When oil prices plunger, the rise in disposable income generally gets directed to dining and the consumption of beverages.
But with consumer preference for sugary sweet sodas waning, beverage companies with diversified offerings from energy drinks to ready-to-drink teas are fighting tooth and nail for a share of the consumers' wallets as well as their tastebuds.
Two similar beverage makers are trying to differentiate themselves with their products. Which one will give you a bigger bang for your buck? Then read on. The winner is among a group of high-growth investments that are poised to overcome the market's downward momentum this year.
One would think that after beverage giant Coca-Cola bought 17% of energy drink-maker Monster, and Monster got Coke's energy drink business in exchange for its non-energy drink portfolio, that Monster would benefit from Coke's massive distribution network, among other benefits.
But the transition and hiccups related to distribution have cost Monster dearly; in three of the last five quarters, the company has reported lower-than-estimated earnings.
This year, earnings per share (EPS) came in at 67 cents, down 6.9% over the same quarter a year ago and against expectations of a rise of 14% to 82 cents. Revenues of $645.4 million, though higher year-over-year by a little over 6.58%, were also below expectations of $698.4 million. But with Well Fargo's "Beverage Buzz" survey stating that the company's distribution issues have largely been resolved, earnings are expected to move up again.
Monster is now banking on its next acquisition: California-based flavor supplier American Fruits & Flavors for $690 million, which it hopes will improve flavor development and its global footprint.
But with the health impact of consumption of energy drinks under serious scrutiny, one wonders if troubles have indeed ended for Monster and if its value is justified.
Over the past half a decade, while Monster's stock valuation has risen a whopping 500%, its revenues are up only 108%. In comparison, not only is soda-maker Dr. Pepper Snapple Group's (DPS) valuation lower than Monster, it also boasts more than double the revenue of Monster. Is Dr. Pepper our growth winner?
Dr. Pepper Snapple Group
DPS, which offers products like Dr. Pepper, Snapple, Canada Dry, Schweppes, 7-Up, Sunkist, A&W, and Squirt, may command a smaller share of the market (11% in 2014) than Coke and PepsiCo , but has been quick to tap the pulse of changing consumer preferences.
Carbonated soft drinks sales have dipped for a decade now, with consumers dumping drinks loaded with sugar and artificial sweeteners, and opting for juices and flavored water. Helped by its low-calorie drinks, teas, and flavored seltzer water line, DPS recorded a 2.6% increase in sales in 2015.
While Monster may be hoping to capitalize on Coke's distribution network through its alliance, DPS has already saved on distribution costs through long-term agreements with the cola giants Coke and Pepsi for visibility of its products on shelves.
One area of concern for the beverage maker may be its concentration in the U.S. While Monster is due to launch its products in China in a few months, Dr. Pepper is yet in the planning stage to enter Asian and European markets. For now, DPS's domestic presence seems to have helped, because they don't have to deal with currency impact like its energy-drink counterpart.
Drumroll, please: The better pick is...
Dr. Pepper Snapple Group.
Monster may be soon be able to put an end to its transition- and distribution-related worries and resume earnings in the future. However, even after losing 11.1% over the last one year, Monster's average P/E at 32.43 is still way higher than DPS' 21.29 and the S&P 500's 11.35.
While analysts like Goldman Sachs and UBS have maintained their Buy ratings on Monster, they have cut their price target on the stock to $157 and $165, respectively.
If Monster can manage to capitalize on its Coke deal and carve a niche in international markets -- some of which are dominated by rival Red Bull -- earnings and share prices will soar. However, there are many moving parts involved there, which ups the possibility of risk with return.
In comparison, DPS is focusing on growing its strengths in the domestic market with its diverse portfolio of offerings, which makes it a more robust company with cost-cutting measures and continuous improvements. While its stock price may not increase by the same amount as Monster (target of $94 for DPS), its 2.3% dividend yield comes as a comfort, among other factors like its cheaper valuation than peers.
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