Within the beverage industry, The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are undisputed worldwide leaders. As such, they offer compelling growth prospects for the long-term. Emerging as a new leader, energy drink company Monster Beverage Corp (NASDAQ:MNST) is also worth a closer look as it could become a global front runner in the years to come. In this article, I will analyze these stocks in order to decide if they are worthy long-term investments or not.
A worldwide giant
Even though the carbonated beverages market is declining in the U.S., many other markets should drive growth in the years to come, especially Brazil, Russia, India, and China as disposable income levels rise and several billion dollar investments are planned by the company in these countries. Results in these economies have been encouraging in the last few years and portray an encouraging growth outlook for the years to come.
Moreover, The Coca-Cola Company (NYSE:KO) has also widened its product portfolio to address the demand of non-carbonated drinks in some central economies through its Minute Maid, Simply, and Powerade brands, among many others around the globe.
Several cost reduction initiatives lift profitability projections even further. After a successful four-year productivity program that was completed in 2011, which resulted in annualized savings of over $500 million, in February 2012, “Coca-Cola launched a four-year productivity and reinvestment program which includes initiatives like optimization of global supply chain; improving effectiveness of global marketing and innovation; operating expense leverage; standardization of information systems and integration of CCE’s North America business. The program is expected to generate annualized savings of $550 to $600 million phased over a four-year period starting in 2012 through the end of 2015” according to Zacks Equity Research.
With a solid cash position, a strong worldwide brand portfolio, one of the widest moats and compelling long-term growth prospects estimated around 8%-9% annually for years to come, I’d recommend buying and holding this stock that, above all, trades at discount to the 45.7 industry average P/E, at only 22.5 times its earnings — a very reasonable valuation for a company that looks this good.
A strong competitor
One of the most famous rivalries in the business world and even between consumers has been, for years now, that of The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP). Just like its main competitor, PepsiCo, Inc. (NYSE:PEP) has an established and successful worldwide brand portfolio that provides it with a wide economic moat and steady cash flows, thus making it a good long-term investment, expected to deliver about 9% in EPS growth over the following five years. Trading at 21.5 times its earnings, I would consider buying this firm for my portfolio as well.
As North America’s largest — and the world’s second largest — food and beverage business, with a product offering that comprises brands like Pepsi, Mountain Dew, Gatorade, Tropicana, Lay’s, Cheetos, Doritos, and Quaker, apart from another 14, the firm is poised to deliver long-term growth. Its focus on marketing, advertising, and innovation should keep it profitable and growing like in the past. Furthermore, its record acquiring or creating brands and products that anticipate consumer trends is outstanding and should continue to be so.
Its Frito-Lay division is worth mentioning. As the world’s biggest snack food company, it holds 40% of the market share and its presence is huge. In many countries, its brands stand for generic snack names as well, and will most likely gain further share of the market as the economy improves.
One aspect that is central to PepsiCo, Inc. (NYSE:PEP)’s success is its direct store delivery system, which has provided it with closer contact with retailers and consumer trends. This relationship was further enhanced by the acquisition of its two main bottlers in 2010.
Several other long-term growth catalysts can be found within PepsiCo, Inc. (NYSE:PEP), including a strong presence in developing economies that are bound to increase their demand for unnecessary consumption goods like cola beverages and salty snacks and several cost reduction initiatives. Yielding 2.71% in dividends and a history of reinvesting money into the business while still repurchasing stock, I’d recommend buying PepsiCo shares while they are still reasonably valued.
A new challenge in the energy drink market
Monster Beverage Corp (NASDAQ:MNST) might have come to take Dr Pepper Snapple Group Inc. (NYSE:DPS)’s place as the third most popular beverage brand in the U.S. Its origin as a fresh juice company has been left way behind, as it is now the second largest energy drink company in the world. With energy drink sales rocketing over the past decade, combined with its asset-light business model that utilizes third-party manufacturers and distributors to market its products, returns on invested capital rose to over 40% last year and are expected to average above 50%, versus The Coca-Cola Company (NYSE:KO)’s 22%, over the next five years (Morningstar Analyst Research).
Plenty of growth opportunities remain both in U.S. and overseas markets, as average annual servings of Monster Beverage Corp (NASDAQ:MNST) products are considerably below its competitors’. Red Bull, its main rival, operates in double the amount of countries than Monster Beverage Corp (NASDAQ:MNST) and generates almost 10 times Monster Beverage Corp (NASDAQ:MNST)´s revenue in overseas markets. International expansion provides plenty of room, especially in countries not yet penetrated. By 2020, the firm´s international sales could reach over two-fold the current value.
However, I would still recommend a hold on this stock, but not losing track of its performance. Main reasons not to venture would be a higher valuation than some of its main peers, significant dependence on its competitors to distribute its drinks (quite paradoxical and not very convenient, as you might imagine), regulation related risks, and private-label (mainly local) competition on pricing.
Nevertheless, if the stock price falls, I would buy into this firm that offers the highest expected growth rate among the analyzed companies: 15% per year over the next five years. Just wait for an entry point and take a chance, you might be surprised by the upside.
Bottom line
Coca-Cola or PepsiCo? One of the most common questions in consumers’ minds. These firms are so huge, so well-known, that profitability and expansion don’t seem like issues. Either one of them, or better, both offer compelling growth prospects at sustainable rates and reasonable valuations. I’d recommend buying and holding on to these stocks, as they will most likely deliver plenty of value and steady returns in the long-term (and will do well for your retirement fund).
The article 3 Big Names in the Soft Drink Industry Worth Investing In originally appeared on Fool.com and is written by Victor Selva.
Victor 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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