Soda Stocks: What to Watch in 2017

By Markets Fool.com

If you invested in soda stocks this year hoping for high returns, odds are that your thirst for gains went unquenched. With just a few weeks left in 2016, the biggest names in the industry, including PepsiCo (NYSE: PEP), Dr Pepper Snapple (NYSE: DPS), and Coca-Cola (NYSE: KO), are all trailing the broader market.

Continue Reading Below

Even past growth stories like National Beverage (NASDAQ: FIZZ) and Monster Beverage (NASDAQ: MNST) failed to produce significant gains. In fact, eye-popping growth was confined to SodaStream (NASDAQ: SODA), the soda-machine maker whose stock doubled as it turned the business away from soda and focused on sparkling water.

FIZZ data by YCharts.

More sparkle

Sparkling water promises to remain an important trend for the year ahead, and that tailwind should keep SodaStream in the news well into 2017. The company counts itself as the world's largest fizzy-water brand by volume, with 350 millionliters of at-home production last quarter alone. Most of its recent stock-price gains came from a dramatic business turnaround, though. SodaStream began the year posting double-digit declines in soda-machine sales but has since managed over 30% growth in each of the last two quarters.

Continue Reading Below

Image source: Getty Images.

National Beverage is the company behind the LaCroix sparkling water brand, and is also worth putting on your 2017 watch list. Its volume growth this past year accelerated to a 9% pace from the prior year's 1% uptick. By pairing those higher sales with rising average prices, CEO Nick Caporella and his executive team posted a 25% spike in net income. Whereas SodaStream's core challenge is to convince a growing number of households to produce their own sparkling water, National Beverage needs to constantly refresh its portfolio with flavors and package sizes that resonate with consumers.

Less sugar

A growing segment of beverage shoppers is rejecting sugar as a key ingredient in their drinks, and the two soda giants, Coca-Cola and Pepsi, are racing to catch up. Coke's new Coca-Cola Zero Sugar brand, for example, posted double-digit volume growth last quarter in the key U.K. market compared to the Coca-Cola Zero product sold earlier. "We know that consumers are looking for less sugar," executive James Quincey recently explained to investors.

Image source: Getty Images.

Similarly, Pepsi is seeing strong demand for its Naked lineup that management attributes to the fact that it has no added sugars or preservatives. The company is now working to apply those lessons across its portfolio. "We are making strides to reduce added sugars in our beverages through reformulation," CEO Indra Nooyi said in late September.

A fundamental shift in customer attitudes away from sweet drinks and their traditional diet alternatives has so far left the incumbent soda giants at a loss. Their success at responding to the change with portfolio shifts in 2017 could make the difference between fast overall volume gains or another year of near-zero organic growth.

Greater energy

Monster Beverage is another stock to watch for caffeinated growth in 2017. After all, its energy-drink-fueled business has been on a tear lately, with volume up 17% over the last nine months. And, thanks to its distribution deal with Coca-Cola, Monster is squeezing more earnings from those sales. Net profit margin has soared to 24% of sales from 20%, compared with Coke's 17%, Pepsi's 11%, and SodaStream's 7%.

Of course, Monster is a far more expensive stock right now. You'll have to pay 34 times projected earnings to own a piece of this business, compared with 29 times for National Beverage and around 20 times profit for most other industry participants. Still, that sky-high valuation is down from the 44 P/E that investors were paying as recently as last summer. And if Monster continues to post market-beating sales growth while improving its profit margin, a year from now investors could look back at today's prices as representing some of the best value among soda stocks.

Forget the 2016 Election: 10 stocks we like better than Monster Beverage
Donald Trump was just elected president, and volatility is up. But here's why you should ignore the election:

Investing geniuses Tom and David Gardner have spent a long time beating the market no matter who's in the White House. In fact, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Monster Beverage wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage and PepsiCo. The Motley Fool owns shares of SodaStream. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.