5 Sturdy Soft Drink Stocks to Watch as the Industry Paces Up

The Zacks Beverages – Soft Drinks industry has been reaping the gains of the pricing strategy adopted by most players to overcome cost woes, along with market share gains and continued innovation. Accelerating digital investments also bodes well. Companies are expected to gain from expansion into newer categories and adjacent categories, including capturing market share in the Ready-to-Drink (“RTD”) alcoholic beverage category through collaborations. Players like The Coca-Cola Company KO, PepsiCo Inc. PEP, Fomento Economico Mexicano FMX, Monster Beverage Corporation MNST and Keurig Dr Pepper KDP are well-poised on robust innovation efforts.

However, industry players are witnessing continued pressure from higher supply-chain costs, including transportation and commodity costs, particularly steel and aluminum. The companies’ actions, including price increases, reducing reliance on imported cans and moving production closer to markets, are poised to combat these headwinds. Elevated operating expenses related to increased spending on marketing and advertising to capture a share are likely to strain margins in the near term.

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 drinks, natural juices, enhanced water, sports and energy drinks, dairy, RTD tea and coffee beverages. Some industry players like PepsiCo produce and sell handy food with flavored snacks, complementing their beverage portfolio. The companies sell products through a network of wholesalers and retailers, including supermarkets, department stores, mass merchandisers, club stores and other retail outlets. Some also offer products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

What’s Shaping the Future of the Beverages – Soft Drinks Industry?

Innovation & Digital Growth: The soft drinks industry is poised to gain from innovations and accelerating digital investments. The companies have been optimizing their portfolio, focusing on core brands and investments in innovation to meet the evolving needs of consumers. The players remain committed to product launches and innovation to boost growth. Expansion into newer markets has been a critical focus for soft drink makers to boost market share. The companies are expected to reap the benefits of digital and technology-driven investments based on the shifting consumer preference for online shopping. Companies in the industry have been accelerating investments to build strong digital capabilities by piloting numerous digital-enabled fulfillment options. They have been expanding digital offerings and investing in loyalty programs to capture online demand. The investments are likely to position soft drink companies for long-term growth.

Evolving Trends: Soft drink companies have been gaining from improved demand trends, aiding volume growth. Due to recovery across markets, market share gains in at-home and away-from-home channels have been boosting sales. Price increases to overcome the ongoing cost pressures have significantly lifted sales in recent quarters. The soft drinks industry has transformed as health consciousness, personal well-being, natural ingredients, varied flavors and better taste experiences are changing consumers’ consumption patterns. Companies in the industry are expected to benefit from the expansion into newer and adjacent categories, including capturing market share in the fast-growing RTD alcoholic beverage category through collaborations. RTD has emerged as the fastest-growing category since 2018. The industry players are also exploring CBD-infused drinks, which have been gaining popularity lately.

Raw Material Cost Inflation and Supply Constraints: The beverage industry has higher supply-chain costs, including higher commodity input costs and transportation expenses. Raw material cost inflation, particularly steel and aluminum, has increased packaging costs. The ongoing supply constraints in the aluminum can industry have been other headwinds. The companies are also witnessing delays in procuring certain ingredients, domestically and internationally, leading to shortages of some goods. The industry players have been facing freight inefficiencies and significant increases in domestic and international freight costs. Logistic issues, higher input costs and freight inefficiencies have resulted in higher sales and operating expenses costs, impacting gross and operating margins. Most players expect commodity cost inflation and higher transportation costs to persist in the near term.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Beverages – Soft Drinks industry is housed within the broader Consumer Staples sector. It currently carries a Zacks Industry Rank #42, which places it in the top 17% of more than 250 Zacks industries.

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

The industry’s positioning in the top 50% of the Zacks-ranked industries results from a positive aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for 2023 have gained 11.1%.

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

Industry vs. Broader Market

The Zacks Beverages – Soft Drinks industry has outperformed the Consumer Staples sector in a year. However, it has underperformed the S&P 500 Index.

The stocks in the industry have collectively gained 6.1% compared with the sector’s decline of 3.2% and the S&P 500’s rally of 12.4%.

Industry’s Current Valuation

On the forward 12-month price-to-earnings (P/E) ratio basis, commonly used for valuing soft drink stocks, the industry is currently trading at 19.23X compared with the S&P 500’s 19.36X and the sector’s 17.33X.

Over the last five years, the industry has traded as high as 23.97X and as low as 19.23X, with a median of 22.25X.

5 Soft Drink Stocks to Watch

One stock in the Zacks Beverages – Soft Drinks industry currently sports a Zacks Rank #1 (Strong Buy), while one stock has a Zacks Rank #2 (Buy). We have also highlighted three stocks with a Zacks Rank #3 (Hold) from the same industry.

Let’s take a look.

FEMSA: Fomento Economico Mexicano, through its subsidiaries, operates as a bottler of Coca-Cola trademark beverages. It also operates small-box retail chain stores in Mexico, Colombia, Peru, Chile, and Brazil under the OXXO name, retail service stations under the OXXO GAS name in Mexico; and drugstores in Chile, Colombia, Ecuador, and Mexico. FEMSA has been gaining pace in the digital space through its tech and innovation business unit — Digital@FEMSA. It is focused on building a value-added digital and financial ecosystem for end customers and businesses. Its strategy of creating a national distribution platform in the United States through the expansion of its footprint in the specialized distribution industry, also bodes well.

FEMSA’s shares have rallied 64.5% in the past year. The Zacks Consensus Estimate for FMX’s 2023 sales and earnings indicates a year-over-year rise of 31.9% and 58.3%, respectively. The consensus mark for earnings has increased 8.9% in the past 30 days. The company currently sports a Zacks Rank #1.

PepsiCo: The stock of this Purchase, NY-based leading soft-drink company has inched up 1.2% in the past year. Resilience and strength in the global beverage and convenience food businesses have aided the company. It expects to benefit from delivering convenience, variety and value proposition to customers through its brands. PEP is poised to benefit from investments in brands, go-to-market systems, supply chain, manufacturing capacity and digital capabilities to build competitive advantages. Its cost-management and revenue-management initiatives bode well amid the ongoing inflationary pressures.

In the beverage business, PepsiCo expects strong growth and market share gains from the liquid refreshment beverage category, with share gains in the carbonated soft drinks, Ready-to-Drink Tea and water categories. The Zacks Consensus Estimate for PEP’s 2023 sales and earnings suggests growth of 6.7% and 10.2%, respectively. The consensus estimate for this Zacks Rank #2 company’s 2023 EPS has been unchanged in the past 30 days.

Coca-Cola: The soft drink behemoth is poised to gain from strategic transformation and ongoing worldwide recovery. The streamlining of its 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 piloting numerous digital-enabled initiatives through fulfillment methods to capture the online demand for at-home consumption.

Coca-Cola is diversifying its portfolio to tap into the rapidly growing RTD category. The company has been gaining from elasticity in the marketplace, improved price/mix and concentrate sales and underlying share gains in both at-home and away-from-home channels. The Zacks Consensus Estimate for KO’s 2023 sales and earnings suggests growth of 4.7% and 6.1%, respectively. The consensus mark for earnings has been unchanged in the past 30 days. The company’s shares have declined 5.3% in the past year. The stock currently has a Zacks Rank #3.

Monster Beverage: The Corona, CA-based company markets and distributes energy drinks and alternative beverages. Monster Beverage has been experiencing continued strength in its energy drinks category, which is driving performance. The company offers a wide range of energy drink brands such as Monster Energy, Java Monster, Cafe Monster, Espresso Monster, Monster Energy Mule, Juice Monster Pipeline Punch, Juice Monster Pacific Punch, Juice Monster Mango Loco, Monster Ultra Paradise and Monster Hydra Sport. Product innovation also plays a significant role in the company’s success. Monster Beverage is implementing pricing actions to overcome the ongoing cost pressure.

Despite the ongoing supply-chain challenges, Monster Beverage continues to stand by its strategy to ensure product availability and solidify the continued long-term growth of its brands. Management is optimistic about strength in the global energy drinks category. It remains poised to gain from growth in the Monster Energy family of brands and strength in Strategic and Affordable energy brands. Shares of this Zacks Rank #3 company have risen 23.1% in the past year. The Zacks Consensus Estimate for MNST’s 2023 sales and earnings indicates a year-over-year rise of 13.7% and 37.5%, respectively. The consensus mark for earnings has increased by a penny in the past 30 days.

Keurig Dr Pepper: The beverage and coffee company in the United States and Canada is poised to gain continued momentum in the Refreshment Beverages segment. Recent innovations and effective in-market execution and the contribution from its sales and distribution partnership for C4 Energy bode well. The company has been witnessing a strong in-market performance in the Liquid Refreshment Beverages category.

The Zacks Consensus Estimate for KDP’s 2023 sales and earnings suggests growth of 6% each. The consensus mark for earnings has been unchanged in the past 30 days. The company’s shares have declined 13.7% in the past year. It currently has a Zacks Rank #3.
CocaCola Company (The) (KO): Free Stock Analysis Report

Fomento Economico Mexicano S.A.B. de C.V. (FMX): Free Stock Analysis Report

PepsiCo, Inc. (PEP): Free Stock Analysis Report

Monster Beverage Corporation (MNST): Free Stock Analysis Report

Keurig Dr Pepper, Inc (KDP): Free Stock Analysis Report

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