Over the years, soft drinks have been a good way to get rich. Most famously, Coca-Cola has been a key driver of the above-market returns posted by Warren Buffett’s Berkshire Hathaway.
Berkshire first bought Coca-Cola stock in 1988; the company currently receives dividends totaling more than 60% of its original cost basis every single year. Going back to the late 1960s, PepsiCo has actually been the better stock: since the beginning of 1968, it has returned 78,000% including dividends (turning $10,000 into $7.8 million), while Coke shareholders have”‘only” made just shy of 50,000%.
Focusing on the last ten years or so, the performance of the group has been solid, if not quite as impressive. Pepsi and Coke have gained, as has Keurig Dr Pepper since it was created by a 2018 merger. But over the past decade, none of those stocks have beaten the market as a whole.
In context, that’s not necessarily a bad thing: safer names like beverage plays should lag in a bull market, because they are likely to hold up when and if investors get nervous. (Coca-Cola stock, for instance, was up modestly across 2008-09, while the Standard & Poor’s 500 index dropped by roughly 20%.) Bottler Coca-Cola Consolidated (which, somewhat confusingly, trades under the ticker ‘COKE’; Coca-Cola is ‘KO’) has been the outlier in the space, rising eightfold over the past decade and putting up a 28x over the last twenty years.
More recently, though, there are some signs in the market that the beverage industry might be entering a new phase. Pepsi stock has fallen off the table, dropping to a four-year low, even if admittedly the larger snacks business is driving investor concern there. Keurig Dr Pepper stock is down 4.5% over the past year even with Dr Pepper passing Pepsi as the number two soda in America. Shares of Coca-Cola Consolidated, the bottler, have fallen 24% in a matter of months, thanks to a disappointing first quarter release.
To be sure, it’s far too early to panic, particularly because Coca-Cola stock keeps marching along. And of course the external environment has played a role, with tariffs and the rise of GLP-1 weight loss drugs likely affecting investor sentiment.
But at the same time, one metric does suggest that investors see the mid- to long-term look as less positive than they did: the profit multiple assigned stocks in the sector. Relative to Wall Street estimates for EBITDA (earnings before interest, taxes, depreciation and amortization), even Coca-Cola stock sits in the middle of a six-year range. Shares in KDP are near their lowest multiple since the 2018 merger; COKE too is closer to the lows than the highs. PepsiCo’s stock is near a four-year low, but its valuation is at a six-year low.
And what’s interesting about the lower multiples is that profit growth hasn’t yet completely stalled out. Adjusted operating profit for both Coca-Cola and KDP was up 4% year-over-year in the first quarter. Pepsi’s beverage division posted an ugly report, and Coca-Cola Consolidated was weak, but for both of those businesses long-term performance remains relatively solid.
The question for the sector is whether that first quarter performance is something of a blip in a highly volatile environment – or the first step in a change in the long-term outlook. Clearly, some investors are leaning toward the latter explanation, and with some reason.
As we noted in March, Pepsi’s decision to acquire Poppi seems an admission that the core soft drink business may finally have legitimate internal competition. There’s no obvious reason why soft drinks will be immune to the GLP-1 concerns buffeting PepsiCo’s snack business and Smucker’s Hostess division.
The MAHA (Make America Healthy Again) movement has taken aim at the beverage category as well, looking to prevent SNAP benefits from being used for sodas and other sugary snacks.
In that context, it’s not surprising that investors have become more cautious. It remains to be seen whether that caution is warranted, or just a pause before the industry resumes its long-term upward march.
About the author: Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. He has no positions in any companies mentioned.
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