It’s hard to replace products that people love to consume. Even if those products are not healthy, people tend to reduce their intake but seldom do they completely abstain from them. No, I’m not talking about tobacco or alcohol. Its carbonated beverages that are in focus and the question being asked is, whether the rally of PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) sustainable or not.
A soda pop?
Shares of PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) have appreciated 23% and 14% over the last year, whereas Monster Beverage Corp (NASDAQ:MNST) has lost nearly 16% of its market cap. As a matter of fact, Coca-Cola has been growing organically without any major shift in core strategy. But, PepsiCo has been making strides with its ground breaking “fat fighting soda”. I admit I got carried away, just like the crowd.
Health concerns regarding carbonated beverages have been around for years, and health experts have been discouraging soda openly. A diet coke may not make a person chubby and the revolutionary soda by PepsiCo may even absorb fat, but that does not make these sodas fit for everyday consumption. According to PepsiCo, Inc. (NYSE:PEP), its latest soda contains a fiber called dextrin, which absorbs fat without any side effects. It has been marketing the soda as “Pepsi Special” in Japan, calling it a nutritional beverage.
But, according to doctors, heavy consumption of dextrin causes stomach ache and bloating in a matter of days. I fail to understand why is it being called a “nutritional product” when it does not contain any nutrients. According to this news source, models eat tissue paper to beat hunger and stay in shape, so does that make tissue paper nutritional?
Furthermore, there are weight loss pills that often have severe side effects and are never called nutritional. But somehow, PepsiCo has a self-proclaimed nutritional soda and the Street has been rewarding it for its breakthrough.
As of now, Monster Beverage operates in only 70 countries, while PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) have a geographical presence in over 200 countries. Going by geographical reach, PepsiCo and Coca-Cola are comparable, but Monster Beverage is not. Currently, PepsiCo has a market share of 29.9%, while Coca-Cola enjoys over 41.9% share. If PepsiCo is to surpass Coca-Cola, its fat fighting soda needs to be sold around the globe, but I doubt if that will ever happen.
An impending crash?
Attached below are some key metrics of Monster Beverage, PepsiCo, and Coca-Cola.
|Company||Net Profit Margin||Forward P/E||PEG|
Over the last five years, shares of PepsiCo have under performed The Coca-Cola Company (NYSE:KO), but over the last six months, PepsiCo has been able to deliver twice the returns of Coca-Cola. Sure, PepsiCo has delivered impressive growth, but analysts at UBS believe its fair price should be $75. According to a consensus of 12 analysts following PepsiCo, its fair price should be $81 and at the current price of $80, there isn’t much room to grow.
Furthermore, the forward earnings multiples and earnings growth multiples indicate that they are fairly priced, and initiating a long position at these prices may not entail much upside.
I’m, however, expecting a crash. PepsiCo, Inc. (NYSE:PEP)’s latest soda isn’t in the U.S. yet, and its entry in the States would certainly attract the FDA. Unless PepsiCo adds actual nutrients in its soda, it is highly unlikely that FDA is going to fall for it. Even Europe has strict drug administration authorities, which act in a similar fashion to the FDA. In my opinion, the hype surrounding PepsiCo could be the cause of its downfall, or at least, a minor crash.
It wouldn’t be wise to expect the sudden disappearance of carbonated beverages. Demand might dwindle with healthier drinks hitting the shelf, but the aggressive marketing campaigns of PepsiCo, The Coca-Cola Company (NYSE:KO), and Monster Beverage keep on luring the young.
Despite the risks, Yacktman Asset Management owns $1.54 billion worth of PepsiCo, Inc. (NYSE:PEP)’s shares, but hedge funds aren’t initiating significant positions in the company at current prices. Meanwhile, insiders of Monster Beverage (including its CEO) have sold around 2.2 million of its shares over the last 12 months.
Shifting focus to Coca-Cola, Berkshire Hathaway owns $14.5 billion worth of its shares, which remains Buffett’s largest single holding in a company. Frankly, I’d be worried for Coca-Cola if Buffett reduces his holdings in the company.
With that in mind, if I had to pick one company from the mentioned brands, I’d pick The Coca-Cola Company (NYSE:KO) for its track record of stable and steady organic growth. Its shares are trading at their 52-week highs, yet they appear to be fairly valued. And to top it all, analysts estimate its annual EPS to grow nearly 9% over the next five years.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage and PepsiCo.