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5 Soft Drink Stocks to Watch Despite Near-Term Industry Woes

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The Zacks Beverages – Soft Drinks industry has been plagued by supply delays and other logistic issues, resulting in higher freight and input costs. Companies in the industry are also faced with higher commodity costs, particularly that of steel and aluminum. Additionally, players are making higher marketing and advertising expenses to capture a share in the recovering markets. Elevated operating and other costs are likely to strain margins in the near term.

However, industry players are poised to benefit from the introduction of innovative products to suit consumers’ needs like functional drinks and naturally prepared drinking options, which support an active lifestyle. Industry players have been steadfastly investing in product innovations to include healthy ingredients in beverages and introduce ready-to-drink variations. Players like The Coca-Cola Company (KO - Free Report) , PepsiCo Inc. (PEP - Free Report) , Keurig Dr Pepper Inc. (KDP - Free Report) , Monster Beverage Corporation (MNST - Free Report) , and Fomento Economico Mexicano S.A.B. de C.V. (FMX - Free Report) , alias FEMSA, are well-poised on robust innovation efforts.

About the Industry

The Zacks Beverages - Soft drinks industry comprises companies that manufacture, source, develop, market and sell non-alcoholic beverages. Soft drinks mainly include sparkling soft drinks, natural juices, enhanced water, sports and energy drinks as well as dairy, and ready-to-drink tea and coffee beverages. Notably, some of the industry players like PepsiCo produce and sell handy food with flavored snacks, which complement their beverage portfolio. The companies sell products through a network of wholesalers and retailers that include supermarkets, department stores, mass merchandisers, club stores, and other retail outlets. Some of them also offer products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

What's Shaping the Future of Beverages - Soft Drinks Industry?

Raw Material Cost Inflation and Supply Constraints: The beverage industry is plagued with higher supply-chain costs, including higher commodity input costs and transportation expenses. Raw material costs inflation, particularly steel and aluminum, have led to increases in packaging costs. The ongoing supply constraints in the aluminum can industry have been other headwinds. The companies are also witnessing delays in the procurement of certain ingredients, both domestically and internationally, which are leading to shortages of some goods. The industry players have been facing freight inefficiencies as well as significant increases in domestic and international freight costs as well. Logistic issues, including shortages of shipping containers and global port congestions, as well as higher input costs and freight inefficiencies have resulted in higher cost of sales and operating expenses, impacting both gross and operating margins.

Industry Dynamics: The soft drinks industry has been witnessing transformed trends more than ever, as health-consciousness, personal well-being, natural ingredients, varied flavors and better taste experiences are changing consumers’ consumption patterns. There has been an increased consciousness for an active lifestyle and healthy eating habits, which has given prominence to natural, plant-based and organic ingredients in food and beverages. Soft drinks, with no preservatives or added colors, low sugar content, and no artificial sweeteners, are the clear choices today. Drinks with plant extracts, natural fruit flavors and not-from-concentrate juices are also gaining popularity. Consumers are choosing “functional drinks” over their high-calorie counterparts, with a focus on ingredients like vitamins and minerals to support a balanced diet. Industry players are vying to grab the market share in on-trend categories like tea, coffee, energy drinks, juices and sparkling water. Players are more conscious about the ingredients used in beverages, looking to include additional nutrients in their drinks. Companies are adopting more transparency toward the disclosure of ingredients to gain consumers’ confidence.

Evolving Trends: The coronavirus pandemic has led to an increase in at-home consumption, which has led to a splurge in at-home channel sales. This has led to the demand for more sustainable packaging, and functional and convenient beverage formats. While the away-from-home channel is gradually opening up, industry experts believe that at-home consumption trends will continue to have a share in overall sales of beverage companies. Beverage companies have been witnessing incremental sales due to the reopening of the convenience and gas, and away-from-home channels like restaurants, sporting events and movie theaters. The rapid inoculation drive has led to the lifting of restrictions on movement in many places, which is likely to bring normalcy in the away-from-home channel. This is anticipated to be a boon for soft drink makers as the away-from-home channel accounts for the majority of their revenues.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Beverages - Soft Drinks industry is housed within the broader Consumer Staples sector. It carries a Zacks Industry Rank #173, which places it in the bottom 31% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past three months, the industry’s earnings estimates for 2021 and 2022 have declined 1.7% and 3.2%, respectively.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Beverages – Soft Drinks industry has underperformed the S&P 500 Index but outpaced the Consumer Staples sector in a year’s time.

While the stocks in the industry have collectively gained 14.4%, the S&P 500 and the sector have witnessed growth of 29.7% and 7.6%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing soft drink stocks, the industry is currently trading at 24.23 compared with the S&P 500’s 23.84 and the sector’s 22.15.

Over the last five years, the industry has traded as high as 24.23X and as low as 18.54X, with a median of 21.78X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Soft Drinks Stocks to Watch

None of the stocks in the Zacks Beverages – Soft Drinks industry currently sport a Zacks Rank #1 (Strong Buy) but we have one stock with a Zacks Rank #2 (Buy). We have also highlighted four stocks with a Zacks Rank #3 (Hold) from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look.

Coca-Cola: The soft drink behemoth is poised to gain from strategic transformation and ongoing recovery around the world. The streamlining of portfolio and accelerating investments to expand the digital presence position the company for growth in the long term. It has been witnessing a splurge in e-commerce, with the growth rate of the channel doubling in many countries. It is strengthening consumer connections and further piloting numerous different digital-enabled initiatives through fulfillment methods to capture online demand for at-home consumption.

The company has been gaining from increased consumer mobility and reopening of economies in several parts, leading to the reopening of the away-from-home channel. The improvement in the away-from-home volume is expected to result in strong price/mix and margin acceleration across the company. The Zacks Consensus Estimate for its 2022 earnings has been unchanged in the past 30 days. This Zacks Rank #2 company’s shares have gained 12.3% in the past year.

Price and Consensus: KO

PepsiCo: The stock of this Purchase, NY-based leading soft-drinks company has risen 20.4% in the past year. Resilience and strength in the global snacks and foods business as well as growth in the beverage category have been aiding the company. It is poised to benefit from investments in brands, go-to-market systems, supply chain, manufacturing capacity and digital capabilities to build competitive advantages. Within the snacks/food business, Frito-Lay remains focused on offering more choices to meet customers’ changing needs and preferences. Some of these include expanding variety pack offerings, continuous flavor and brand innovation, and introducing healthier snacking alternatives.

In the beverage category, PepsiCo expects strong growth and market share gains for energy drinks, driven by the increased depth and breadth of its portfolio, and improved distribution capabilities. The company continues to invest in its Zero Sugar products and other functional beverages in the carbonated and non-carbonated categories to offer more choices to consumers. The consensus estimate for the company’s 2022 EPS has been unchanged in the past 30 days. It currently carries a Zacks Rank #3.

Price and Consensus: PEP

Keurig Dr Pepper: Packaged Beverages and Coffee Systems businesses have been driving sales for this beverage and coffee company based in the United States and Canada. Robust market share gains and in-market performances across categories and brands have been growth drivers. The Packaged Beverages segment is witnessing improved volume/mix due to an increase in at-home consumption trends and strong market share growth.

The company expects increased household penetration across both hot and cold beverage portfolios to continue. Its market share growth is being supported by efficient marketing and product innovation strategies. The company is also investing in boosting distribution platforms and e-commerce operations. Shares of this producer, distributor and seller of a range of non-alcoholic ready-to-drink beverages have gained 16.7% in the past year. The consensus estimate for its 2022 EPS has been unchanged in the past 30 days. It carries a Zacks Rank #3 at present.

Price and Consensus: KDP

Monster Beverage: This leading marketer and distributor of energy drinks and alternative beverages based in Corona, CA, remains committed to product launches and innovation to boost growth. Management is optimistic about strength in the energy drinks category, with the Monster Energy brand growing significantly. It remains on track to launch a number of additional products and product lines in domestic and international markets this year. Product launches across the Monster family are expected to drive the company’s overall top and bottom lines in the coming quarters.

Management doesn’t expect any material impact of the COVID-19 pandemic on the functioning of its co-packers and bottlers/distributors who manufacture and distribute products, respectively. The Zacks Rank #3 stock has advanced 6% in the past year. The Zacks Consensus Estimate for its 2022 earnings has been unchanged in the past 30 days.

Price and Consensus: MNST

FEMSA: This Monterrey, Mexico-based company participates in the beverage industry through Coca-Cola FEMSA, which is the world’s largest franchise bottler for Coca-Cola products. It has been gaining from improved consumption patterns and strong business momentum, resulting from the easing of restrictions across most markets. FMX continues to focus on offering customers more options to make contactless purchases by intensifying digital and technology-driven initiatives across operations.

The company’s Coca-Cola FEMSA is leading the way with its omni-channel business, while FEMSA Comercio is progressing with the adoption of digital initiatives. Within its OXXO store chains, the company is on track with investing in digital offerings, loyalty programs and fintech platforms to evolve stronger after the pandemic and over the long term. Shares of this Zacks Rank #3 company have risen 3.5% in the past year. The consensus estimate for FMX’s 2022 EPS has been unchanged in the past 30 days.

Price and Consensus: FMX