Wednesday, October 30, 2013

The Tax Attack on Soft Drink Companies: What About the Stocks?

If you have been watching the news about the soft drink industry recently, you would notice what I call the Tax Attack on soft drinks with lots of sugar. Will sugary soda become the next tobacco? San Francisco is now considering cutting down on the consumption of these drinks through a proposed soda tax following in the footsteps of other cities. Even Mexico is proposing to tax soft drinks with sugar along with junk food.

Just in the last six months, Coca Cola has dropped by about 6%, versus the S&P 500 which is up over 10% during the same period. What's a contrarian to do? By the way, have you heard about the new Coca Cola is part of a Healthy Lifestyle ad? (You probably won't see it in the United States.)

Obviously, Coke is moving towards more healthier drinks along with the other major beverage producers. The company just reported a year-over-year 5.9% earnings growth, on a 2.5% drop in revenues. The stock sports a 20.5 price to earnings ratio, and trades at 17.9 times forward earnings. The company provides its shareholders with a 2.8% yield.

Coke's biggest competitor is Pepsico (PEP), which trades at 20 times trailing earnings and 18 times forward earnings. Earnings that were recently reported were almost flat on the positive side, with revenues up slightly at 1.5%. The yield on the stock is 2.7%.

According to the list at, there are over a dozen beverage stocks to choose from, including Dr Pepper Snapple Group, Inc. (DPS) with a PE of 15.4, a forward PE of 14.5,  and yielding 3.3%. There is also SodaStream International Ltd. (SODA), which is a different type of competitor. The stock trades at 18.6 times forward earnings.

Disclosure: Author owns KO indirectly.


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