Coke Shares Facing The Ultimate Test

| About: The Coca-Cola (KO)

By Neal Rau

Soda has been part of American culture for several decades now. However, over the past decade the obesity epidemic has brought soda under fire socially. Beverage giants PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO) are seeing sluggish sales due to changing consumer preferences and increasing health consciousness. Which beverage stocks are best positioned for growth despite a stall in soda sales?

You would think if health concerns are steering customers away from soda that diet soda sales would be less affected, but the opposite is true. Diet Coke volumes were down 3% last year, Diet Dr Pepper was down 2% and Diet Pepsi was down over 6%. Since the beginning of May, the stock price for Pepsi is down about 3.5% and Coca-Cola is down about 9%, and both are currently testing mid-term support.

Diets sodas contain artificial sweeteners and other chemicals that have received bad press over the years. There was even a proposal put forth in the state of New York that would impose an 18% excise tax on all non-diet soda sales. Coca-cola and Pepsi have been able to mitigate the effects of a declining U.S. market through expansion of their sales abroad in regions such as Asia, where demand is still growing and consumers are not as sensitive.

However, instead of relying on soda sales, Coke has been expanding into the energy drink segment. Red Bull and Monster Beverage Corp (NASDAQ:MNST) are the most recognizable names, but Coca Cola's energy drink portfolio of Full Throttle and Nos is doing well. This category's growth has slowed down recently, but Monster Beverage reported 6.5% higher sales and Coca-Cola reported 5% volume growth in energy drinks. PepsiCo and Dr Pepper Snapple (NYSE:DPS) do not have a large presence in energy drinks yet.

Pepsi does have non-carbonated tea brands like Lipton and Brisk, and Dr Pepper Snapple has the Snapple brand, but Coca-Cola is reporting the strongest volume growth in this category. Coca Cola's Gold Peak and Honest Tea brands reported volume growth of 10%, and by comparison, PepsiCo reported that non-carbonated beverage volume was actually down 2%, and Snapple's volume was up just 4%. Coca-Cola is also debuting a bottled "herbal tea" drink in Thailand named Habu.

Coca-Cola is the leader in both sparkling and still beverages and has the highest gross margin of the group. Coca-Cola trades with a 21 P/E, which is a premium to the industry, as well as the S&P 500 Index (NYSEARCA:SPY), but being the most powerful brand in the world allows the company to perform in any economic environment. That does not mean the stock is a buy. In fact, according to the real time report offered here, long-term support has just broken lower, which raised sell/short signals. As long as the stock remains below long-term support, we expect shares to trade lower.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation fromt he publicly traded companies listed herein for writing this article.