Don't Be Fooled: This Industry Is Still a Solid Investment
Sep 3rd 2013 9:20AM
Updated Sep 10th 2013 9:16AM
"Have a Coke and a smile."
There is nothing better than cracking open an ice-cold Coca-Cola on a hot summer day. Consumers can't help but smile while indulging in the famous soft drink. For more than a century, Coca-Cola (NYSE: KO) spread its empire, building a brand universally recognized around the world. Likewise, PepsiCo (NYSE: PEP) successfully created a beloved drink that reaches around the globe.
Lately, however, soda sales have stalled and investors have questions about the future. Report after report is coming out detailing the demise of the industry. True, there is some cause for worry: amid healthier consumer trends, soda sales dropped 1.2% in 2012. However, soda sales have been decreasing since 2005, and soda companies' stock prices continue to move upward.
Here are three reasons why I think soda companies are still good investments.
1. More than soda
Soda companies make a lot more than just soda. For example, both Coca-Cola and Dr Pepper Snapple (NYSE: DPS) make dozens of juice and sports drinks, as well as bottled water. In Q4 of 2012, Coca-Cola's profit increased 13% despite the continued drop in soda sales during the same quarter.
Pepsi is even more diversified. The company's revenue is split 50-50 between beverages and snack foods. In fact, Pepsi's Americas Food unit alone accounts for 37% of Pepsi's revenue and 52% of its profits. The diversity that Pepsi brings to investors is a huge reason that its stock is trading above $80. Pepsi is more risk averse than Coca-Cola and Dr Pepper Snapple, who earn 100% of their revenues through beverages.
The bottom line is that soda companies don't have all of their eggs in one basket. Yes, carbonated soft drinks are their most popular products, but a large portion of revenue comes from other beverages or snack foods. As consumers buy less Dr Pepper, they buy more Hawaiian punch and Country Time lemonade. Dr Pepper Snapple pulls in the cash either way.
In fact, Dr Pepper Snapple reported a 48% year-over-year increase in net income for Q4 in 2012. Declining soda sales don't necessarily mean declining profits.
2. Growth abroad
Yes, Americans are drinking healthier, but what about the rest of the world? The First Lady's "Let's Move" initiative, a movement to fight childhood obesity partly by encouraging children to stay away from soda, doesn't reach the ears of Indians or Brazilians. The potential for growth in emerging countries is promising, and both Pepsi and Coca-Cola are in position to make a killing. Already, international sales account for 50% of Pepsi's revenues and 60% of Coca-Cola's revenues. Even if healthy trends continue to sweep the US, soda companies can look to other countries to pick up the slack.
In the first quarter of 2012, Pepsi reported net revenue growth of 11% in its Latin America Foods division, as well as 12% growth in Brazil. Coca-Cola also had a solid quarter abroad with sales growth of 15% in the firm's Eurasia and Africa business. Developed countries are saturated with soda, but emerging nations have plenty of room to grow.
3. Value in the brand
There is money in a quality brand, and Coca-Cola and Pepsi are two of the most recognized brands in the world. According to Brand-Finance, Coca-Cola and Pepsi are the 8th and 38th most valuable brands today, respectively. Dr Pepper Snapple also has an valuable brand, as its namesake soda's 1885 origin makes it the oldest major soda in the US.
For Coca-Cola, branding goes back to 1915 when the company first introduced its famous glass bottle. Even today, as soda firms have largely shifted to aluminum and plastic, glass bottle sales are growing. For the fiscal year ending April 13, sales of soda in glass bottles increased 2.6%, while sales of plastic bottles and aluminum cans decreased .8% and 1.9%, respectively. The popularity of the glass bottle shows that consumers are still willing to pay for the classic Coca-Cola brand.
Not to be outdone, Dr Pepper Snapple and Pepsi are also on board the glass bottle train. Though their bottles aren't as iconic as Coca-Cola's, both brands also experienced growth in sales of beverages available in glass containers.
Soda sales may be on the decline, but don't run for the hills just yet. The big three soda firms still offer value in their brands as well as their wide product ranges. Moreover, promising growth in emerging countries tells me that global sales numbers will soon turn around.
The article Don't Be Fooled: This Industry Is Still a Solid Investment originally appeared on Fool.com.This article was written by Randy Holcombe and edited by Chris Marasco and Marie Palumbo. Chris Marasco is HeadEditor of ADifferentAngle. None has a position in any stocks mentioned.The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of 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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