The beverage industry is well-positioned for significant growth because of increasing disposable income and shifting consumer preferences toward ready-to-drink beverages and unique flavors.
Being the market dominators, The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) are well-positioned to benefit from the favorable industry trends. However, while these stocks show enough promise, it could be wise to wait for better entry points in these stocks.
Before diving deeper into their fundamentals, let’s discuss why the beverages industry is well-positioned for long-term growth.
A rising demand for products among the elderly demographic primarily drives the beverage market. Furthermore, changing consumer preferences and a heightened awareness of the significance of nutrition and overall well-being are driving market expansion.
Challenges like inflation, changing regulations, and shifting consumer tastes push companies to innovate for profit protection and market growth. Additionally, heightened promotional efforts drive the industry’s current growth. The global beverages market is expected to reach $1.99 trillion by 2028, registering at a CAGR of 3.5%.
According to Statista, the U.S. beverage market is projected to reach a revenue of $52.99 billion in 2024, indicating an annual growth rate of 10.3%. This growth is expected to continue, resulting in an estimated market volume of $86.31 billion by 2029.
On top of it, heightened health concerns and rising demand for vegan options are propelling the plant-based beverage market, which is expected to be worth $374.60 billion this year.
Let’s examine the fundamentals of the two Beverages stocks, starting with the less favorable one from an investment point of view.
Stock #2: The Coca-Cola Company (KO)
KO manufactures, markets, and sells various non-alcoholic beverages worldwide. It offers sparkling soft drinks, sparkling flavors, water, sports drinks, coffee, tea, juice, value-added dairy products, plant-based beverages, and other beverages.
KO’s revenue grew at a CAGR of 11.5% over the past three years. Its EBIT grew at a CAGR of 10% over the past three years. Moreover, its Total Assets grew at a CAGR of 3.8% during the same period.
In terms of the trailing-12-month asset turnover ratio, KO’s 0.48x is 42% lower than the 0.83x industry average. On the other hand, its 31.56% trailing-12-month EBITDA margin is 164% higher than the 11.96% industry average. Also, its 4.05% trailing-12-month Capex/Sales is 25.3% higher than the 3.23% industry average.
KO’s net operating revenues for the fourth quarter ended December 31, 2023, increased 7.2% year-over-year to $10.85 billion. Its gross profit for the same quarter increased 10.7% from the year-ago value to $6.22 billion. However, its net income decreased 2.9% year-over-year to $1.97 billion. Its EPS came in at $0.46, representing a decrease of 2.1% compared to the prior-year quarter.
Street expects KO’s EPS for the quarter ending March 31, 2024, to increase 2.4% year-over-year to $0.70. However, its revenue for the quarter ending June 30, 2024, is expected to decrease marginally year-over-year to $11.88 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined marginally to close the last trading session at $60.54.
KO’s POWR Ratings are consistent with this outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a C grade for Growth and Sentiment and is ranked #17 out of 33 stocks in the B-rated Beverages industry. In addition to what we stated above, we have also given KO grades for Value, Momentum, Stability, and Quality. Get all KO ratings here.
Stock #1: PepsiCo, Inc. (PEP)
PEP manufactures, markets, distributes, and sells beverages and convenient foods worldwide. It has seven operating segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia, and New Zealand; and China Region.
On March 19, 2024, PEP announced the launch of Bubly Burst, a new sparkling water beverage with bold fruit flavors, zero added sugar, and minimal calories. The product is available in six flavors and comes in 100% recycled PET bottles, aiming to cater to consumers looking for a slightly sweeter taste in the sparkling water category.
PEP’s EBITDA grew at a CAGR of 7% over the past three years. Its net income grew at a CAGR of 8.4% over the past three years. Also, its EPS grew at a CAGR of 8.6% during the same period.
In terms of the trailing-12-month EBIT margin, PEP’s 14.80% is 67.9% higher than the 8.81% industry average. Likewise, its 17.85% trailing-12-month EBITDA margin is 49.3% higher than the 11.96% industry average. Its 0.95x trailing-12-month asset turnover ratio is 14.7% higher than the 0.83x industry average.
PEP’s net revenue for the fiscal fourth quarter that ended December 30, 2023, decreased 0.5% year-over-year to $27.85 billion. However, the company’s non-GAAP operating profit increased 8.7% year-over-year to $3.19 billion. Likewise, its non-GAAP attributable net income came in at $2.46 billion and $1.78 per share, representing increases of 6.6% each year-over-year, respectively.
For the quarter ending March 31, 2024, PEP’s EPS and revenue are expected to increase 1% and 1.9% year-over-year to $1.51 and $18.18 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 3.6% to close the last trading session at $172.73.
PEP’s POWR Ratings reflect its bleak prospects. It has an overall rating of C, which translates to Neutral in our proprietary rating system.
It has a C grade for Growth and Value. It is ranked #14 in the same industry. To see PEP’s Momentum, Stability, Sentiment, and Quality ratings, click here.
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KO shares were trading at $61.33 per share on Wednesday morning, up $0.79 (+1.30%). Year-to-date, KO has gained 4.91%, versus a 9.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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