In this article, I have evaluated prominent beverage stocks, PepsiCo, Inc. (PEP) and National Beverage Corp. (FIZZ), to assess which stock is the better pick for Q4. After thoroughly evaluating these stocks, I think PEP is the right choice for the reasons discussed in this article.
The rise in disposable income, especially in developing economies, and shifting consumer preferences towards ready-to-drink beverages are key factors propelling the beverage market. Furthermore, rising per capita consumption of beverages and consumer preferences for premium products will likely fuel market expansion.
The global beverage market is expected to reach a market size of $1.99 trillion in 2028.
Moreover, plant-based beverages have been gaining popularity, boosted by the rise in the number of people allergic to dairy. Furthermore, growth in health awareness and the introduction of additional healthy ingredients by different market players fuel the growth of the plant-based beverage market.
The plant-based beverage market is estimated to reach $22.45 billion by 2026, growing at a CAGR of 6.7% until 2026.
PEP has gained marginally over the past month as compared to FIZZ’s marginal decline, whereas PEP declined 8.3% over the past year compared to FIZZ’s marginal decline.
However, here are the reasons why I think PEP might perform better in the near term:
Recent Developments
On November 21, 2023, PEP announced the third year of its global agriculture program, the Positive Agriculture Outcomes (PAO) Accelerator, by backing eight new innovation projects across nine countries. PEP's continued investment aims to address some of the most urgent challenges facing agriculture today, while moving the company's pep+ (PepsiCo Positive) agenda forward.
Conversely, during the recent quarter, FIZZ revealed the launch of two new flavors, Mojito and Sunshine. This launch would be two new additions to the LaCroix sparkling water family in the coming months.
Recent Financial Results
PEP’s net revenue increased 6.7% year-over-year to $23.45 billion in the fiscal third quarter that ended September 9, 2023. Its non-GAAP gross profit grew 8.8% from the year-ago quarter to $12.77 billion, while its non-GAAP operating profit increased 12.1% year-over-year to $4.03 billion. Also, the company’s non-GAAP attributable net income came in at $3.11 billion and $2.25 per share, up 13.7% and 14.2% year-over-year, respectively.
On the contrary, FIZZ’s net sales for the fiscal first quarter that ended July 29, 2023, increased 1.9% year-over-year to $324.24 million. Its net income rose 40% year-over-year $49.63 million. Moreover, the company’s earnings per share rose 39.5% year-over-year to $0.53.
Past And Expected Financial Performance
PEP’s revenue has increased at a CAGR of 9.5% over the past year. Its revenue is expected to increase 6.7% in the current year ending December and 1.5% in the fourth quarter ending December 2023. Its EPS is expected to gain 11.3% this year and 3% in the fourth quarter ending December 2023.
Conversely, FIZZ’s revenue has increased at a CAGR of 3% over the past year. Its revenue is expected to increase 1.8% this year and 2% in the second quarter ended October 2023. Its EPS is expected to gain 21.9% this year, 21.2% in the second quarter ended October 2023 and 8.2% in the third quarter ending January 2024.
Valuation
PEP’s forward EV/EBITDA multiple of 16.64 is lower than FIZZ’s 18.34. PEP’s forward non-GAAP P/E multiple of 22.23x is lower than FIZZ’s 26.44x.
Thus, PEP is more affordable.
Profitability
PEP's trailing-12-month gross profit margin of 54.03% is higher than FIZZ’s 34.93%. In addition, PEP’s trailing-12-month CAPEX/Sales of 5.66% is higher than FIZZ’s 2.11%.
Thus, PEP is more profitable.
POWR Ratings
PEP has an overall rating of B, translating to a Buy, in our proprietary POWR Ratings system. Conversely, FIZZ has an overall rating of C, which equates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PEP has a has a B in Sentiment in sync with its favorable analyst estimates. On the other hand, PEP has a C grade for Sentiment consistent with mixed analyst estimates.
Among the 35 stocks in the B-rated Beverages industry, PEP is ranked #12, while FIZZ is ranked #16.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Growth, Momentum, Value, and Quality. Get all PEP ratings here. Click here to view FIZZ ratings.
The Winner
Rising health consciousness and the growing prevalence of lifestyle diseases encouraged consumers to choose healthy drinks. Furthermore, the beverage market is witnessing an increased demand for low-alcohol-by-volume beverages, specifically among millennials and baby boomers. Industry players such as PEP and FIZZ are well-positioned to benefit from these industry tailwinds.
However, FIZZ's poor profitability and higher valuation makes its competitor PEP the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Beverages industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PEP shares were trading at $167.21 per share on Wednesday afternoon, down $0.73 (-0.43%). Year-to-date, PEP has declined -4.79%, versus a 20.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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