An Alternative To The Fizz

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

In the non-alcoholic beverage space, there are two big names that come to everyone’s mind – Pepsi (NYSE: PEP) and Coca-Cola (NYSE: KO). These two companies have been delivering gains for quite a while now, and both of them pay a fairly good dividend too. In fact, Coca-Cola is one of the companies in which Warren Buffett’s Berkshire Hathaway has invested a significant amount.

The Status Quo

Coke is currently trading at around $36, which is somewhere in between 52 week high of $40 and the 52 week low of $33. Pepsi is trading at $70, which is at the higher end of the 52 week range of between $62 and $73. Both Coke and Pepsi have been fairly bearish in the past few months and you would have to wonder whether it makes any sense to invest in these companies, particularly with the entry of a large number of energy drinks into the market.

Energy brands such as Monster, Burn, and Red Bull will give Coke and Pepsi some stiff competition. Coke and Pepsi had their own brands for energy drinks named Amp Energy and Full Throttle, respectively, but these have diminished in prominence thanks to a lack of investment from the companies in these two brands. Coke now distributes the Swedish energy drink Burn in a lot of countries. But do these energy drinks really pose a significant threat to Coke and Pepsi? I don’t believe so, honestly. Energy drinks taste quite different and have an entirely different target audience from the fizzy black sugary beverages. The extremely high caffeine content (Pepsi and Coke also contain caffeine) in energy drinks make it a fairly unsuitable beverage for children (again, not that Pepsi and Coke are particularly healthy for kids either).

Another reason why Coke and Pepsi shouldn’t be too worried about the prominence of energy drinks in the recent past is the fact that they have diversified fairly well. Pepsi gets a fairly large chunk of its revenues from packaged snack foods, not to mention the fact that they have other carbonated drinks brands such as 7Up, Mountain Dew, and so on. Coca Cola, while it doesn’t delve into the packaged food division, has a fairly strong brand in Minute Maid. Not only does the company have strong brands of drinks, they also have a foothold in emerging markets and see these as a key destination.

While Coca-Cola and Pepsi are fairly stable and their revenue streams are relatively secure, it is unlikely that they’ll see much growth in the coming years. This is one of the reasons why investors who are looking to invest in this space might want to consider an alternative.

The Alternative

Sodastream (NASDAQ: SODA) is a company that makes a home carbonation product which allows consumers to make soda from regular water. If you add the right syrups and concentrates, you can make a fairly decent tasting carbonated product in the comfort of your own home.

The Israel-based company has only recently started making inroads into the American market, but has been around in Europe for quite a while, so it isn’t something of an unknown brand, really. The stock hit an all time high of $80 in 2011 and is currently fairly well short of that number. There are quite a few reasons for why an investor should look into Sodastream.

Citi recently started coverage on this company and have given it a “Buy” rating. According to Citi analyst Wendy Nicholson, the company has strengthened its distribution channels – tying up with companies such as Wal-Mart and Costco. The target audience has been diversified and the largest market, which was Europe, has now seen lesser contribution to the company’s revenue. The company has also maintained a fairly good level of profitability, which is a key factor for any investor to consider. Since the company has just tied up with these retail channels, consumer penetration for the product hasn’t been particularly high thus far, indicating a fairly high potential for growth.

I must recommend that you do your own due diligence on the company, as you would for any other investment. Coca Cola and Pepsi are fairly stable companies and pay a regular dividend, which gives them an edge over Sodastream. However, what I see in Sodastream is a potential for growth that I feel neither of the prominent two beverage brands can match.

keshavr has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. 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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