Still The King, At Least For Now

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

It's hard to bet against a company as good as Coca-Cola (NYSE: KO). I'm not suggesting the stock is cheap, because it isn't, but the company's results speak for themselves. Among the traditional beverage makers, Coca-Cola stands head and shoulders above the rest. However, if you look outside of the traditional competitors, there is a threat lurking.

Nothing New Under The Traditional Beverage Sun
When was the last time a beverage product was introduced that customers were really excited about? More often than not, many customers have become spoiled by the fact that they can get their favorite beverage almost anytime they want. 

As proof that Coca-Cola owns the beverage market, think about this. When you are out at a restaurant, if you ask for a PepsiCo (NYSE: PEP) product, the usual response is, “we only have Coke products.” However, if you ask for a Coke product and the company only carries Pepsi, the response usually is, “we have Pepsi is that okay?” The fact that it doesn't work the other way around tells customers every day who the king is.

On the outskirts of this battle for beverage dominance are smaller players like Dr. Pepper Snapple Group (NYSE: DPS), and Monster Beverage (NASDAQ: MNST). There isn't necessarily anything wrong with either company, but they aren't Coke or Pepsi. Dr. Pepper Snapple has pushed hard to increase its sales in traditional sodas when the market seems to be moving toward teas, waters, and energy drinks. Monster on the other hand, has a great energy drink and tea franchise, but they have virtually nothing in the water and traditional soda categories.

The Threat Is Becoming More Real
While the traditional beverage manufacturers seem content with their growth trajectory, there is a new threat. This threat to the beverage industry is SodaStream (NASDAQ: SODA). While it's true that SodaStream isn't playing in the same league as Coke, Pepsi, Dr. Pepper Snapple, or even Monster, that may not always be the case. 

SodaStream just sold over one million soda makers in the last quarter for the first time. The company has deals with Kraft and Campbell Soup to offer brands like CountryTime and V8 through their system. Samsung is building refrigerators with SodaStream built in. In addition, the company is building a one million square foot manufacturing plant to get ready for their next growth phase. These are not the actions of a company with no future. The fact that the company estimates they just captured 1% of the U.S. soda market should be a concern for the rest of the industry.

The Good News
On a positive note, Coca-Cola is doing almost everything better than their traditional competition. In the company's recent quarter, revenue increased 4% and EPS was up 15%. By comparison, PepsiCo reported sales down 1%. Without a huge difference in tax provision, PepsiCo's EPS would have actually been down 1.12%. Dr. Pepper Snapple showed sales up 2%, and EPS up 5%, but overall volumes were actually down. While Monster Beverage last reported revenue up 18%, their EPS only increased 6.1%. 

If you look at organic volume growth, Coca-Cola was the leader among peers of their size. The company reported global volume growth of 3%. By comparison, PepsiCo reported volumes down 1% in their America's division, and 3% volume growth in Latin America. Dr. Pepper Snapple said that overall volumes actually decreased 1%.

While Monster Beverage saw case volumes increase 18% last quarter, Coca-Cola's energy drink division reported a 12% volume increase and a 16% increase in packaged teas. Since Monster competes directly in both of these categories, you can see that Coca-Cola is holding their own.

The Bad News
While all of Coca-Cola's results sound good, there are two problems. The first is, the company's stock isn't as good of a value as other options in the industry. Among their traditional beverage competition, the stock looks fine. Coca-Cola pays a 2.95% yield, which is comparable to PepsiCo's 3% yield, and just less than Dr. Pepper Snapple's 3.5% payout. The company's expected growth rate is also better than these peers. Analysts expect 8.95% growth in the next few years from Coca-Cola, compared to 7.27% at PepsiCo, and 5.85% at Dr. Pepper Snapple. 

Relative to Monster Beverage and SodaStream though, Coca-Cola is playing from behind. Monster is expected to grow EPS by 19% in the next few years, and sells for a P/E of about 21.5. This gives the company a PEG of 1.13 versus Coca-Cola's PEG of 1.99. The best value in the industry might be SodaStream, which sells for just 16.7 times projected earnings, yet is expected to grow by more than 30%. The company's PEG of 0.56 is 102% cheaper than Monster and 255% cheaper than Coca-Cola. While SodaStream is much smaller, this discount appears too large given the company's growth prospects.

The real question for Coca-Cola is, what if SodaStream isn't just a fad? The company has spent billions on bottlers so buying SodaStream would seem like a foolish (with a small f) move. What if one of Coca-Cola's competitors were to acquire SodaStream? This would give this upstart even more recognizable brands to work with. There is no simple answer to these questions, and that should worry the current king of beverages. Without a good answer, this king might find he has no clothes.

MHenage owns shares of SodaStream. The Motley Fool recommends Coca-Cola, Monster Beverage, PepsiCo, and SodaStream. The Motley Fool owns shares of Monster Beverage, 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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