Investing in Soft Drink Companies
Is your portfolio running a little dry in capital appreciation? Try pouring yourself a nice tall serving of soft drink stocks. If you are thirsting for rapid stock appreciation with plenty of future growth on the horizon, your portfolio will find these stock most refreshing.
But I’m not talking about the leaders in the soft drinks industry, such as Coca-Cola (NYSE: KO) and Pepsico (NASDAQ: PEP). I’m directing your attention to the two upstarts right behind them, namely Monster Beverage Corporation (NASDAQ: MNST) and Dr Pepper Snapple Group, Inc. (NYSE: DPS).
In the cola space we need to disregard everything they say about underdogs. When it comes to performance, Monster has been simply monstrous, while DPS has kept pace very well indeed. Just take a look at all four of the largest U.S. soft drinks stocks over the past six years since the economic recovery began in early 2009 as graphed below:
Where the S&P 500 index (black) has grown some 208%, the top soft drink companies Coca-Cola [beige] and Pepsico [blue] have risen about 115% each, while smaller Monster [purple] and DPS [orange] have risen some 560% and 550% respectively. And these two small pints managed it on market capitalizations that are just one-tenth the size of the two big boys.
Yet there is more elevating Monster and DPS high above Coke and Pepsi – both presently and in the future. Before getting into their books, though, let’s take a brief look at what each company offers.
The Soft Drinks Menu
• The Coca-Cola Company, headquartered in Atlanta, Georgia, manufactures and distributes sparkling beverages (carbonated) and still beverages (non-carbonated) including water, flavored and enhanced water, energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. It also offers flavoring ingredients such as sweeteners, fountain syrups, and powders for purified water products. Some of its best known name brands include Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Minute Maid Pulpy, Del Valle, Ayataka, Bonaqua/Bonaqa, and Schweppes.
• PepsiCo, Inc., headquartered in Purchase, New York, produces and markets snack foods including potato chips, corn chips, tortilla chips, chip dips, and cheese-flavored snacks, in addition to cereal, oatmeal, grits, rice cakes, oat squares, granola bars, pancake mixes and syrups, and rice side dishes – all under such brand names as Doritos, Cheetos, Marias Gamesa, Ruffles, Emperador, Saladitas, Lay’s, Rosquinhas Mabel, Elma Chips, Sabritas, and Quaker. The company also produces and markets non-alcoholic carbonated and non-carbonated refreshment drinks, beverage concentrates, fountain syrups, ready-to-drink tea and coffee, and juices - all under such well-known name brands as Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, 7UP, Diet Mountain Dew, Tropicana Pure Premium, Sierra Mist, and Diet 7UP.
• Monster Beverage Corporation, headquartered in Corona, California, develops, markets, sells, and distributes refreshment beverages including carbonated energy drinks, non-carbonated dairy based coffee plus energy drinks, non-carbonated energy shakes containing proteins, carbonated energy drinks containing nitrous oxide, non-carbonated energy drinks with electrolytes, energy supplements, ready-to-drink iced teas, sparkling water beverages, seltzer waters, energy drinks, fruit juices, juice cocktails, aseptic juices, coconut water juices, ready-to–drink lemonades, ready-to-drink lemonade plus tea drinks, powder drink mixes, and probiotic digestive wellness powder drinks – all under such well known name brands as Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster, X-Presso Monster, Muscle Monster, Punch Monster, Hansen’s, Hansen’s Natural Cane Soda, Junior Juice, Blue Sky, Hubert’s, Worx Energy, and Peace Tea brands.
• Dr Pepper Snapple Group, Inc., headquartered in Plano, Texas, manufactures and distributes non-alcoholic beverages including carbonated soft drinks, non-carbonated beverages, ready-to-drink teas, juices, juice drinks, mixers, and water – all under such well known brand names as Dr Pepper, Canada Dry, 7UP, Squirt, Crush, A&W, Peñafiel, Sunkist soda, Schweppes, Sun Drop, Snapple, Hawaiian Punch, Mott’s, Clamato, Mr & Mrs T, and Rose’s.
While the general description of each company’s offerings seems to indicate all companies are simply copying one another in the assortment of drinks they market, what doesn’t show in the descriptions is the head start that Monster and DPS have had over Coca-Cola and Pepsico in branching-out into new directions.
Consumers are much more health conscious these days, and are choosing their refreshments wisely. Monster and DPS have made great headway into these alternative branches of the refreshments industry, with Coca-Cola and Pepsico left scrambling to catch up.
But while the two largest cola-kings have already committed themselves to offering healthier soft drink choices, might their effort be just a little too late? Some key financial figures show that this is precisely the case, for the nearer and longer terms equally.
Which is in Better Shape?
In order to properly analyze the relevance of each financial figure, we need to base the figures on each company’s size to determine an accurate ratio. We must, thus, first weigh each company by market cap, much like boxers being weighed before a fight.
In the heavyweight category we have Coca-Cola weighing in at $182.54 billion, with Pepsico just a little lighter at $145.81 billion in market capitalization.
In the lightweight category we have Monster at $19.9 billion, and DPS at $14.87 billion. The lightweights are roughly 10% the size of the heavyweights. We would thus expect Coke’s and Pepsi’s numbers to be proportionately 10 times greater than Monster’s and DPS’ – except where the figures are already expressed as percentages.
When determining which company is in better shape at the present time we need to look at three figures in particular: How much are its revenues? How much profit remains from those revenues after expenses? And how much cash and debt does the company have?
Beginning with revenues, we see that KO reported $46 billion in the trailing twelve months (ttm), PEP reported $66.68 billion, MNST brought in $2.4 billion, while DPS earned $6.12 billion. But just looking at these numbers by themselves does not reveal which is performing better since they are of different sizes. We’ll need to convert these revenues into percentages of market cap to determine which is outperforming.
• In order of best to worst performer in revenues over market cap we have PEP at 45.73%, DPS at 41.16%, KO at 25.20%, and MNST at 12.06%. That’s quite the jump up for the smallest squirt in the bunch, DPS, which is fourth in market cap but second in revenue over market cap.
But how much of those revenues are actually being kept as profit? To determine this we’ll need to look at profit margins, which are already expressed as percentages.
• In order of best to worst in profit margin we have MNST at 18.08%, KO at 15.43%, DPS at 11.49%, and PEP at 9.77%. In this case we have one of the lightweights – MNST – outperforming both heavies in as much as generating more profit from its revenues, denoting a leaner-run enterprise.
Lastly regarding the companies’ current position we have the current ratio, which is a measure of how readily a company can cover its debt if all debts were to be called today. The higher the ratio, the better able the company is to cover its obligations.
• In order of best to worst current ratio we have MNST at 4.36, DPS at 1.17., PEP at 1.14, and KO at 1.02. In this case, both lightweights are in much better shape than the heavyweights, with Monster seemingly built like a brickhouse.
Which Has the Better Fighting History?
Of course, past fighting experience is very important, as each contender’s past successes and failures contribute much to the current fight. For this we’ll need to look at trailing revenue and earnings growth. But we’ll also consider return on shareholder equity over the past twelve months as an indication of how well the companies are using the money they have received from the investing public.
• In order of best to worst revenue growth over the trailing twelve months we have MNST at +7.7%, DPS at +3.1%, PEP at -0.8%, and KO at -1.5%. How about that? While the lightweights have grown their revenues over the past year, the heavyweights have actually shrunk.
• In order of best to worst earnings growth ttm we have MNST at +31.9%, DPS at -3.8%, PEP at -24.7%, and KO at -55%. Again we have both lightweights well ahead of the heavies.
• In order of best to worst returns on equity ttm we have MNST at 36.98%, PEP at 31.28%, DPS at 30.76%, and KO at 22.26%. MNST is on top once more, with DPS still managing to beat the largest fighter of the bunch.
Which Has the Brighter Future Prospects?
Having looked into each company’s present and past conditions, we now turn to their future prospects as represented by earnings growth forecasts. In particular we’ll want to note next year’s earnings growth (for the reporting year ending December 2015), and earnings growth as averaged annually over the next five years.
• In order of best to worst next year’s earnings growth we have MNST at +20.8%, PEP at +8.6%, KO at +7.5%, and DPS at +7.2%. As suspected, MNST comes out on top, and by a wide margin. Sadly, though, the smallest pip squeak shows up last on the list, though it’s his only time there.
• In order of best to worst five year earnings growth we have MNST at +16.2%, DPS at +7.68%, PEP at +6.94%, and KO at +4.9%. And the rout of the heavyweights concludes, with both MNST and DPS clobbering the big boys.
Not Just a Matter of Taste
While choosing a beverage is really quite the subjective task, with each individual having their own unique taste, choosing a stock is very much a mathematical exercise, with plenty of figures available to help investors arrive at the best possible conclusion.
Simply on the basis of the eight financial statistics presented here – three measuring a company’s present shape (revenue over market cap, profit margin, and current ratio), three measuring past performance (trailing revenue growth, trailing earnings growth, and return on equity), and two measuring future earnings potential (next year’s earnings growth and five-year earnings growth) – we have an undeniable set of winners and losers at follows, where each first place finish earns 3 points, each second place finish earns 2 points, each third place finish earns 1 point, and last place finishes score nothing:
• In first place: Monster Beverage Corporation with a total of 21 points from an astounding 7 out of 8 first place finishes.
• In second place: Dr Pepper Snapple Group with a total of 12 points mostly from 5 second place finishes.
• In third place: Pepsico with a total of 11 points mostly from a combination of second and third place finishes.
• In last place: Coca-Cola with a total of just 4 points mostly from last place finishes.
After the final bell is rung, there’s just one contender remaining in the ring, crowned the new champion of the soft drinks industry: Monster Beverage – whose stock will likely shake, rattle and roll portfolios with monstrous gains for years to come.
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