NEW YORK (TheStreet) -- The battle between soft drink companies for the hearts and taste buds of consumers has been going on for decades. Well, with Quant Ratings, TheStreet's proprietary algorithmic stock rating technology, we can at least determine which soft drink stock investors should buy right now -- and the answer might surprise you.
The soft drink industry is made up of soft drink manufacturing and flavored syrup and concentrate manufacturing; the latter is 25% the size of the former. The soft drink industry grew at 2.5% per year from 1997 to 2013, well below GDP growth of 4%.
The sector is projected to grow less than GDP through 2015. The shift in the industry is away from sugar-sweetened beverages and in favor of functional drinks (sports drinks). The industry is dominated by the three biggest players Coca-Cola (KO), Pepsi (PEP), and Dr Pepper Snapple Group (DPS).
So what are the best softdrink companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which softdrink companies made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 28, 2015, closing prices. The highest-rated stock appears last.KO data by YCharts
3. The Coca-Cola Company (KO)
Market Cap: $179.3 billion
Year-to-date return: -2.5%
The Coca-Cola Company, a beverage company, manufactures and distributes various nonalcoholic beverages worldwide. The company primarily offers sparkling beverages and still beverages.
"We rate COCA-COLA CO (KO) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, expanding profit margins and notable return on equity. We feel its strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- KO's revenue growth has slightly outpaced the industry average of 5.6%. Since the same quarter one year prior, revenues slightly increased by 1.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has increased to $1,574.00 million or 47.65% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 34.45%.
- The gross profit margin for COCA-COLA CO is rather high; currently it is at 66.11%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 14.53% trails the industry average.
- COCA-COLA CO' earnings per share from the most recent quarter came in slightly below the year earlier quarter. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, COCA-COLA CO reported lower earnings of $1.59 versus $1.90 in the prior year. This year, the market expects an improvement in earnings ($2.00 versus $1.59).
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Beverages industry and the overall market, COCA-COLA CO's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- You can view the full analysis from the report here: KO Ratings Report