Beverage Stocks: Know Your Risks, or Risk Your Future

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In the beverage industry, no one can stand up to PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO) due to their massive production, distribution systems, and most importantly, the brand value attached with them. Monster Beverage (NASDAQ: MNST) has successfully emerged as the world's second-largest energy drink company (behind Red Bull). Buying the shares of these companies presents a predicament for investors as the companies are solid dividend payers. However, do they perform better than the market averages and other stocks available on the market?

Recent events

For Coca-Cola, over the last five quarters, the company’s revenue has been stagnant, hovering at $11 billion quarterly. The position is getting worse for its shareholders as since Q2 2012, the EPS has been declining. However, Coca-Cola reported a better than expected EPS for the last quarter, and its current EPS is $1.97. Over the last 10 years, the company’s sales have been doubled at least. However, if the current crunch continues in the near future, any revenue growth will be stifled.

PepsiCo’s stock has been up 27% over the past 12 months despite having to deal with weak North American sales like its primary competitor, Coca-Cola. Similar to Coca-Cola, its EPS is also alarming about the company’s weakness as it faltered in the preceding two quarters. On revenue, PepsiCo has outperformed Coca-Cola as its quarterly sales are much higher on the back of renewed marketing efforts, including its first bottle redesign in 17 years. Its latest annual EPS stands at $3.92.

Energy drink producer Monster Beverage reported disappointing first-quarter results with lower revenue growth and a failure of cost containment. Net income declined 17% when compared to the previous year. The earnings were largely short of the Zacks consensus estimate of $0.47 per share. Moreover, Monster Beverage has disappointed its investors in each of the last four quarters, with an average negative surprise of 11%.

Complaints against its energy beverages have been fairly elevated over the past years. San Francisco's city attorney is now suing Monster Beverage for marketing its energy drinks to children, saying the products provoke severe health risks.

Competition

Based on average stock market metrics, PepsiCo and Coca-Cola look undervalued (good time to Buy), whereas Monster Beverage is overvalued (good time to Sell).  

<table> <thead> <tr><th> <p><strong>Indicator</strong></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/pep/s?t=PEP"><strong>PepsiCo</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/ko/s?t=KO"><strong>Coca-Cola</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/mnst/s?t=MNST"><strong>Monster Beverage</strong></a></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Price/Earnings ttm</strong></p> </td> <td> <p>21.5</p> </td> <td> <p>22.5</p> </td> <td> <p>32.6</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> </td> <td> <p>5.8</p> </td> <td> <p>5.9</p> </td> <td> <p>14.0</p> </td> </tr> <tr> <td> <p><strong>Net Income Growth (3 Yr Avg.)</strong></p> </td> <td> <p>1.3</p> </td> <td> <p>9.7</p> </td> <td> <p>17.7</p> </td> </tr> <tr> <td> <p><strong>Revenue Growth (3 Yr Avg.)</strong></p> </td> <td> <p>14.9</p> </td> <td> <p>15.7</p> </td> <td> <p>21.7</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong><strong>, %</strong></p> </td> <td> <p>2.71%</p> </td> <td> <p>2.61%</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>1.0</p> </td> <td> <p>0.4</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>27.1</p> </td> <td> <p>26.7</p> </td> <td> <p>37.0</p> </td> </tr> <tr> <td> <p><strong>Current Price</strong></p> </td> <td> <p><strong>$83.</strong><strong>81</strong></p> </td> <td> <p><strong>$42.98</strong></p> </td> <td> <p><strong>$59.26</strong></p> </td> </tr> </tbody> </table>

However, there is an inherent security about PepsiCo and Coca-Cola regarding their performances in driving revenues, which will fuel their stock price. PepsiCo, however, has a high debt/equity ratio. That being said, the two stocks are very closely matched. Coca-Cola’s performance has been worse than PepsiCo’s, though it does seem to be clawing its way back up for now and provides a good opportunity to buy the stock.  Monster Beverage has strong profitability margins that are among the strongest in a market comparison. 

What does the future hold?

Coca-Cola has launched its Australian marketing campaign by printing customized names on its bottles. If Warren Buffett’s recommendation means anything, then you shouldn’t even consider selling your Coca-Cola stock. The company is now striving to maintain a healthy revenue stream in India and China. While the health drawbacks of Coca-Cola are undeniable, the company’s revenue and stock performance should continue to be strong.

In the U.S., soda consumption has been on a downward trend over the last eight years. PepsiCo is moving forward to Asia, the Middle East, and Africa, with its 24% operating profit increase in Q1 2013. In addition, PepsiCo has also initiated a strategic partnership with Tingyi – one of the leading food and beverage companies in China. This helps to access the company’s distribution network and will result in profit growth.

These days, there are a lot of negative rumors about safety of Monster's energy drinks. However, consumers will realize soon that these products actually are not so bad as feared. Monster's strongest advantage compared to the peers is that it has more than 30 different flavors whereas Red Bull only has a few flavors.

Final verdict

Coca-Cola’s favorable price and evident growth in developing countries, due to its brand recognition, helps it lead over PepsiCo at present. I suggest that the current price of Coca-Cola stock gives a good entry opportunity as well as makes the company’s stock a solid buy. For  Monster Beverage, there is a great opportunity for sales increase in the international markets due to a large marketing presence to propel growth of the company's multiple brands.   

PepsiCo has quenched consumers’ thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.


Marina Avilkina has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage and PepsiCo. 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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