Soda Fizzes Despite Challenges
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Steve Jobs recruited former PepsiCo (NYSE: PEP) president John Sculley to Apple in the 1980s by saying "Do you want to save the world or sell sugar water to kids?"
Later in the decade, Warren Buffet decided that that he could indeed make money selling sugar water to kids. He started buying shares of Coca-Cola (NYSE: KO) in 1988. Berkshire Hathaway (NYSE: BRK-A) holds 400 million shares, which is worth approximately $31.3 billion, according to Yahoo Finance. Berkshire is Coke's top institutional shareholder.
Most outsiders don't know this, but Coke’s business isn't in selling their sodas, but selling syrups to both independent bottlers that put the finished products into bottles and cans as well as for soda fountains in restaurants. Pepsi operates the same way.
Soda might be a perfect consumer product. Just about everybody likes it, it's relatively cheap to make, and manufacturers can create lots of variety easily for different tastes. If you don't like the regular Coke or Pepsi you can pick up the diet versions of the two flagship colas, or Pepsi's Sierra Mist. If you're looking for something other than soda both companies manufacture bottled water and fruit juices. If you get hungry, Pepsi also owns Frito-Lay and Quaker foods. If that's not enough, you can choose the various brands from the Dr. Pepper Snapple Group (NYSE: DPS), if you're interested in, well, Dr. Pepper or Snapple, or 7-Up or Canada Dry ginger ale, among others. Phew! Now that's diversification.
Coke's sales have grown over the past few years, with $46.5 million in 2011, with the company consistently posting a profit. Drink sales are somewhat seasonal, however. Coke seems to have the highest sales in the summer, while Pepsi's start slower and ramp up at the end of the year, which is odd since it's Coke that's most associated with the holidays, though it didn't, contrary to popular opinion, invent the modern image of Santa Claus. The Dr. Pepper Group's sales also seem be highest in the summer months.
Income investors might want to note that these three companies consistently pay dividends. As mature companies, they have average P/Es for the industry ranging from 19-20, but they're not too expensive. Coke has been trading down, so this might be a good buying opportunity.
Of course, nobody ever got fired for recommending Coca-Cola, but the soda business does face some challenges.
The drink business is competitive, and one of the recent markets has been in the growth of energy drinks. In the convenience store near my home, I've been seeing lots of people grab a Monster (NASDAQ: MNST) drink more than they do soda, but of course this is anecdotal. (You have to wonder about the people who buy beer in the early afternoon on a weekday, though.) Coke has answered with Full Throttle and Pepsi with AMP Energy. Dr. Pepper Snapple has even gotten in on the act with Venom.
Even though these energy drinks aim to keep people like gamers performing at their peak, they've attracted attention from New York State attorney general, Eric T. Scneiderman, who is investigating the claims of the manufacturers. The industry as a whole is facing more scrutiny. New York City mayor Michael Bloomberg recently banned large sodas from the city's stores. Schools across the country are increasingly removing sodas from their grounds as well, replacing them with milk and fruit juices (which the soda companies also happen to manufacture).
Perhaps sensing that the company might encounter some difficulties, Monster has branched out into other brands, including some more countercultural offerings including Hansen's and Blue Sky sodas, as well as Peace Tea. Monster's P/E is a bit high, and the trouble with its trendy products is that at some point they're not trendy anymore, so I'd hold off on Monster, even if sales are growing and the company is consistently profitable. The P/E's rather high at 33.00, which doesn't help matters.
Of course, it's impossible not to mention the drought that's affected the food and drink industry as a whole, especially corn. Where else do you think they get the high fructose corn syrup for their drinks? On the other hand, both Coke and Pepsi are hedging ingredients, so they might be able to keep their costs down as food prices shoot up. They've managed to keep costs low relative to their sales, so far.
The soft drink market is quite bubbly, overall. Kids still want their sugar water, after all.
ddelony has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, and The Coca-Cola Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.