Top 3 Beverage Stocks: Summer Earnings Reveal Key Trends

Key Points

• Coca-Cola and PepsiCo are navigating inflationary pressures with price increases, while Celsius benefits from lower costs.
• Consumers increasingly seek healthier beverage options, driving growth and prompting diversification from traditional soda giants.
• The energy drink market is booming, providing opportunities but also leading to increased competition.

As temperatures rise and consumers seek refreshment, the beverage industry and consumer staples sector gears up for its busiest season. Summer often brings increased sales and heightened investor interest in beverage stocks. The "Summer Beverage Wars" are heating up this year, with three key players vying for dominance. Recent earnings reports from these companies offer a valuable snapshot of their performance, strategic moves, and broader industry trends. 

Earnings Reports Reveal Varying Paths to Growth

The most recent quarterly earnings reports of 2024 paint a picture of these beverage giants' success and challenges. Each company has adopted strategies to navigate the evolving consumer landscape and macroeconomic pressures.

Coca-Cola: A Global Giant Navigating Headwinds

Coca-Cola's NYSE: KO recent stock performance has been relatively stable, with a 3-month performance of +8.27% and a year-to-date performance of +7.08%. Coca-Cola’s earnings report for the first quarter of 2024  reported revenue of $11.3 billion, a 3% increase year-over-year. Net income reached $3.177 billion, a 2% increase, translating to an earnings-per-share (EPS) of $0.74, also a 3% rise. While indicating modest growth, these figures were impacted by a decline in operating margin due to a combination of items affecting comparability and currency headwinds.

Despite these challenges, Coca-Cola highlighted several positive trends driving its performance. The company experienced strong organic revenue growth of 11%, fueled by volume growth in developing and emerging markets, particularly Latin America. Trademark Coca-Cola and Coca-Cola Zero Sugar emerged as key growth drivers, underscoring the enduring power of the company's flagship brands.

Coca-Cola's management emphasized its strategic focus on digital capabilities and targeted marketing efforts. The company is leveraging digital tools to deepen its relationship with consumers, gather valuable data, and drive transactions. Marketing campaigns have successfully connected consumption occasions with consumer passion points, contributing to volume growth and value share gains. Looking ahead, Coca-Cola has updated its full-year 2024 guidance, projecting organic revenue growth of 8-9% and comparable EPS (non-GAAP) growth of 4-5%.

PepsiCo: Margin Expansion and Strategic Investments

PepsiCo NASDAQ: PEP has also shown positive momentum, with a 3-month performance of +3.56% and a year-to-date performance of +1.23%. PepsiCo’s earnings report for the second quarter of 2024 revealed revenue of $22.5 billion, reflecting a modest 0.8% increase year-over-year. However, net income climbed to $3 billion, a significant 12% increase, translating to an EPS of $2.23, up by 13%.

Despite facing headwinds in its North American convenience foods segment and dealing with product recalls at Quaker Foods North America, PepsiCo achieved strong gross and operating margin expansion, resulting in double-digit EPS growth. The company's organic revenue growth reached 1.9%, with a core EPS of $2.28.

PepsiCo's management announced plans to enhance productivity initiatives further and make strategic commercial investments to stimulate growth. These investments will optimize value propositions within certain parts of its North American convenience foods portfolio, strengthen advertising and marketing efforts, and leverage its extensive distribution network for more precise market execution. Based on these initiatives, PepsiCo has updated its full-year 2024 guidance, anticipating organic revenue growth of approximately 4% and core constant currency EPS growth of at least 8%.

Celsius Holdings: Riding the Energy Drink Wave

Celsius Holdings NASDAQ: CELH has witnessed the most dramatic stock performance of the three, with a three-month performance of -26.59% and a year-to-date performance of +7.34%. Celsius Holding’s earnings report for the first quarter of 2024 revealed substantial growth, with revenue surging to $355.7 million, a 37% increase year-over-year. Net income reached $64.8 million, an impressive 106% increase, translating to an EPS of $0.27, up 108%.

Celsius's strong performance is attributed to its successful capture of market share in the rapidly expanding energy drink category. It holds an 11.5% share in the U.S. energy drink market, a significant gain driven by its popular CELSIUS Essentials line, innovative product launches, and effective marketing campaigns.

The company is also aggressively pursuing international expansion, with plans to launch in Australia, France, Ireland, New Zealand, and the United Kingdom in 2024. While inventory fluctuations with its largest distributor pose a potential challenge, Celsius remains optimistic about its long-term growth prospects.

Evolving Tastes, Rising Costs, and Strategic Maneuvers

The most recent earnings reports from Coca-Cola, PepsiCo, and Celsius reveal a beverage industry in transformation, shaped by shifting consumer preferences, mounting cost pressures, and distinct strategic approaches by each company.

Healthier Choices and Energy Drinks Fuel Growth

A clear trend emerges towards healthier options and functional beverages. Celsius's meteoric rise, driven by its "better-for-you" energy drinks, exemplifies this shift. This has prompted traditional soda giants Coca-Cola and PepsiCo to diversify their portfolios with low-sugar alternatives and even enter the energy drink market. PepsiCo's recent acquisition of a significant stake in Celsius underscores the growing demand for performance-enhancing beverages.

Inflationary Pressures and Pricing Strategies

Rising costs are a concern across the industry. Coca-Cola and PepsiCo have implemented price increases to offset inflation, impacting their margins. However, Celsius, benefiting from lower freight and material costs, has managed to expand its margins, showcasing the potential for agile companies to thrive in this challenging environment.

Distinct Paths to Success

Each company is navigating the changing landscape with unique strategies. Coca-Cola leverages its digital prowess to boost consumer engagement and drive sales, while PepsiCo focuses on productivity initiatives and targeted commercial investments. Conversely, Celsius is capitalizing on the burgeoning energy drink market through product innovation and aggressive international expansion, including the successful launch of CELSIUS Essentials.

Investor Considerations: A Balancing Act

For investors, the summer beverage wars present a mix of opportunities and considerations. With its strong financial performance and expansion plans, Celsius offers a high-growth potential, but its reliance on a single distributor and high valuation requires careful assessment. Coca-Cola (KO) and PepsiCo (PEP), with their global reach, diversified portfolios, and brand recognition, provide stability and potential for long-term value appreciation, making them attractive to more conservative investors.

The beverage industry is in flux, with consumer preferences evolving and companies adapting to maintain their competitive edge. While the war for summer dominance continues, the battleground is clearly shifting towards healthier options, functional beverages, and innovative strategies that cater to a new generation of consumers. Investors should closely monitor these trends and company performance to make informed decisions in this dynamic market.