Markets

Soft Drinks Industry's Near-Term Outlook Lacks Fizz

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, Inc. (PEP) produce and sell handy food with flavored snacks, which complement the 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 products via company-owned or controlled bottling, independent bottling partners and partner brand owners.

Let’s take a look at the industry’s major themes:

  • Carbonated beverages are no longer favored owing to increasing consumer awareness about health and wellness. Carbonated drinks, with artificial sweeteners, have been the root-cause of several health problems, obesity being one. Reduction in CSD volumes has been eating into overall sales and profits of soft-drink makers.
     
  • In addition, higher costs pertaining to tariffs are a major headwind. Increased input costs, attributable to a bump-up in tariffs on steel and aluminum, have raised packaging costs. Also, rising demand for non-carbonated drinks calls for huge investments on part of the industry players that might weigh on margins. These companies are witnessing significant cost of investments in capabilities like data analytics, technology, marketing, and supply chain as well as product innovation. Meanwhile, adverse foreign currency movements are plaguing the soft drinks industry, given the vast worldwide operations of the companies. Although soft-drink makers are resorting to cost-containment efforts and price increases, these bottlenecks will continue in the near term.
     
  • On a positive note, continuous innovation, including rebranding acts as one of the prime catalysts for the soft drinks market. Moreover, the addition of non-carbonated beverages with zero-sugar, low-calorie and other healthier options to the portfolio resonates well with the current consumer preference. Apparently, industry players are introducing flavors for health drinks by revamping existing products, acquiring new brands, product innovation and other rollouts. Players are also targeting categories like sports nutrition, sparkling water, dairy, iced tea, juices and coffee to better restructure their portfolios. In addition, the booming cannabis-infused drinks space can be an attractive alternative to sugary sodas. These actions can significantly boost the companies’ top and bottom lines.


Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Beverages - Soft Drinks industry is housed within the broader Consumer Staples sector. It carries a Zacks Industry Rank #149, which places it in the bottom 41% 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 position 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 gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has gone down 11.4%.

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 both the S&P 500 Index and the Consumer Staples sector in a year’s time.

While the stocks in the industry have collectively gained 6.5%, the S&P 500 has advanced 17.8%. Meanwhile, the sector has registered growth of 8.3% in the said time frame.

One-Year Price Performance



 

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 22.58X compared with the S&P 500’s 17.98X and the sector’s 19.17X.

Over the last five years, the industry has traded as high as 23.23X and as low as 18.46X, with a median of 21.31X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)



Bottom Line

Constant efforts to add healthier beverages through innovation and brand buyouts are likely to favor the soft drinks industry. However, higher costs, tariffs and slowdown in the CSD category cannot be ignored. Despite resorting to cost-containment efforts and price increases, these bottlenecks are likely to continue in the near term.

While none of the stocks in the Beverages – Soft Drinks industry currently sports a Zacks Rank #1 (Strong Buy), we present two stocks with a Zacks Rank #2 (Buy) and a couple more with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look.

Coca-Cola HBC AG (CCHGY): This producer and distributor of non-alcoholic ready-to-drink beverages has gained 17.8% in a year. The Zacks Consensus Estimate for this Zacks Rank #2 company’s EPS has been revised 0.6% upward in the past seven days.

Price Performance: CCHGY

 



Coca-Cola Amatil Limited (CCLAY): The manufacturer and distributor of non-alcoholic and alcoholic ready-to-drink beverages has gained 7.5% in the past year. Moreover, the Zacks Consensus Estimate for this Zacks Rank #2 company’s EPS has been stable over the past 30 days.

Price and Consensus: CCLAY

 



Monster Beverage Corporation (MNST): This leading distributor of energy drinks and alternative beverages has risen 19.1% year to date. The Zacks Consensus Estimate for this Zacks Rank #3 company’s EPS has been stable over the past 30 days.

Price and Consensus: MNST

 



The Coca-Cola Company (KO): Shares of this soft-drinks behemoth have advanced 13.9% year to date. Moreover, the Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year EPS has been stable in the past 30 days.

Price and Consensus: KO

 



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

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COCA-COLA HBC (CCHGY): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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