Are These Beverage Stocks Fizzling Buys?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) reported growing sales for 2012. Are these two stocks or any others in the non-alcoholic beverage industry attractively priced? 

Coca-Cola Results

Coca-Cola reported that its fourth-quarter profit increased by 13% due to rising sales of non-carbonated drinks like Powerade in North America. During the quarter, the company’s sales volume in North America increased by 1%. In the region, the volume of the beverages declined by 2% while the volume of beverages advanced by 8% due to increased demand for the Powerade energy drink.

This development counterbalanced the decline in demand across Europe. The slower European economy reduced the demand in the region, where sales volume also dropped by 5%. According to Stifel’s Swartzberg, analysts believe that there would be little change in the volume in Europe. According to the median of 45 estimates compiled by Bloomberg News, Euro-area gross domestic product fell by 0.4% during the fourth quarter. This would be the biggest fall since the first quarter of 2009, when gross domestic product of the country fell by 2.8% due to the collapse of Lehman Brothers. According to Morningstar analyst Thomas Mullarkey, “Global diversification continues to pay dividends for the company even though you might have a little bit of softness in some regions like Europe, China or North American carbonated soft drinks. It’s still able to grow unit case volume globally.”

Overall 2012 results were solid. Net income increased to $1.87 billion or 41 cents per share during the quarter as compared to the $1.66 billion or 36 cents per share during the fourth quarter of the previous year. The company’s revenue increased by 3.8% to $11.46 billion, or increased by 5% on a comparable currency basis. The company’s global sales volume increased by 3%, the lowest quarterly increase during 2012.

Profit was 45 cents a share excluding restructuring costs and other similar items, which was higher against the 44 cents a share analyst estimate. The company’s CEO Muhtar Kent is focusing on increasing consumer demand for healthier beverages with offerings such as Honest Tea, Powerade and Simply Orange

The company now bottles 80% of the volume of drinks sold in the US; it plans to combine various distribution regions in its bottling unit to reduce costs and enhance its efficiency. Under this strategy, the company’s refreshments bottling unit would be reduced from seven to three territories such as East, Central and West. Kent focuses on restricting the distribution pattern across the US since the acquisition of Coca-Cola Enterprises’ North American operations in 2010. He also said that they are focusing on improving in terms of how they serve their customers.

Kent focused on the fact that there will be an increase in the role of partners to acquire various parts and portions of the North American bottling operation, which the company now owns and operates. He also said that the current strategy of selling the bottling operations of the company would take place in another two to three years.

There could be further problems for Coca-Cola and other sugar drink sellers since there is criticism that sweetened drinks add to the United States obesity epidemic. In January 2013, the company commenced airing advertisements to highlight the significance of exercise and lower calorie intake in reducing obesity.

Pepsi Results

PepsiCo reported an increase of 17% in its profit during the fourth-quarter due to higher prices. The company also plans to repurchase approximately $10 billion in stock as it prefers to return cash to its investors. According to Hugh Johnston, the CFO of Pepsi, the company does not require any large-scale acquisitions. The company also seeks permission from the US Food and Drug Administration for new sweeteners. It does not plan any restricting of its bottling business in North America before early 2014. According to Johnston, “We certainly wouldn’t want to make a change in the business structure while there are still opportunities to unlock value that might be better unlocked while PepsiCo still owns the business.”

Non-Alcoholic Beverage Growth Companies

Coca-Cola FEMSA (NYSE: KOF) has finalized its acquisition of a 51% stake of Coca-Cola Bottlers Philippines from Coca-Cola for $688.5 million. The acquisition would strengthen the company’s position in the global beverage industry. The company has the necessary skills and operational capabilities to capture the opportunities available in its Philippine operation.

According to Beverage Digest, Monster Beverage (NASDAQ: MNST) will label its beverages’ ingredients as per the U.S. federal guidelines for food products that have caffeine content. According to Rodney Sacks, the CEO of Monster Beverage, the labels on the beverage cans would provide details about nutrition facts instead of supplement facts to qualify as food items under U.S. Food and Drug Administration policies. US regulators are investigating the drinks' safety after they were linked to deaths and hospitalizations. The agency is investigating whether the beverages could cause any harm to people when consumed in large quantities by young people or by those who have heart problems.

Valuation Considerations

Most beverage firms are not trading at attractive price multiples:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> <td> <p><strong><span>EPS Growth Next 5 Years</span></strong></p> </td> </tr> <tr> <td> <p><span>DPS</span></p> </td> <td> <p><span>Dr Pepper Snapple</span></p> </td> <td> <p><span>14.7</span></p> </td> <td> <p><span>1.5</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.19</span></p> </td> <td> <p><span>6.9%</span></p> </td> </tr> <tr> <td> <p><span>KO</span></p> </td> <td> <p><span>Coca-Cola</span></p> </td> <td> <p><span>19.49</span></p> </td> <td> <p><span>3.53</span></p> </td> <td> <p><span>54.26</span></p> </td> <td> <p><span>0.99</span></p> </td> <td> <p><span>8.2%</span></p> </td> </tr> <tr> <td> <p><span>KOF</span></p> </td> <td> <p><span>Coca-Cola FEMSA</span></p> </td> <td> <p><span>33.06</span></p> </td> <td> <p><span>2.89</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.21</span></p> </td> <td> <p><span>13.5%</span></p> </td> </tr> <tr> <td> <p><span>MNST</span></p> </td> <td> <p><span>Monster Beverage</span></p> </td> <td> <p><span>28.07</span></p> </td> <td> <p><span>4.38</span></p> </td> <td> <p><span>31.04</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>19.0%</span></p> </td> </tr> <tr> <td> <p><span>PEP</span></p> </td> <td> <p><span>PepsiCo</span></p> </td> <td> <p><span>19.65</span></p> </td> <td> <p><span>1.73</span></p> </td> <td> <p><span>52.67</span></p> </td> <td> <p><span>1.3</span></p> </td> <td> <p><span>4.9%</span></p> </td> </tr> </tbody> </table>

Possibly the only exception is Dr Pepper Snapple. All the other stocks on this list trade at high price-to-earnings ratios. All but Dr Pepper Snapple and PepsiCo trade at high price-to-sales ratios as well.

That being said, Dr Pepper Snapple is not trading at attractive valuations, just valuations that are near the averages of the broader market. There is no compelling reason to jump in.

Conclusion

Do not add non-alcoholic beverage stocks at current prices. As a group they are pricey compared to the stock market as a whole, and the only name with reasonable valuations, Dr Pepper Snapple, is not compelling based on growth or valuation.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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