Don't Overlook These Beverage Stocks in 2013

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

The Center for Science in the Public Interest (CSPI), a non-profit organization, has recently filed a petition with the FDA asking it to set a safe level for added sugar in beverages. If implemented, it will have a significant impact on the beverage industry. But I see two reasons why this shouldn’t be on the table very soon. One – The American Beverage Association (ABA) will again fight this one out like they have in the past. Secondly, for two decades soft drinks have held the title of the single greatest source of added sugar in the American diet, but now it has lost the belt to the food industry.

Whatever is the case, the immediate future of the beverage industry looks safe from the outcomes. In this article, I have picked three beverage stocks that offer good long potential this year.

PepsiCo Incorporated (NYSE: PEP)

The impact of the 17% rise in its earnings was pretty clear on PepsiCo’s stock price. With the declaration of 4Q12 results the company's stock jumped by ~4%. It also announced guidance for 2013, in which it expects revenue growth of 7% year-over-year and a rise in organic sales by mid-single digits. Historically, the company has been a consistent performer, and its guidance is in accordance with the recent cost cutting initiatives. 2012 began with the implementation of an additional program to improve PepsiCo’s productivity. The combined productivity plan is expected to generate ~$1 billion of savings in each of the next three years. Last year, this plan was successful in achieving its yearly target and it is expected that the same success shall be repeated in 2013 as well. The program includes leveraging new technologies across businesses, simplifying organizational structure, which includes lay-offs and uniting manufacturing, warehousing, and sales facilities.

Investor's Returns

2013 will also be in focus because of the recently authorized repurchase plan and the increase in the annualized dividend. PepsiCo has initiated a new share repurchase program of $10 billion to be executed in the next three years. Along with this, the company has also announced a 5.6% increase in the annual dividend effective June 2013. Last year, PepsiCo repaid its investors around $6.5 billion in the form of buybacks and dividend payments and expects to return ~$6.4 billion in 2013 too. This shows the inclination of the company to reward its investors. The company's diversified product line is beneficial for its reach, but at the same time the company is heavily exposed to currency fluctuation. The stock’s future seems strong because of its robust product line, well-planned productivity program, and the announcements regarding repayment to the investors. I am bullish about the stock, hence I'll rate it a Buy. 

Dr Pepper Snapple Group Incorporated (NYSE: DPS)

After the declaration of 4Q12 and full year 2012 results, investor disappointment was evident from the fall in Dr Pepper's share price. Dr Pepper reported a rise in revenue by ~2%, but a decline in overall sales volume was seen. Additionally, a modest guidance for 2013 added fuel to the fire. But I feel that the decline in price has created a good entry point, because the company has a strong product line and the new variants should be successful in the future.

Future Pipeline

Recently Dr Pepper announced few new variants of its popular brands like 7Up, Canada Dry, Sunkist, A&W, and RC on the TEN platform. The specialty of the TEN platform is that it provides taste with health. Twelve ounces of a TEN platform drink comes with only 10 calories. With the increasing health conscious consumers in the market, the drinks should sell well. To boost the expected sales from the variants, Dr Pepper is also planning to invest around $30 million on the marketing of the platform. In the long run TEN can be a champ.

Additionally, the agreement of the company with Zaxby's, a Georgia-based chain food franchise, will increase the reach of the company in the Southeast US. According to the agreement, Zaxby's will introduce brands of Dr Pepper in all of its current and future locations. At present, it operates 565 locations spread over 13 states. Zaxby's specialty chicken fingers and boneless wings are a southeastern favorite. The noticeable payoff from the new platform and increased reach should strengthen the company's performance in the near future. 

Starbucks Corporation (NASDAQ: SBUX)

Starbucks posted solid 1Q13 results for its investors. The EPS of $0.57 was in-line with the analyst consensus, strong same-store-sale (SSS) showed better-than-expected holiday sales, and a continued growth abroad justifies its future expansion endeavors.

Expanding horizon

Starbucks has planned to open nearly 1300 new stores worldwide in FY13. This includes ~600 each in the American and China Asia Pacific (CAP) regions. The company has already successfully opened 212 new stores in the first quarter of FY13. Same stor sales in the American region increased by ~7% because of the rise in traffic. The out-sized growth in gift cards and mobile reloads aided the SSS, and a continuous growth is expected to help the comps in the coming quarters as well.

As for CAP, half of the expansion plan in the region is dedicated to China. The country has the highest co-operated store-margin in the company at ~30%, and one year return on investment is somewhere around 67%. The company's recent decision of opening nearly 300 stores, revising the past target of 250, is in accordance with the longer term outlook of making China the second largest market for Starbucks. Along with it, I see its investment in India as a positive opportunity. Although it is too early to say anything about the expansion plans since it has opened only one store to date, the recent opening of the roasting and packaging plant in the country increases my faith in the investment. Looking at all this I feel that Starbucks’ stock should remain strong in the future as well.

Conclusion

Pepsi's productivity related initiatives seems effective and should achieve the required cost savings. This, along with the company's commitment to repay its investors, makes the stock strong. Dr Pepper's roll-out of new products in the market could help it to secure a profitable position. And, the expansion plans, may it be Dr Pepper's introduction in Zaxby's or Starbucks’s expansion in the American and CAP regions, should help increase the reach of each company's products in the future. Therefore, I recommend a buy on all three stocks. 


madhudube has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and Starbucks. The Motley Fool owns shares of PepsiCo and Starbucks. 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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