For the past few years, the large soda companies, such as The Coca-Cola Company (NYSE:KO) , have been increasingly blamed for their role in the obesity problem in the U.S. However, they continue to do okay due to their international operations and financial power. Increasingly, competition is arising from smaller companies such as National Beverage Corp. (NASDAQ:FIZZ) and Lifeway Foods, Inc. (NASDAQ:LWAY).
Valuation
As seen from the table below, Lifeway Foods, Inc. (NASDAQ:LWAY) has the highest growth rate but a solid gross margin and operating profit, bested only by The Coca-Cola Company (NYSE:KO). It is much easier to grow a company with annual sales of $80 million, in the case of Lifeway, than a company with $48 billion in sales, in the case of Coca-Cola. Both National Beverage Corp. (NASDAQ:FIZZ) and Lifeway are niche players due to their smaller sizes and implied flexibility.
However, of the two companies, only Lifeway Foods, Inc. (NASDAQ:LWAY) has a double-digit growth rate. For example, only in the past year did Lifeway launch a new line of products (five new kefir confections for kids and grownups) and expand internationally in the UK.
It seems that both The Coca-Cola Company (NYSE:KO) and National Beverage Corp. (NASDAQ:FIZZ) are managed for profitability by sacrificing growth. This is evident by the volatility of their stocks as measured by beta. While Lifeway Foods, Inc. (NASDAQ:LWAY) also has a very low beta, or volatility, the company is able to grow more steadily.
| KO | FIZZ | LWAY | |
| Market capitalization | $180B | $815M | $295M |
| Sales growth (last fiscal year vs year before) | 3.2% | 5.3% | 16.3% |
| Price-to-sales | 3.8 | 1.2 | 3.5 |
| Price-to-book | 5.6 | 11.1 | 7.2 |
| Gross margin | 60.5% | 32.8% | 34.7% |
| Operating margin | 26.8% | 10.6% | 12.4% |
| Beta | 0.5 | 0.4 | 0.5 |
| one-year total return | 1% | 23% | 72% |
Source: Reuters, SEC filings, author’s calculations.
Competitive positions
The Coca-Cola Company (NYSE:KO) has over 500 non-alcoholic brands, including such well-known names as Coca-Cola, Sprite, Fanta, Minute Maid, Dasani, Vitaminwater, and Powerade that are sold in over 200 countries. The reach and depth of Coca-Cola’s brand is second to none.
On the other hand, National Beverage Corp. (NASDAQ:FIZZ) and Lifeway have 13 major brands each. By having relatively fewer brands and a focus on the U.S. market, National Beverage and Lifeway are able to compete with The Coca-Cola Company (NYSE:KO) by offering niche products. National Beverage Corp. (NASDAQ:FIZZ), with its Shasta soda brand is mainly targeting the rising Hispanic population and its Ritz drinks are primarily sold in Southeastern U.S. Also, National Beverage is the only company offering energy drinks in the popular and growing (as evidenced in this recent industry article) shot-form with its Rip It brand.
Lifeway has the widest variety of products compared to the number of brands. It offers a variety of products including: kefirs aimed at kids and grownups as well as light versions; soft cheeses; cheese spreads; a kefir-based beverage to support the gastrointestinal functions and the immune systems; powdered kefir; Lassi – a traditional Indian cultured drink; and organic kefir.
Importantly, Lifeway makes the majority of its products using fermented dairy and sells them primarily in the yogurt section of groceries, which further signifies the health properties of its products.
Recommendation
Coca-Cola, National Beverage and Lifeway are three companies primarily marketing non-alcoholic beverages. Coca-Cola is the largest company, which is barely growing. In fact, its most recent quarterly sales declined by 3% with sales in North America down by 1% and Europe and Pacific regions down by 1% and 5%, respectively. At the same time, Lifeway’s most recent quarterly sales increased by over 25% compared to the same period in 2012, while those of National Beverage rose by 1.5%.
National Beverage offers the best balance between growth and profitability but its lack of natural and healthy products make it less likely to continue to grow. Coca-Cola is likely to lose market share due to backlash against soda products and increasing popularity of coffee and tea drinks. However, Coca-Cola should be able to manage costs well due to its economies of scale.
Finally, Lifeway is the fastest growing company. It has a small portfolio of brands but it is a niche player that offers healthier kefir drinks and is expanding into new categories and markets. If successful, international expansion and a solid product pipeline could be the catalyst for Lifeway to be acquired by a larger company with larger resources and growth needs.
Conclusion
The companies discussed above will be helped by the recent record-high temperatures. Coca-Cola is a major company operating in the non-alcoholic beverage industry and it is the company, that usually benefits the most from weather swings. However, due to a secular move away from corn-syrup based soda, Coca-Cola is likely to lose market share. On the other hand, National Beverage offers brands that target specific demographics and/or areas and is an active player in the popular energy drink market with its Rip It products.
And Lifeway is the smallest but nimblest company, which should also benefit from its focus on kefir products. Due to its faster growth and healthy products, Lifeway offers the largest growth potential. Given the company’s long history (since 1986) and pioneering role in kefir-based products in the U.S., investors should feel confident about investing in the company.
Delian Naydenov has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola.
The article Shark and Minnows: A Look at Three Nonalcoholic Drinks Companies originally appeared on Fool.com and is written by Delian Naydenov.
Delian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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