Niche Beverages Offer Refreshing Alternatives

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There should be a place in every portfolio for Coca-Cola (NYSE: KO) or PepsiCo (NYSE: PEP).  

Each is an excellent company with a global franchise, healthy dividend yield and a robust total return over the decades, accounting for why Coca-Cola is the largest holding of Warren Buffett's in the portfolio of Berkshire Hathaway.  But for investors looking for high growth or undervalued stocks in the beverage sector, niche companies such as Monster Beverage (NASDAQ: MNST), Cott Corporation (NYSE: COT), and Reed's Inc might have better growth potential due to the evolution of the world marketplace for these products.

Both sales and earnings-per-share growth are soaring for Monster Beverage, which produces and sells a variety of energy drinks.  The stock price of Monster Beverage is down, however, in recent market action due to regulatory concerns.  Off more than 30% for the quarter, it appears as if all possible difficulties have been accounted for in the stock price of Monster Beverage, except for a complete ban of energy drinks, which is very unlikely (cigarettes are still sold, after all).  Moreover, both Coca-Cola and PepsiCo are trying to establish themselves in the highly profitable energy drink niche, so that makes a total ban even more unlikely to transpire.

Despite that competition from PepsiCo's Amp and Coca-Cola with Powerade, earnings-per-share growth is on a very bullish trajectory for Monster Beverage.  Earnings-per-share growth this year is 34.53%.  For the past five years, earnings-per-share growth averaged only 25.28%.  As the chart below shows, earnings-per-share growth is over 31% for Monster Beverage while under 1% for Coca-Cola and negative for PepsiCo.


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KO Earnings Per Share Growth data by YCharts


Reed's is the anti-Monster Beverage in that it produces and markets natural drinks.  Based in Southern California (where else?), Reed's also sells candies and ice cream.  Reed's six flavors of beverages are Original Ginger, Extra Ginger, Premium Ginger, Raspberry Ginger, Cherry Ginger and Spiced Apple. Last month, Reed’s reported a 27% jump in earnings to $7.8 million, the company’s 11th quarter of double-digit revenue growth.

The largest private label maker of beverages in the world, Cott Corporation should benefit from increasingly cost conscious consumers.  Watching every penny in the current low economic growth climate, customers of Wal-Mart and other stores will pass on name brands such as Coca-Cola and PepsiCo for an adequate cheaper product.  That is the basic economic principle of "substitution."  It is also why Warren Buffett has loaded up on shares of Wal-Mart.  Almost one-third of the sales for Cott Corporation are to Wal-Mart.

For value investing, Cott Corporation is very attractive as it is selling at a price-to-sales ratio of just 0.33.  That means that every dollar in sales of Cott Corporation is only accounted for in 33 cents of cost in the share price.  That is odd as with so much of its sales to Wal-Mart, there is a very solid customer base that will only expand for Cott Corporation.  

While a low price-to-sales ratio can be an element of a classic "value trap" (SuperValu has a price-to-sales ratio of just 0.01, as an example), Cott Corporation is profitable with earnings-per-share growth of 26.87% for the last five years, which is expected to be 21.21% for the next year.  This key indicator for Cott Corporation is much more appealing than the price-to-sales ratios for both Coca-Cola or PepsiCo.  As the chart below shows, each dollar of sales costs $3.65 in the share price of Coca-Cola and $1.66 for those buying PepsiCo stock.


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COT Price / Sales Ratio data by YCharts

Monster Beverage, Reed's and Cott Corporation are well-positioned to profit from economic trends, societal shifts and global demographics.  Even in adverse economic conditions, the demand for natural products continues to rise.  The energy drink sector is the fasting growing segment in the beverage industry (which explains the efforts of PepsiCo and Coca-Cola).  With economic growth declining around the world, more consumers will opt for lower priced substitutes, favoring the products of Cott Corporation.

Niche beverages such as these follow the success of Coca-Cola and PepsiCo.  This allows for a worldwide reach in sales.  At present, Coca-Cola and PepsiCo have operations in every country in the world except for Cuba and North Korea.  That makes the global market much more amenable for niche substitutes from Monster Beverages, Cott Corporation and Reed's.  


Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. 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.

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