Beverage companies set to bottle higher earnings

June 22, 1994|By Andrew Leckey | Andrew Leckey,1994 Tribune Media Services Inc.

"What'll it be?"

The thirst-quenching response this summer increasingly will be tea, juice drinks, water or sport drinks.

So-called "new age" choices, 10 percent of the beverage market, are growing at a dramatic clip. One personal observation: I recently visited the home of some friends who offered up four different types of liquid refreshment from their refrigerator, all of them Snapple Beverage teas and juice drinks.

Carbonated soft drinks, despite international growth in new markets, aren't as popular with health-conscious Americans as they once were. That's why the giant companies that make them have embraced the trendy drink category dominated by smaller firms. Coca-Cola Co., for instance, is featuring Nestea, PowerAde, Minute Maid Juices to Go and Fruitopia beverages.

Consumption of alcoholic beverages is losing steam. Sales segments such as beer remain relatively flat in this country, with little or no export potential, and only a few U.S. brown spirits products, such as Jim Beam and Jack Daniels, make much impact overseas.

All this change is daunting to would-be investors in beverage stocks. Yet tracking major industry trends -- "new age" popularity, international growth and competitive marketing efforts -- can provide positive results. Beverage companies appear poised for strong earnings growth.

"As consumers seek alternatives, there's a flood of new products from Coca-Cola and PepsiCo, though Snapple's ability to continue its 100 percent sales gains in fruit drinks and 60 percent sales gains in tea will still be a key factor," observed June Page, analyst with Bear Stearns. "The time to invest is in a period prior to an acceleration in volume, and now's that time."

International markets are vital.

"Just consider that the vast new markets such as China, India, Eastern Europe, the former Soviet Union and Mexico offer 4 billion potential consumers," said Roy Burry, analyst with Kidder Peabody. "The U.S. 'owns' the soft-drink market, and, with so many more countries now accessible, is able to walk in and take over."

There's disagreement about how to best benefit from all this. For example, Joseph Doyle, analyst with Smith Barney Shearson, emphasizes large multinational beverage companies, while Howard Penne, analyst with Morgan Stanley, sticks with domestically oriented firms that are on top of the latest taste trends.

Snapple Beverage, favorably positioned with a respected product, is a pick of both Burry and Penne. It benefits from having the Snapple name on all its beverages, so it doesn't have to foot enormous start-up costs as big soft-drink companies must when they introduce products with entirely new names. Expect its tremendous growth to continue for a while.

Coca-Cola Co., which derives more than 80 percent of earnings from outside the United States, is recommended by Burry, Doyle and Page. Sixteen to 20 percent annual growth is predicted. Coke dwarfs rival PepsiCo Inc. on the international scene and should benefit when Japanese and European economies revive. It has protected itself from the domestic market penetration of new-age beverages through product introductions. Its marketing is outstanding, with commercials that leave television viewers humming catchy jingles or admiring such creations as the animated polar bears that made their debut during Winter Olympics telecasts.

Among alcoholic beverage companies, Seagram Co. is suggested by Burry, but not simply for liquor offerings. The firm's Tropicana juice brand is offering numerous new drinks, and the company has acquired worldwide rights to Absolut Vodka. In a different vein, it owns 25 percent of Du Pont, whose chemical business is undergoing recovery.

Canandaigua Wine Co., which has tripled in size since 1991 and recently bought wine company Vintner's, is a Page selection. It is strong financially and its stock is inexpensive.

Cott Corp., maker of house-brand soft drinks for retail firms; Celestial Seasonings, dominant in herbal teas; and Dr. Pepper/Seven Up Cos., a niche firm whose Welch's products are booming, are Penne choices.

PepsiCo, an inexpensive stock offering value, is recommended by Page. The stock was hit hard after the company said it expected no profit growth in its second quarter because of soft-drink price wars and reduced restaurant results.

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