A handful of beverage companies outperformed expectations in the first half of 2014. These included PepsiCo, Inc. (PEP), Dr Pepper Snapple Group, Inc. (DPS), Monster Beverage Corp. (MNST), The Coca-Cola Co. (KO) and Keurig Green Mountain, Inc. (GMCR).
While most of these bellwethers sustained the momentum in the third quarter, Coca-Cola did not. This was mainly due to volume deceleration in Europe and China. Coca-Cola further warned that earnings growth could miss the long-term target in both 2014 and 2015 due to broader economic challenges. Coke is expected to release its fourth quarter and full year results next month.
Several other beverage companies have gained significant momentum and caught investors’ attention with returns considerably higher than that of Coca-Cola in 2014. We picked four such stocks that stood out in terms of market returns and performance in 2014. Also, the fundamentals and favorable Zacks Rank of these stocks signal their outperformance in 2015 as well.
Monster Beverage Corp. (MNST)
Headquartered in Corona, CA, Monster Beverage offers a wide range of products under the categories of energy drinks and juice based and soda beverages.
While Coca-Cola and other soda makers have been struggling because of declining soda volumes in developed markets, like the U.S., over the past few years, Monster Beverage is gaining from improving demand for energy drinks.
In Aug 2014, Monster Beverage entered into a landmark deal with Coca-Cola. Under the deal, Coca-Cola will buy a 16.7% equity stake in Monster Beverage and also transfer the ownership of its global energy drinks business to the latter, making it Coca-Cola’s exclusive energy play.
The strategic deal will provide Monster Beverage full access to Coca-Cola’s world-class global distribution network, strengthen its position further in the energy drinks market, significantly expand its international presence and boost its cash position.
Monster Beverage gained 62% in 2014, far exceeding the industry majors. The company has delivered positive earnings surprises for three straight quarters with an average beat of 4.9%. The Zacks Consensus Estimate for 2015 earnings reflects year-over-year growth of 21%. Currently, the stock has a Zacks Rank #2 (Buy).
With successful innovations and the strategic Coca-Cola deal, Monster Beverage is definitely a stock to watch in 2015.
Keurig Green Mountain (GMCR)
Based in Waterbury, VA, Keurig Green Mountain Inc. is a provider and wholesale distributor of premium coffee. The company offers coffee, tea as well as other beverages like hot apple cider, cocoa and other dairy-based beverages.
The company delivered robust results in fiscal 2014 (ended Sep 2014) and is strongly poised to continue the momentum in fiscal 2015 as well.
We are impressed with the company’s strategic licensing agreements with other coffee and beverage companies like Dunkin’ Brands Group Inc. (DNKN), Unilever, plc (UL) Kraft Group Inc. (KRFT) and Starbucks Corp. (SBUX) to offer the signature drinks of these companies in its K-cups and Vue packs. Moreover, the company is stepping into the world of cold beverages and sodas with the launch of The Keurig Cold Machine scheduled this year.
Keurig Green Mountain’s market value in 2014 grew manifold with around 80% in gains last year. The company delivered an average earnings surprise of 12.68% in the trailing four quarters. The Zacks Consensus Estimate reflects year-over-year increase of 8% for fiscal 2015 earnings. Currently, the stock carries a Zacks Rank #2 (Buy).
PepsiCo (PEP)
Where Coke hasn't done so well in 2014, its closest competitor, Pepsi, has thrived with its massive snack foods business. This has become the key differentiator between the two soda giants.
Despite a difficult operating environment in developed countries and nagging volatility in emerging ones, the company had a solid run last year delivering positive earnings and revenue surprises in all the three quarters of 2014 reported so far.
Pepsi also raised the earnings guidance twice for 2014 to reflect strong performance and an optimistic outlook. Shares of Pepsi have surged almost 20% in 2014. The Zacks Consensus Estimate reflects year-over-year increase of 7% for earnings in 2015.
With a strong snacks business, robust international growth and aggressive cost savings, this Zacks Rank #3 (Hold) company comfortably finds a place on the list of top beverage stocks to watch in 2015.
Dr Pepper Snapple Group (DPS)
The Plano, TX-based beverage company also had an impressive run in 2014 delivering strong profits in all the three quarters reported so far. This was driven by pricing gains, productivity improvements and lower interest expense and taxes.
Dr Pepper raised its earnings outlook twice in 2014 following better-than-expected results. Management also raised its top-line expectations concurrent with the third quarter results, driven by better soda volumes.
The company has delivered positive earnings surprises in the past four quarters with an average beat of 16.53%. The share price of this Zacks Rank #3 (Hold) company soared 54.5% in 2014. The Zacks Consensus Estimate reflects year-over-year increase of around 7% for earnings in 2015.
Better top-line expectations coupled with cost of goods sold deflation and a slightly lower tax rate should lead to improved earnings in 2015, as it finds a spot in our list of beverage stocks worth a watch this year.
Outlook for 2015
As a group, beverage stocks have done well in 2014. Though we are encouraged by the overall growth of these beverage makers in 2014, sustaining the momentum in the New Year will significantly depend on how they deal with the soft consumer spending environment, increasing business volatility in emerging markets due to currency fluctuations and other structural issues, and a rising commodity cost environment.
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