that they do offer income: PepsiCo, Inc. (NYSE:PEP) and Coca-Cola both pay a 2.7% dividend.
Dr Pepper Snapple Group Inc. (NYSE:DPS) is primarily a soft drink company, with beverage concentrates making up 20% of sales and 70% of revenues tied to packaged beverages. The other issue is that Dr. Pepper is primarily a U.S. operator, generating some 90% of revenue from the country. What’s more is that Dr. Pepper does not participate in the sports drinks, energy drink, or bottled water markets.
This less diverse portfolio of non-carbonated drinks should strain Dr Pepper (NYSE:DPS)’s growth going forward. Revenue growth is expected to come in at a mere 2.3% this year, which will be driven by its TEN platform offering 10-calorie versions of 7UP, A&W, Sunkist, Canada Dry, and RC. Yet, this is likely to strain margins going forward due to marketing and promotion investments to expand this new platform. It is worth noting that Dr. Pepper does sport a 3.2% dividend yield.
What hedge funds think
Going into 2Q, there were a total of 38 hedge funds long Monster, which was an impressive 36% increase from the previous quarter. This includes Ricky Sandler’s Eminence Capital with the largest position, $92.8 million, making up 2.4% of its 13F portfolio (check out Eminence’s top picks).
PepsiCo, Inc. (NYSE:PEP) had 47 hedge funds long the stock at the end of 1Q, which was essentially flat form the previous quarter. However, Donald Yacktman’s $1.8 billion position in the beverage company makes up 9.3% of his hedge fund’s portfolio; serious conviction (check out Yacktman’s top stocks).
Meanwhile, Coca-Cola has a robust 59 hedge funds long the shares, with billionaire Warren Buffett’s Berkshire Hathaway as one of its biggest backers. Buffett holds a $16.2 billion position in the stock, which made up 19% of Berkshire’s 13F portfolio (see Buffett’s cheap stocks).
The bottom line
Sure, you can invest in the likes of PepsiCo, Inc. (NYSE:PEP) or Coca-Cola, but I like investing in Monster for its greater exposure to the energy drink market. With a return on equity that’s in excess of 35%, it’s hard not to get excited about Monster. Analysts expect Monster to grow EPS at an annualized 16% over the next five years, which is well above the 9% growth expected for Pepsi and Coca-Cola. Yet, Monster has underperformed both by at least 30 percentage points over the past 12 months. I think this trend is likely to reverse itself over the next 12 months.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage (NASDAQ:MNST), and PepsiCo (NYSE:PEP). The Motley Fool owns shares of Monster Beverage and PepsiCo.
The article How to Energize Your Portfolio originally appeared on Fool.com.
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