Transformations in lifestyles, evolving consumer preferences, and impressive technological advancements in production processes catalyze significant growth of the beverage industry.

My analysis suggests that PepsiCo, Inc. (PEP) and Coca-Cola Consolidated, Inc. (COKE) are strong candidates to invest in. Conversely, waiting for a better entry point in Anheuser-Busch InBev SA/NV (BUD) could be wise.

Before delving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the industry’s prospects.

The U.S. government’s rating downgrade from AAA to AA+ by Fitch and Moody's credit rating downgrades for several American banks have curbed investor enthusiasm and triggered a fresh bout of market volatility.

However, consumer defensive stocks continue to showcase resilience, maintaining solid performance despite fluctuations in the broader economy. Beverage firms enjoy inelastic product demand and generate stable revenues amid market downturns.

Moreover, consumers are broadening their horizons, gravitating toward products that promote health and safety. There is a surge in global awareness concerning the detrimental effects of excessive sugar consumption.

Consumer attitudes toward sugar consumption and the rising prevalence of diseases such as diabetes and obesity will likely catalyze the expansion of the global zero-sugar beverage market. Future Market Insights expects the sector to grow at a 14.7% CAGR by 2033.

Beverage firms have responded proficiently to these changing consumer preferences. Incorporating sustainable choices and healthier options into their product lines, such as launching reduced sugar content products and enhanced functionality, are driving the growth of the functional beverages sector.

Moreover, adopting industry 4.0 technologies like the Internet of Things (IoT), AI, big data, advanced analytics, and robotics drives significant improvements across every phase of beverage production, from sourcing and manufacturing to product distribution and sales.

The technological injection promises considerable long-term expansion for the beverage industry. The growth of the global beverages market is projected to reach $4.39 trillion by 2027, growing at a 4.7% CAGR.

Given this backdrop, fundamentally strong beverage stocks PEP and COKE could be solid portfolio additions. However, it could be wise to hold BUD.

Stocks to Buy:

PepsiCo, Inc. (PEP)

PEP manufactures, markets, distributes, and sells beverages and convenient foods worldwide. It has seven operating segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia, and New Zealand; and China Region.

On July 20, PEP declared a quarterly dividend of $1.265 per share of its common stock, payable to shareholders on September 29, 2023. This is a 10% uptick from the prior-year period. PEP has paid quarterly cash dividends consistently since 1965, and 2023 marked the company's 51st annual dividend increase.

PEP pays a dividend of $5.00 per share annually, translating to a 2.79% yield on the current price. Its dividends have grown at 6.6% and 7.1% CAGRs over the past three and five years, respectively. Its four-year average dividend yield is 2.71%.

PEP’s trailing-12-month levered FCF margin of 5.95% is 75.1% higher than the 3.40% industry average, while its trailing-12-month EBIT and EBITDA margins of 14.07% and 17.08% are 95.9% and 60.9% higher than the industry averages of 7.18% and 10.61%, respectively.

PEP’s revenue grew at CAGRs of 10% and 7% over the past three and five years, respectively. Its EBITDA and levered free cash flow grew at 7.7% and 2% CAGRs, respectively, over the past three years.

PEP’s net revenue increased 10.4% year-over-year to $22.32 billion in the fiscal second quarter that ended June 17, 2023. Its non-GAAP gross profit grew 13.1% from the year-ago value to $12.20 billion, while its non-GAAP operating profit increased 13.2% year-over-year to $3.86 billion.

Also, the company’s non-GAAP attributable net income came in at $2.89 billion and $2.09 per share, up 12% and 12.4% year-over-year, respectively. As of June 17, 2023, PEP’s total current assets stood at $24.95 billion, compared to $21.54 billion as of December 31, 2022.

Street expects PEP’s revenue and EPS for the fiscal third quarter ending September 2023 to increase 6.6% and 8.8% year-over-year to $23.42 billion and $2.14, respectively. Moreover, the company surpassed the EPS and revenue estimates in each of the trailing four quarters, which is promising.

The stock has gained 1.2% over the past six months to close the last trading session at $178.45.

PEP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PEP is rated an A for Quality and a B for Stability. Among the 37 stocks in the A-rated Beverages industry, it is ranked #14.

To see additional POWR Ratings for Growth, Value, Momentum, and Sentiment for PEP, click here.

Coca-Cola Consolidated, Inc. (COKE)

COKE manufactures, markets, and distributes nonalcoholic drinks. Its diverse range includes sparkling and still beverages, sold directly at various outlets like grocery, mass merchandise, convenience stores, restaurants, schools, amusement parks, and vending machines.

COKE’s trailing-12-month gross profit margin of 38.65% is 18.7% higher than the 32.57% industry average. Its trailing-12-month ROCE, ROTC, and ROTA of 41.87%, 25.55%, and 11.96% are 272.5%, 293.1%, and 180.9% higher than the industry averages of 11.24%, 6.50%, and 4.26%, respectively.

COKE’s revenue grew at CAGRs of 10.3% and 7.5% over the past three and five years, respectively. Its EBITDA and levered free cash flow grew at 37.5% and 28.8% CAGRs, respectively, over the past three years.

During the fiscal second quarter that ended June 30, 2023, COKE’s net sales stood at $1.74 billion, up 9% year-over-year, while its non-GAAP gross profit grew 19.3% year-over-year to $673.15 million. Its non-GAAP income from operations rose 47.1% from the year-ago value to $235.47 million.

In addition, the company’s non-GAAP net income and non-GAAP net income per share grew 54% year-over-year to $172.83 million and $18.43, respectively. Moreover, as of June 30, 2023, COKE’s total current assets stood at 1.55 billion, compared to $1.25 billion as of December 31, 2022.

The stock has gained 34.7% year-to-date, closing the last trading session at $689.88. Over the past six months, it gained 30.1%.

COKE’s solid outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

COKE has an A grade for Quality and a B for Growth, Value, Stability, and Sentiment. It is ranked #2 within the Beverages industry.

Click here to access the additional COKE ratings (Momentum).

Stock to Hold:

Anheuser-Busch InBev SA/NV (BUD)

Headquartered in Leuven, Belgium, centuries-old BUD produces, distributes, and sells beer, alcoholic beverages, and soft drinks worldwide. It offers a portfolio of approximately 500 beer brands.

BUD’s trailing-12-month EBIT and levered FCF margins of 24.33% and 11.84% are 238.8% and 248.5% higher than the industry averages of 7.18% and 3.40%, respectively. Its trailing-12-month ROCE and ROTA of 8.39% and 2.89% are 25.3% and 32.1% lower than the industry averages of 11.24% and 4.26%, respectively.

BUD’s revenue grew at CAGRs of 7.3% and 0.9% over the past three and five years, respectively. Its EBITDA and levered free cash flow declined at 4.8% and 13.8% CAGRs, respectively, over the past five years.

Its forward EV/EBITDA of 9.45x is 16.9% lower than the industry average of 11.38x, while its forward Price/Sales multiple of 1.78 is 67% higher than the industry average of 1.07.

For the fiscal second quarter that ended June 30, 2023, BUD’s revenue stood at $15.12 billion, up 2.2% year-over-year, while its gross profit grew 1.3% from the prior-year quarter to $8.10 billion.

The company’s normalized EBITDA stood at $4.91 billion, down 3.7% from the year-ago quarter. Underlying profit attributable to equity holders of BUD and earnings per share declined 1.1% and 1.4% year-over-year to $1.45 billion and $0.72, respectively.

Analysts expect BUD’s revenue and EPS to increase 8% and 8.1% year-over-year to $16.30 billion and $0.88, respectively, for the fiscal third quarter (ending September 2023). It surpassed the consensus EPS estimates in each of the trailing four quarters but failed to surpass the consensus revenue estimates in three of the trailing four quarters.

BUD’s shares have gained marginally intraday to close its last trading day at $55.39. Over the past month, it has lost 3.8%.

BUD’s POWR Ratings reflect its outlook. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.

It has a C grade for Value and Quality. It is ranked #15 within the same industry.

In addition to what we highlighted above, one can see the other ratings of BUD for Growth, Momentum, Sentiment, and Stability here.

43 Year Investment Pro Shares Top Picks

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PEP shares rose $0.07 (+0.04%) in premarket trading Friday. Year-to-date, PEP has gained 0.14%, versus a 14.94% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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