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by Robert Gordon

In good times and bad, in summer and winter, the large non-alcoholic beverage makers remain iconic with American culture. These companies tend to be well-established, very well-capitalized, and treat their investors well. There are also numerous, smaller beverage makers, with less defined prospects but with speculative appeal. I will analyze both types of companies in this space, and as always, look at past performance and current balance sheets as probable views into their futures. In this article I will take a look at four large beverage companies, and take a more careful look at Cott Corp. (NYSE:COT), the leading maker of private label soft drinks seen at grocers nationally.

A table will concisely cover the numbers of the four leading non-alcoholic beverage companies in the United States: Coca Cola Company (NYSE:KO), Pepsico (NYSE:PEP), and Dr. Pepper Snapple Group (NYSE:DPS), along with large niche beverage company Hansen Natural Corporation (HANS).

Ticker

Price; P/E

Market Cap $ billions

Quarterly dividend; Yield

12 month trailing Gross Margin%

12 month trailing Operating Margin %

12 month trailing return on equity %

Debt / capital %

Third quarter 2011 year to year revenue growth %

KO

$70; 12.8

158.9

$0.47; 2.7%

60.7

22

27

31

45.4

PEP

$60; 16.6

103.8

$0.51; 3.1%

53.2

15.7

29

48

13.3

DPS

$40; 16.2

8.6

$0.32; 3.3%

58.4

17.4

23

48

4.9

HANS

$35; 32.8

8.3

nil

52.4

26.8

32

0

24.4

Coca-Cola's stunning revenue increase is the result of its $12.2 billion purchase of Coca Cola Enterprises (NYSE:CCE), Coca-Cola's largest bottling company's North American operation in 2010. It was the largest purchase in KO's plan to acquire its bottlers to achieve cost synergies. That is especially true in North America, where soda sales have been in decline for some time.

KO raised its dividend in February, 2011, for the 49th consecutive year. With its low debt levels, high profitability, and powerful momentum, KO is a buy and hold stock for nearly any investor.

Hansen Natural

Hansen is a California company with a history of making fresh juices, but more recently, it is a holding company that owns brands of nutritional and energy drinks. Its largest brand is Monster, which is available nationally. It also owns the Blue Sky series of natural sodas, along with a wide variety of carbonated and non carbonated beverages under the Hansen Natural brand.

Over the past five years, Hansen has averaged 43% net income increases. Hansen carries no long term debt, and has over $700 million of cash equivalents on its balance sheet. With a clean balance sheet, and excellent growth, what is not to like? First, the stock's valuation, as I believe future profit increases are already reflected in the price. Also, with much of the company tied into its Monster subsidiary, there appears to be a slackening of growth in the energy drink sector. I would be interested in Hansen at a lower valuation multiple. And in a few years, I may regret not buying it at today's level. It is possible that the company grows into its rich valuation. However, I believe it is overpriced right now.

Pepsico

Pepsi led Coca-Cola to the idea of purchasing back its bottling operations in order to allow the syrup manufacturing company to wring synergies from the entire operation. In 2009, Pepsi spent nearly 8 billion acquiring its two largest domestic bottlers. It expects the consolidation will reduce costs as much as $300 million per year.

While not quite the financial behemoth that Coca-Cola is, Pepsi is no slouch. Its 2011 dividend increase marked 39 years of increases. And earlier this year, it announced its intention not to spin off its mammoth Frito Lay snack food division,. Pepsi also stated its goal is to have 30% of its products sold be “healthy”, as opposed to the current 22% level.

Why is Pepsi selling at a premium to KO based on P/E? Pepsi has averaged 10% profit growth in recent years, and I expect that to roughly continue over the next three to five. I am unconcerned about its debt level, for, while it is high, the interest on the debt is covered over 20-fold. I like the stock at this valuation, though not quite as much as Coca-Cola.

Dr. Pepper Snapple

DPS was formed from the spinoff by the former Cadbury Schweppes PLC in 2008. DPS now holds over 50 brand names-- everything from the names in its title, to Motts applesauce. Its recent growth in revenues, profits, and dividends has been most impressive. Unfortunately, the growth cannot last. DPS was provided with cash as compensation when many of its bottlers realigned with KO and Pepsi. This money was part of DPS's working capital, which flowed down the income statement as free cash flow. This element of cash flow is now muted, and free cash flow is likely to decline in coming years.

I love DPS' product line up. I don't like that its revenue growth rate trails Coca-Cola and Pepsi over the past few years. I also don't like that the mean analyst rating is a dull and neutral 2.7. With companies like KO and PEP to choose between, DPS is clearly a step behind.

Cott

Cott is actually a Canadian company, but over two thirds of its sales are in the United States. It was trading recently at a little over $6 per share, near the low end of its 52 week range of from $9.08 to $5.94. It has a market capitalization of just over $600 million, and has a P/E of 9.4. It does not pay a dividend.

Historically, some thirty to thirty five percent of Cott's business is to Wal-Mart Stores, Inc. (NYSE:WMT). WMT is well known for both pressuring low prices from its private label suppliers, as well as brand name product manufacturers. It also has used branded products from Coca-Cola and Pepsi as loss leaders, eroding Cott's ability to compete and maintain any margin.

More recently, the company has turned to growth. In 2010, Cott bought private label juice maker Cliftstar. That purchase nearly tripled Cott's long term debt, which now accounts for about 50% of capital. Cott's relatively small size also leaves it that much more exposed to commodity costs such as PET plastic resin, sugar, and corn syrup. Its gross and operating margins (12.7% and 5.16%, respectively) are very low relative to the other beverage companies. Cott has a low enough valuation to foresee the stock price doubling or better in the next three to five years, if everything goes right. With Cott's high debt and lack of flexibility, that is unlikely to occur. I would rather have the safety and predictability of Coca-Cola and Pepsi.

Source: 2 Best Soda Companies To Buy Now, 3 To Avoid