The stock market faced several macroeconomic and geopolitical challenges in 2022, including inflation rising to a 40-year high. However, inflation eased for the sixth consecutive month in December, with the Consumer Price Index (CPI) rising 6.5% year-over-year and declining 0.1% sequentially.

Although inflation is showing signs of easing, minutes from the Fed’s December policy meeting show that the Fed will continue with interest rate hikes until it brings inflation down to its desired level. This is expected to push the economy into a recession this year.

The beverage industry is usually unaffected by economic turmoil as beverages usually enjoy inelastic demand. The sector consists of established brands, making it difficult for new competitors to enter the market, helping them maintain margins consistently.

With changing trends and consumer tastes, beverage manufacturers are innovating their product mix to cater to consumers. Moreover, beverage companies are coming up with healthy beverages for the growing health-conscious population, driving further growth.

According to Statista, the U.S. beverages segment revenue is expected to reach $88.77 billion by 2023, growing at a CAGR of 28.9%.

Given this backdrop, it could be wise for investors to buy fundamentally strong beverage stocks The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), and Ambev S.A. (ABEV).

The Coca-Cola Company (KO)

Famous beverage company KO manufactures, markets, and sells various non-alcoholic beverages. The company provides sparkling soft drinks; flavored and enhanced water and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks.

In terms of trailing-12-month gross profit margin, KO’s 58.49% is 86.5% higher than the 31.37% industry average. Its 28.90% trailing-12-month EBIT margin is 271% higher than the industry average of 7.79%. Likewise, its 44.13% trailing-12-month ROCE is 323.1% higher than the industry average of 10.43%.

KO’s non-GAAP net operating revenues increased 10% year-over-year to $ 11.06 billion for the third quarter that ended September 30, 2022. Its non-GAAP gross profit increased 6.5% year-over-year to $6.54 billion.

The company’s non-GAAP net income increased 6.7% year-over-year to $3.01 billion. In addition, its non-GAAP EPS came in at $0.69, representing a 6.2% increase from the prior-year quarter. 

KO’s revenue for the quarter that ended December 31, 2022, is expected to increase 4.4% year-over-year to $9.89 billion. Its EPS for the quarter ending June 30, 2023, is expected to increase 1.8% year-over-year to $0.71.

The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has fallen 0.2% to close the last trading session at $60.64. 

KO’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. 

Within the A-rated Beverages industry, it is ranked #16 out of 36 stocks. The company has an A grade for Sentiment and a B for Stability and Quality. Click here to see the additional POWR Ratings of KO for Growth, Value, and Momentum. 

PepsiCo, Inc. (PEP)

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

In terms of the trailing-12-month gross profit margin, PEP’s 53.24% is 69.7% higher than the 31.37% industry average. Its 18.12% trailing-12-month EBITDA margin is 62.7% higher than the 11.14% industry average. Likewise, its 8.48% trailing-12-month levered FCF margin is 200% higher than the industry average of 2.83%.

For the fiscal third quarter that ended September 3, 2022, PEP’s net revenue increased 8.8% year-over-year to $21.97 billion. The company’s non-GAAP gross profit increased 8.4% from the year-ago period to $11.73 billion, while its non-GAAP operating profit increased 11% year-over-year to $3.59 billion.

Non-GAAP net income attributable to PEP increased 10.1% year-over-year to $2.73 billion. In addition, its adjusted EPS came in at $1.97, representing a 10% increase from the prior-year quarter.

Analysts expect PEP’s EPS and revenue for the quarter that ended December 31, 2022, to increase 7.8% and 6.2% year-over-year to $1.65 and $26.82 billion, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has fallen 1.3% to close the last trading session at $169.48. 

PEP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It is ranked #7 in the same industry. It has an A grade for Quality and a B for Growth, Stability, and Sentiment. 

We have also given PEP grades for Value and Momentum. Get all PEP ratings here. 

Ambev S.A. (ABEV)

Headquartered in Sao Paulo, Brazil, ABEV produces, distributes, and sells beer, draft beer, carbonated soft drinks, other non-alcoholic beverages, malt, and food products. The company operates through four segments: Brazil; Central America and the Caribbean; Latin America South; and Canada.

In terms of the trailing-12-month gross profit margin, ABEV’s 49.47% is 57.7% higher than the 31.37% industry average. Its 27.08% trailing-12-month EBITDA margin is 143.1% higher than the 11.14% industry average. Likewise, its 16.57% trailing-12-month net income margin is 302.5% higher than the industry average of 4.12%.

For the fiscal third quarter that ended September 30, 2022, ABEV’s net revenue increased 11.3% year-over-year to R$20.59 billion ($4.03 billion). The company’s gross profit increased 7.6% from the prior-year quarter to R$9.94 billion ($1.94 billion). In addition, its normalized EBITDA increased 2.4% year-over-year to R$5.60 billion ($1.09 billion).

Analysts expect ABEV’s revenue for the quarter that ended December 31, 2022, to increase 7.2% year-over-year to $4.61 billion. Its EPS for the fiscal year 2023 is expected to increase 1.4% year-over-year to $0.16.

It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has fallen 3.7% to close the last trading session at $2.62.

ABEV’s POWR Ratings reflect this positive outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system. It is ranked #14 in the Beverages industry. It has a B grade for Sentiment and Quality.  

In total, we rate ABEV on eight different levels. Beyond what we stated above, we have also given ABEV grades for Growth, Value, Momentum, and Stability. Get all ABEV ratings here. 

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KO shares were trading at $60.68 per share on Tuesday morning, up $0.04 (+0.07%). Year-to-date, KO has declined -4.61%, versus a 5.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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