Soft Drinks Outlook: Can Portfolio Shift Bring Back the Fizz?

Companies manufacturing, sourcing, developing, marketing and selling non-alcoholic beverages such as sparkling soft drinks, natural juices, enhanced water, sports and energy drinks as well as dairy and ready-to-drink tea and coffee beverages, mainly constitute the Zacks Beverages - Soft drinks industry. However, some of the leading industry players like PepsiCo, Inc. (PEP) produce and sell handy food and snacks, which complement their beverage portfolio.

These companies sell products through a network of wholesalers and retailers that include supermarkets, department stores, mass merchandisers, club stores, and other retail outlets. Additionally, some of them offer their products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

In the U.S. beverage market, the soft drinks industry holds a dominant place. It is estimated to reach $388.4 billion by 2025, per Grand View Research, Inc. This indicates CAGR of 5.1% through 2025. Further, the global soft drinks market is expected to witness CAGR of about 6% during the 2019-2023 period. All in all, the prospects of the soft drinks space are solid.

Here are the three major industry themes:

• Despite healthy prospects of the overall soft drinks industry, we note that the carbonated beverages category is no longer favored owing to increased consumer awareness about health and wellness. Carbonated drinks coupled with use of artificial sweeteners have been the root-cause of several health issues and obesity in the United States. Therefore, consumers are shifting from carbonated soft drinks (‘CSDs’) to non-carbonated and healthier beverages. The shift is eating into sales and profits of soft drink makers. Potential new taxes on sugar-sweetened beverages and growing regulatory pressure are also affecting CSD sales.
  

• On the flip side, players in the soft-drinks space are witnessing commodity cost inflation and increased operating expenses, which are weighing on margins and profitability. Additionally, these companies are experiencing pressure due to higher input costs, which can be attributed to increased tariffs on steel and aluminum (which have raised packaging costs) as well as higher freight costs. These headwinds have put pressure on the bottling system and some finished products. Although soft-drink makers have resorted to price increases to counter higher costs, this might hurt their top and bottom lines for a while. Furthermore, unfavorable foreign currency is plaguing the soft drinks industry as companies in this space have operations worldwide.
  

• Renovating and rebranding the existing drinks’ portfolio to incorporate healthy and non-carbonated beverages should prove beneficial for the companies in this space. Industry players are introducing healthy flavors by revamping existing products, acquiring new brands, product innovation and roll outs. Players like PepsiCo and Coca-Cola (KO) have acquired new brands and businesses, targeting categories like sports nutrition, sparkling water, dairy, iced tea, juices and coffee, to reorganize their portfolios. Not to forget, some of these companies are also fascinated by the popularity of cannabis-infused drinks, which can be an attractive alternative to sugary sodas.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Beverages - Soft Drinks industry dwells in the broader Consumer Staples sector. It carries a Zacks Industry Rank #200, which places it in the bottom 22% 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 bleak 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 losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have declined nearly 18.2%.

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 Versus Broader Market

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

While the stocks in the industry have collectively declined 7.8% over the period, the S&P 500 has gained 3%. The sector has declined 9.5% in the said time frame.

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing soft drinks stocks, the industry is currently trading at 20.57X compared with the S&P 500’s 16.68X and the sector’s 18.05X.

Over the last five years, the industry has traded as high as 22.94X and as low as 18.07X, with a median of 20.44X, as the chart below shows.

Bottom Line

Headwinds like higher costs, tariffs and freight are likely to persist in the near term, dampening the profitability of soft-drink makers. Furthermore, a complete transformation of the vast carbonated drinks portfolios will take time and remain a drag on volumes. Nevertheless, efforts to add healthier beverages through product innovation and buyouts present a long-term growth opportunity for the soft drinks industry.

None of the stocks in the Zacks Beverages – Soft Drinks space currently sport a Zacks Rank #1 (Strong Buy). Despite the near-term hurdles, the industry has two stocks carrying a Zacks Rank #2 (Buy), which are well poised for growth. Moreover, we suggest two other stocks with a Zacks Rank #3 (Hold) that investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Coca-Cola European Partners plc (CCEP): This producer and distributor of non-alcoholic ready-to-drink beverages has advanced 18.3% in a year. Moreover, the Zacks Consensus Estimate for this Zacks Rank #2 company’s current-year EPS has inched up 1.4% over the past 60 days.

Price and Consensus: CCEP

New Age Beverages Corp. (NBEV): This Denver, CO-based beverage company has surged 61.9% in the past year. The Zacks Consensus Estimate for the current-year EPS has been stable over the past 30 days. It carries a Zacks Rank #2.

Price and Consensus: NBEV

Barfresh Food Group, Inc. (BRFH): This manufacturer and distributor of ready to blend frozen beverages has gained 43.8% in a year. Further, the consensus estimate for this Zacks Rank #3 company’s current-year EPS has been stable over the past 30 days.

Price and Consensus: BRFH

Keurig Dr Pepper Inc. (KDP): This beverage and coffee company has gained 13.3% in the past six months. The Zacks Consensus Estimate for this Zacks Rank #3 company’s EPS has been stable over the past 30 days.

Price and Consensus: KDP

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Pepsico, Inc. (PEP) : Free Stock Analysis Report
 
New Age Beverage Corporation (NBEV) : Free Stock Analysis Report
 
Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report
 
Coca-Cola European Partners PLC (CCEP) : Free Stock Analysis Report
 
Barfresh Food Group Inc. (BRFH) : Free Stock Analysis Report
 
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