To Love a Monster

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

Now that Coca-Cola Company (NYSE: KO) has reported earnings there’s better visibility into the non-alcoholic beverage sector. Which of the big names are ready to ‘pop’?

Four segments make up this sector: carbonated beverages, energy drinks, ‘functional’ beverages’ and teas, juices, water and ades collectively called ‘stills.’ The functional are those that provide some kind of health benefit like rehydration (think Gatorade) vitamin-enhanced, i.e  vitaminwater and pre and probiotic drinks for enhancing digestion.

 

Jolt Your Portfolio

Of all these, energy drinks have been amping up the most, and the biggest publicly traded name in energy is Monster Beverage Corporation  (NASDAQ: MNST) with its line of Monster Energy Drinks. Although Red Bull is the biggest winner, it is privately held. I may think that Red Bull tastes like a cat urinated in a flat cola but millions of college students seem to be able to overlook this and are buying Red Bull and Monster beverages aggressively.

Monster also has a big pipeline of the other segments with Hansen Natural sodas, fruit juices, teas, waters and functional beverages. Monster really jumped a month ago when unsubstantiated rumors came out that one of the big boys would buy it out. The rumor wasn’t true although it has a bottling agreement with Coca Cola and that may have lent some credence temporarily.

On June 28 Monster replaced Sara Lee on the S&P 500 and since then has been trading in the low $70’s and is up 77.77%  in a year. The company has a lofty P/E of 43.39 and a quarterly earnings growth rate of 38.30% year over year. It has a 13% insider hold and a 72.30% institutional hold. The percentage of shares sold short is under 1%, surprisingly low for a momentum name with no yield that has had such a spectacular run. It also has no debt and levered free cash flow of $333.01 million. It reports August 6.

 

Does SodaStream Still Have ‘Juice’?

The other momo name in this space is SodaStream International  (NASDAQ: SODA). This one has really come down from its 52 week high of $79.72 last summer just before its earnings release. The stock lost 41% of its market cap after it disappointed. It’s now trading at $39.21 with a P/E of 25.04. This beverage carbonation system maker has its products available in 50,000 retail stores in 43 countries. They are expanding the flavoring syrups available having agreed with Kraft Foods (NASDAQ: KRFT) in January to offer Country Time and Crystal Light and another deal with Kraft for Kool Aid was just inked today. It also has a Red Bull energy type drink flavoring available which should appeal to those college kids ‘addicted’ to the stuff that might prefer to save on energy drinks and invest their disposable income in more worthwhile purchases like beer and pizza.

There’s been some speculation that Coca-Cola or Pepsi (NYSE: PEP) might want to make a deal with SodaStream for a branded syrup, which would be quite a coup. It sure would but the Israeli company showed a lot of chutzpah recently by displaying its CAGE  traveling exhibit (a metal cage filled with over 10,000 cans and bottles retrieved from a dump that the average American family could save by using SodaStream) in Centennial Park in Atlanta where Coca-Cola is headquartered. This embarassment likely will rule out partnerships or a buyout by the Big Boys until they have time to forgive and forget.

SodaStream still has a whopping 67% of the float short and a -$15.46 million operating free cash flow.

 

The Big Boys

The big three, Pepsico, Coca-Cola, and Dr. Pepper Snapple Group totally dominate the carbonated beverages group. Coca-Cola just reported July 17 and beat but reported slower carbonated sales overall with the biggest growth coming from emerging markets and the worst from Europe. Commodity costs trimmed margins as well as currency concerns.  Coca-Cola owns 43% of the carbonated beverage market to Pepsi’s 31%.

Coca-Cola has been trading near its 52 week highs of $79.36 with a P/E of 20.52 and a 2.70% yield. The company can boast of 92 years of uninterrupted dividend increases. It also has a respectable showing of products in the functional beverages, waters, juices, teas and energy drinks (Rockstar energy drink, Minute Maid, Dasani, Fruitopia and Odwalla, for example) that can offset any flattening (pun totally intended) in the bubbly arena. Also, it recently acquired Coca-Cola Enterprises, the bottler, which should help offset commodity costs. One big expense for Coca-Cola is advertising: it spends $2 billion a year, almost twice as much as Pepsi.

Speaking of Pepsi, they will be up on deck on July 25. It has a 17.38 P/E and a 3.10% yield and is trading close to its 52 week high of $70.89 up from its low of $58.50. Pepsi is no slouch in the non carb sector with Tropicana, Gatorade, Aquafina, Lipton , Amp energy drink and Sobe functional drinks. Pepsi is not just a beverage company. It has an ever expanding food division with Quaker Oats, Aunt Jemima, Capn’ Crunch and Life cereals as  well as all the ‘itos’, the salty snacks that go down so well with a Pepsi: Doritos, Cheetos, Fritos and Tostitos.  Pepsi also can be proud of 40 years of dividend increases and Pepsi is sill acquiring and expanding, having purchased Russian food and beverage  maker Wimm-Bill-Dann in 2011 and signing a partnership with Germany’s Theo Muller to produce yogurt products, THE hottest new food segment.

Dr Pepper Snapple is the smallest of these three and reports the day after Pepsi. It has been trading close to 52 week highs as well. It has a 3.10% yield and a 16.16 P/E. Like Coke and Pepsi it has popular carbonated brands and the famous Snapple, but it’s also burdened with losers like Clamato, Diet Rite and their struggling energy drink Venom. Some short sellers may think Dr. Pepper is too frothy as they make up 5.30% of the float compared to the 1% or less for Coke and Pepsi. However, institutions love Dr. Pepper and hold 97.3%.

These big three have the headwinds of commodity costs, Europe and public initiatives against the consumption of oversized quantities of ‘Liquid Candy.’ Monster will likely not be bought out as the company can honestly say,”No thanks. We’re doing just fine.” As for SodaStream, that short float, negative earnings and lack of yield should give investors pause as this one is very volatile to the upside or downside as seen by today’s deal with Kraft boosting it 5%.

For growth, Monster is the play, for value and yield I’d have to go with a cold Pepsi. Coca-Cola and Dr. Pepper offer value with their yields but Dr. Pepper has to jettison some of those dying brands.  

 


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, PepsiCo, and SodaStream. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, SodaStream, 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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