Which Soda Stock to Buy?

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

Carbonated Soft Drinks (CSD) industry

A close look at the U.S. carbonated soft drinks (CSD) industry shows that Coca-Cola (NYSE: KO) is still leading the industry with a 41.9% market share. Pepsi (NYSE: PEP) comes at 2nd spot with 28.5% share, while Dr. Pepper Snapple (NYSE: DPS) takes the 3rd position with a market share of almost 16.7%.

<table> <tbody> <tr> <td> <p><strong> </strong></p> <p><strong>Top 10 CSD</strong></p> </td> <td> <p><strong> </strong></p> <p><strong>Market share</strong></p> </td> </tr> <tr> <td> <p>Coca-Cola</p> </td> <td> <p>41.9%</p> </td> </tr> <tr> <td> <p>Pepsi</p> </td> <td> <p>28.5%</p> </td> </tr> <tr> <td> <p>Dr Pepper Snapple</p> </td> <td> <p>16.7%</p> </td> </tr> <tr> <td> <p>Cott Corp.</p> </td> <td> <p>5.2%</p> </td> </tr> <tr> <td> <p>National Beverage</p> </td> <td> <p>2.8%</p> </td> </tr> <tr> <td> <p>Monster Beverage</p> </td> <td> <p>1.2%</p> </td> </tr> <tr> <td> <p>Red Bull</p> </td> <td> <p>1%</p> </td> </tr> <tr> <td> <p>Big Red</p> </td> <td> <p>0.6%</p> </td> </tr> <tr> <td> <p>Rockstar</p> </td> <td> <p>0.6%</p> </td> </tr> <tr> <td> <p>Others</p> </td> <td> <p>1.5%</p> </td> </tr> </tbody> </table>

Source (www.beverage-digest.com)

Coke is still the leading brand in the U.S. with a CSD share of 17%. Coca-Cola’s diet coke grabs the 2nd spot with a 9.6% share, while Pepsi-Cola is at the 3rd spot with a 9.2% CSD share.

<table> <tbody> <tr> <td> <p><strong> </strong></p> <p><strong>Top 10 CSD Brands</strong></p> </td> <td> <p><strong> </strong></p> <p><strong>Market share</strong></p> </td> </tr> <tr> <td> <p>Coke</p> </td> <td> <p>17%</p> </td> </tr> <tr> <td> <p>Diet Coke</p> </td> <td> <p>9.6%</p> </td> </tr> <tr> <td> <p>Pepsi-Cola</p> </td> <td> <p>9.2%</p> </td> </tr> <tr> <td> <p>Mountain Dew</p> </td> <td> <p>6.7%</p> </td> </tr> <tr> <td> <p>Dr Pepper</p> </td> <td> <p>6.4%</p> </td> </tr> <tr> <td> <p>Sprite</p> </td> <td> <p>5.7%</p> </td> </tr> <tr> <td> <p>Diet Pepsi</p> </td> <td> <p>4.9%</p> </td> </tr> <tr> <td> <p>Diet Mountain Dew</p> </td> <td> <p>2.0%</p> </td> </tr> <tr> <td> <p>Fanta</p> </td> <td> <p>1.9%</p> </td> </tr> <tr> <td> <p>Diet Dr Pepper</p> </td> <td> <p>1.8%</p> </td> </tr> </tbody> </table>

Source (www.beverage-digest.com)

Diet Pepsi’s new sweetener

Pepsi has a massive plan of rebranding itself globally. Earlier, Pepsi’s CEO, Indra Nooyi, announced that the company is planning to invest heavily in its major brands. As a part of this plan, Pepsi would change its Diet Cola’s sweetener next month. At the moment, Pepsi’s only using aspartame as a sweetener in its diet cola which is really sensitive to heat (with the passage of time, aspartame breaks down and effects the taste of soda). In order to preserve taste, Pepsi would be adding acesulfame potassium to its sweetener. This would elongate soda’s life but will not have any effect on its taste.

Pepsi’s new ad campaign

Pepsi’s spokeswoman Andrea Canabal announced that the company has plans of launching its all-new ad campaign with a new theme “Love every sip” which will start from this January. Pepsi has just gone through a global partnership with the singing sensation, Beyonce. The deal is worth almost $50 million. Beyonce is all set to appear on Pepsi cans and bottles throughout United States. Moreover, Pepsi’s recent ads have included top celebrities like Lionel Messi, Nicki Minaj, and Drew Brees.

Dr Pepper’s new 10-calorie versions

Dr. Pepper Snapple has plans of launching 10-calorie versions of its major sodas. Dr. Pepper would be launching 7up Ten, A&W Ten Root Beer, Sunkist Ten Orange soda, RC Ten Cola and Canada Dry Ten Ginger Ale. Both caloric and non-caloric sweeteners would be added to the new brand which will have 10 calories per 12 oz. The primary target market for "Ten" are 25-39 years old who want the same taste but want to cut on their calories. Dr. Pepper Ten, which was launched in 2011, received great demand from customers.  According to DPS, the new flavors which were tested in the market in 2012 also did really well. As a result, the company is hopeful that these five new flavors will certainly have an incremental effect on its sales.

Dr. Pepper’s new ad campaign

Moreover, Dr. Pepper Snapple is about to launch its latest ad campaign “one of one.” According to Dr. Pepper, this would feature real people with real stories. The first “one of one” ad campaign would be featuring Mikaela Mayer (model turned Olympic boxer). Apart from this, DPS’s new ad campaigns would also be featuring Armando Cristian Perez, Justin Howard, and Misty Copeland (Boys & Girls club alumna).

Valuation

Pepsi

As Pepsi tries to keep up with Coca-Cola’s pace in the CSD industry, it’s important to have a look at its share price. Currently, it’s trading at $68.43 which shows a YTD capital appreciation of almost 6.7%. Its dividend is yielding 3.1% and has an EPS of $3.76.

<table> <tbody> <tr> <td> <p><strong>EPS (est )</strong></p> </td> <td> <p> </p> </td> <td> <p><strong>Valuation - Industry P/E</strong></p> </td> </tr> <tr> <td> <p>Low EPS</p> </td> <td> <p>$4.31</p> </td> <td> <p>$75.12</p> </td> </tr> <tr> <td> <p>Consensus EPS</p> </td> <td> <p>$4.41</p> </td> <td> <p>$76.87</p> </td> </tr> <tr> <td> <p>High EPS</p> </td> <td> <p>$4.50</p> </td> <td> <p>$78.44</p> </td> </tr> </tbody> </table>

Using industry’s P/E (consensus EPS), Pepsi’s value comes out to be $77 which shows that it’s an undervalued stock. Furthermore, its forward P/E (1yr) of 15.62x makes it a good buy. At the moment, it has an upside potential of almost 12%.  

Dr Pepper Snapple

Dr Pepper Snapple is currently trading at $44.18 and has an EPS of $2.92. It’s yielding $3.10 on its dividend and has a YTD capital appreciation of almost 19%. Using an industry P/E of 17.43, we value it at $55.78.

<table> <tbody> <tr> <td> <p><strong>EPS (est )</strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>Valuation - Industry P/E</strong></p> </td> </tr> <tr> <td> <p>Low EPS</p> </td> <td> <p>$3.10</p> </td> <td> <p>$54.03</p> </td> </tr> <tr> <td> <p>Consensus EPS</p> </td> <td> <p>$3.20</p> </td> <td> <p>$55.78</p> </td> </tr> <tr> <td> <p>High EPS</p> </td> <td> <p>$3.30</p> </td> <td> <p>$57.52</p> </td> </tr> </tbody> </table>

Dr. Pepper’s valuation clearly shows that it is a hugely undervalued stock. It has an upside potential of almost 27%. Moreover, its forward P/E (1yr) of 14.16x makes it the best buy in the CSD industry. With the new “Ten“ sodas in the market, DPS is all set to grab a significant CSD market share from Pepsi and Coca-Cola. This could result in a YTD return of almost 28% next year. 

Coca-Cola

While Coca-Cola is still the market leader in the CSD industry, its shares haven’t been that attractive lately. When compared to Pepsi, it has been lagging behind in terms of returns to the investors. Coca-Cola is trading at $36.25, showing a YTD return of 6.8%. It’s yielding 2.7% on its dividend and has an EPS of $1.91.

<table> <tbody> <tr> <td> <p><strong>EPS (est )</strong></p> </td> <td> <p><strong> </strong></p> </td> <td> <p><strong>Valuation - Industry P/E</strong></p> </td> </tr> <tr> <td> <p>Low EPS</p> </td> <td> <p>$3.10</p> </td> <td> <p>$54.03</p> </td> </tr> <tr> <td> <p>Consensus EPS</p> </td> <td> <p>$3.20</p> </td> <td> <p>$55.78</p> </td> </tr> <tr> <td> <p>High EPS</p> </td> <td> <p>$3.30</p> </td> <td> <p>$57.52</p> </td> </tr> </tbody> </table>

According to the average EPS estimate, Coca-Cola should be trading around $38 which means that it has an upside potential of only 5.3%. When compared to Pepsi and Dr Pepper Snapple, Coca-Cola’s yielding only 2.7% on its dividend. Moreover, its forward P/E (1yr) of 16.98x depicts that it's an expensive buy.

Conclusion

As Pepsi tries to grab the market share from Coca-Cola in 2013, it will keep on investing on its rebranding. Pepsi’s latest ad campaigns are already showing a lot of renewed brand awareness among U.S. customers therefore, it’s expected to do really well in the coming year. Moreover, Diet Cola’s new sweetener would also have a significant impact on its sales. Having said this, DPS’s 10-calorie test versions have already given incremental revenue of almost 40% to the company which suggests that it would be a major revenue source for DPS in 2013. The bottom line is that Coca-Cola will lose its CSD share to DPS and Pepsi in 2013. Coca-Cola’s current price plus its dividend yield doesn’t make it as attractive as DPS and Pepsi. Among DPS and Pepsi, DPS is more attractive with an upside potential of 28% as compared to Pepsi’s 12%. In short, buy DPS for an upside of 28%.


Vamosrafa7 has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company 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!

blog comments powered by Disqus