“Have a Coke and a smile.”
There is nothing better than cracking open an ice-cold The Coca-Cola Company (NYSE:KO) on a hot summer day. Consumers can’t help but smile while indulging in the famous soft drink. For more than a century, The Coca-Cola Company (NYSE:KO) spread its empire, building a brand universally recognized around the world. Likewise, PepsiCo, Inc. (NYSE:PEP) successfully created a beloved drink that reaches around the globe.
Lately, however, soda sales have stalled and investors have questions about the future. Report after report is coming out detailing the demise of the industry. True, there is some cause for worry: amid healthier consumer trends, soda sales dropped 1.2% in 2012. However, soda sales have been decreasing since 2005, and soda companies’ stock prices continue to move upward.
Here are three reasons why I think soda companies are still good investments.
1. More than soda
Soda companies make a lot more than just soda. For example, both The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS) make dozens of juice and sports drinks, as well as bottled water. In Q4 of 2012, The Coca-Cola Company (NYSE:KO)’s profit increased 13% despite the continued drop in soda sales during the same quarter.
PepsiCo, Inc. (NYSE:PEP) is even more diversified. The company’s revenue is split 50-50 between beverages and snack foods. In fact, PepsiCo, Inc. (NYSE:PEP)’s Americas Food unit alone accounts for 37% of Pepsi’s revenue and 52% of its profits. The diversity that Pepsi brings to investors is a huge reason that its stock is trading above $80. PepsiCo, Inc. (NYSE:PEP) is more risk averse than The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS), who earn 100% of their revenues through beverages.
The bottom line is that soda companies don’t have all of their eggs in one basket. Yes, carbonated soft drinks are their most popular products, but a large portion of revenue comes from other beverages or snack foods. As consumers buy less Dr Pepper, they buy more Hawaiian punch and Country Time lemonade. Dr Pepper Snapple pulls in the cash either way.
In fact, Dr Pepper Snapple reported a 48% year-over-year increase in net income for Q4 in 2012. Declining soda sales don’t necessarily mean declining profits.
2. Growth abroad
Yes, Americans are drinking healthier, but what about the rest of the world? The First Lady’s “Let’s Move” initiative, a movement to fight childhood obesity partly by encouraging children to stay away from soda, doesn’t reach the ears of Indians or Brazilians. The potential for growth in emerging countries is promising, and both PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) are in position to make a killing. Already, international sales account for 50% of Pepsi’s revenues and 60% of Coca-Cola’s revenues. Even if healthy trends continue to sweep the US, soda companies can look to other countries to pick up the slack.