2 Soft Drink Stocks with Fizz - Analyst Blog

Yesterday's top gainer on the S&P 500 was Keurig Green Mountain, Inc. GMCR. Shares of the specialty coffee retailer gained 7.6% after The Coca-Cola Company KO said that its subsidiary, Atlantic Industries, raised its stake in the coffee-brewer manufacturer to 16% from 10%.

What's in It for Coke?

Coca-Cola is buying another 2.8 million shares of Keurig for $107.76 per share. This move will make Coca-Cola the largest shareholder of Keurig. This development is in keeping with Keurig's 10-year partnership deal with Coca-Cola as part of its strategy to step into the world of cold beverages.

But the deal is equally important for Coke, which gained 0.7% after the announcement. The deal provides the soft drink giant entry into the ‘single-serve at home' format and a segment which is far removed from its traditional offerings.

Decline in Diet Sodas

In the recent past, the demand for carbonated drinks has undergone a steady decline. A recent report in The Wall Street Journal based on data from Citi Research said soda sales at U.S. stores had declined 1.9% during the first quarter of 2014. In 2013, retail sales of soft drinks fell for the first time in 15 years. Sales declined 1% to $76.3 billion.

The primary reason for this decline is the fact that consumers are increasingly rejecting drinks which use artificial sweeteners. Earlier, soft drink majors could depend on the diet soft drinks segment to capture consumer dollars lost from conventional products.

But they can no longer do so because consumers are wary of the health effects of artificially sweetened drinks.

Need to Expand Product Portfolio

Companies with wider product portfolios are poised to benefit from this situation. The other option is to expand offerings which utilize natural sweeteners. These drinks would continue to target customers who are looking for low calorie options. At the same time, they would carry none of the health concerns attached to older artificially sweetened drinks.

Below we present two soft drink stocks that have the ability to beat the decline in carbonated drink consumption, each of which also has a good Zacks Rank. The first of them is relatively smaller and is developing naturally sweetened beverages. The second is a soft drink major which has performed impressively, depending largely on its snacks offerings.

Dr Pepper Snapple Group, Inc.

Dr Pepper Snapple Group, Inc. DPS owns iconic brands like Dr Pepper, 7UP, Mott's, Snapple and Canada Dry. It manufactures and distributes its products across the U.S., Canada and Mexico. The company has begun evaluating naturally flavored options for its iconic brands.

These would use stevia and real sugar as sweeteners. This is a clear indication that the company is responding to consumer concerns and exploring healthier alternatives.

Dr Pepper Snapple Group holds a Zacks Rank #2 (Buy) and expects earnings growth of 6.10% in the next financial year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 16.50.

Pepsico, Inc.

Pepsico, Inc. PEP began 2014 on a solid note, beating the Zacks Consensus Estimate for both earnings and revenues as snacks once again offset weakness in beverages. While organic snacks volumes grew 2%, beverages were flat in the quarter.

Organic snacks volumes grew 3% in Europe and 4% in developing and emerging markets. In the Americas, beverage volumes remained flat, though improving sequentially like The Coca-Cola Company. Non-carbonated beverages volume grew in the quarter, whereas carbonated soft drinks remained a weak spot due to category headwinds.

Currently the company holds a Zacks Rank #3 (Hold), and has expected earnings growth of 8.7% in the next financial year. It has a P/E (F1) of 19.22.

The strategies adopted by both companies give them the strength to defy the headwinds affecting the soft drinks business. This is why these two stocks are good choices for your portfolio.

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