Non-alcoholic beverages like sparkling soft drinks, juices, enhanced water, sports and energy drinks, and dairy and plant-based beverages are the main constituents of the soft drinks industry. Additionally, some industry participants produce and sell handy foods and snacks, which complement their non-alcoholic flavored and sweetened beverages portfolio.
The soft drinks industry holds a dominant place in the U.S. beverage market, accounting for overall sales of $135.7 billion in 2017, according to Beverage Digest. In fact, this number indicates that American's spent additional $2 billion on soft drinks last year.
Here are the three major themes in the industry:
- The U.S. soft drinks industry is currently facing turmoil as consumers are increasingly becoming health conscious. Carbonated drinks, with high sugar content, have been a major cause for the country's rising obesity problem. Additionally, its zero or low-calorie alternatives are causing health hazards due to their use of artificial sweeteners. This has resulted in a major shift in consumer preference to healthier non-carbonated beverages, leading to a marked slowdown in the carbonated drinks category (CSD).
- The Trump administration's tariffs on steel and aluminum have increased input costs, making the production of soda cans expensive. Consequently, the industry participants anticipate increasing prices for sodas, which could be another reason for customers refraining from buying colas and other drinks. Moreover, escalating freight costs and increase in other input costs are impacting the profitability of industry players. Also, the strengthening of the U.S. dollar is affecting the companies' businesses across borders.
- Growing preferences for non-carbonated and health drinks has forced soft drink makers to rethink their portfolio. Introduction of health drinks, either by innovation or acquiring new brands, is the main route for most industry players. For example, Coca-Cola (KO) is constantly enhancing its portfolio, as evident from its recent acquisition of the major sports performance and hydration brand - BODYARMOR. The industry biggie has also agreed to buy Costa Coffee as it intends to expand in the on-the-go coffee business. Similarly, PepsiCo (PEP) has inked a deal to buy SodaStream (SODA) to fortify its fast-growing sparkling water portfolio. The industry players are also exploring the options to adopt cannabis-infused drinks that can be a great alternative to the sugary sodas.
Clearly, the soft drinks industry is poised for a dramatic change, as health drinks take the main stage, putting an end to the era of carbonated-drinks.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Beverages - Soft Drinks industry is housed within the broader Zacks Consumer Staples sector. It carries a Zacks Industry Rank #199, which places it at 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 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 estimate for the current year has declined by 10.6%.
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 Lags on Stock Market Performance
The Zacks Beverages - Soft Drinks Industry has lagged the broader Zacks Consumer Staples Sector as well as the S&P 500 index over the past year.
The industry has declined 15.2% over this period compared to the S&P 500 index's rise of 7.2% and broader sector's fall of 14.7%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing soft drinks companies, we see that the industry's currently trading at 19.07X compared to the S&P 500's 16.29X. It is also above the sector's forward-12-month P/E of 17.4X.
Over the last five years, the industry has traded as high as 22.94X, as low as 17.04X and at the median of 20.23X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
The soft drinks market should gradually recover backed by product innovation and introduction of healthier alternatives. However, the impact of tariff on steel and aluminum will remain near-term operational headwinds to these companies.
None of the stocks in the Zacks Beverages - Soft Drinks space currently holds a Zacks Rank #1 (Strong Buy). However, we are presenting two stocks with a Zacks Rank #2 (Buy) that are well positioned to grow combating the challenges. There is another stock with Zacks Rank #3 (Hold) that investors may currently hold on to.
You can see the complete list of today's Zacks #1 Rank stocks here .
Monster Beverage Corporation (MNST): This Corona, CA-based distributor of energy drinks and alternative beverages has gained 8.6% in the past two years. The current fiscal Zacks Consensus Estimate EPS estimate for this Zacks Rank #2 company has remained stable over the last 30 days.
Price and Consensus: MNST
Price and Consensus: COT
Fomento Economico Mexicano, S.A.B de C.V. (FMX), alias FEMSA: This Zacks Rank #3 (Hold) stock gained 3.2% in the past year. The consensus EPS estimate for this company has remained stable over the last 30 days.
Price and Consensus: FMX
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