3 Soda Stocks You May Be Overlooking

Markets Motley Fool

Soda giants Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) have produced solid returns for investors this year that roughly track those of the broader market. But thanks in part to their massive size, these beverage titans have a limited growth outlook that relies heavily on capital returns.

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Below, we'll look at three smaller industry rivals -- SodaStream (NASDAQ: SODA), Dr Pepper Snapple (NYSE: DPS), and National Beverage (NASDAQ: FIZZ) -- that might generate stronger gains due to their wider market opportunities.

1. National Beverage

National Beverage is the company behind the blockbuster La Croix sparkling water franchise. It trounced the market last year but has gone on to more than double since the start of 2017.

Investors have good reasons to feel optimistic about this business. With its portfolio anchored on non-traditional soda beverages like sparkling water and energy drinks, volume jumped 9% last year. Coke, in contrast, saw just a 1% volume uptick.

National Beverage paired that market-thumping growth with rising prices, which has allowed its operating margin to almost double since 2015 to recently pass Coke's 20% result.

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National Beverage can't earn its premium valuation on just the La Croix brand, though. That's why management is pouring resources into building out distribution of its Shasta franchise today. Together, the two brands hope to soak up far more than their fair share of a sparkling water market that's growing much faster than cola drinks.

2. Dr Pepper Snapple

For a more conservative -- but still attractive -- choice, consider Dr Pepper Snapple. This business is enjoying solid growth today, with volume up 4% in the most recent quarter thanks to a powerful marketing message that's helped spark a resurgence in the 88-year old 7UP franchise. Management is hoping to extend that success into its other core brands over the coming quarters.

Like Pepsi did with its 2016 purchase of the KeVita portfolio, Dr Pepper is betting big on acquisitions to accelerate its growth, spending almost $2 billion to add Bai Brands to its holdings. Management has cautioned investors that the acquisition should hurt profits over the short term as they invest in building up Bai's base of loyal drinkers. Yet executives are excited about the long-term potential, given that the franchise could grow to 10% or more of the total business over time.

3. SodaStream

At-home beverage machine maker SodaStream has been on a tear as its operating results rebound from a disastrous 2015 fiscal year. CEO Daniel Birnbaum and his team used that crisis to drive several fundamental improvements to the business, including shifting the brand focus away from soda and driving costs far lower.

As a result, not only are sales rising again -- revenue rose 10% last quarter -- but profits are soaring. The company generated $29 million of net income over the last six months, or more than it made in fiscal 2015 and 2014, combined.

SodaStream is heading into what's traditionally a risky period for the business as retailers stock up on the products they think will resonate with their shoppers over the holiday season. A weak showing for its newest carbonation machines could put an abrupt end to its recovery.

On the other hand, a growing customer base and rising machine prices suggest its products could prove popular as consumers continue shifting their spending away from the traditional cola drinks that helped Pepsi and Coca Cola build globally dominant businesses.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of SodaStream. The Motley Fool recommends PepsiCo. The Motley Fool has a disclosure policy.