Looking for a secular sector that will always have demand? Look no further than beverage stocks.
No matter how the economy is doing, people still need to drink. However, the sector has been under pressure the last few years as consumers tastes have shifted to healthier and more natural beverages. And past that, competition has ramped up in the last several years, with brands fighting it out in the grocery aisle alongside dozes of other choices.
But this pressure of recent years has forced beverage companies to get better or get out, and these two companies in particular look ready to make a comeback now.
Coca-Cola (NYSE: KO)
Of all the beverage stocks, Coca-Cola (NYSE: KO) is unparalleled in terms of brand recognition and cultural impact. The company has had a rough few years in the court of public opinion though as younger consumers shifted toward healthier beverage options.
With annual sales in decline since 2012, Coca-Cola is making some big changes to find new areas of growth in an environment where consumer tastes have changed. In an effort to court younger customers back to the brand, KO gave Diet Coke a major rebrand with sleek new packaging and vibrant new flavors. KO also incorporated new, healthier beverages into its lineup, including Honest Tea, and FUZE TEA.
And just this morning, it was announced that Coca-Cola was making a bold move into coffee and retail outlets with a $5.1 billion purchase of the U.K. chain Costa, it’s first foray into the competitive coffee market and its biggest acquisition in eight years.
The deal gives Coca-Cola 3,800 stores in 32 countries, including a foothold in China. Coca-Cola will use its distribution network to supercharge Costa’s expansion efforts as it goes after the current coffee chain market leader, Starbucks. It may prove to be a smart deal as Costa can provide Coca-Cola with a new growth platform in one of the world’s fastest growing drink categories.
Analysts’ average 12-month price target for KO is $50.20, suggesting potential upside of just under 12%. However, just last week, HSBC reiterated its Buy rating on the stock and gave a price target of $61, or 38% higher than the price as of this writing.
Starbucks (NASDAQ: SBUX)
With Coca-Cola’s new purchase of coffee chain Costa, the beverage giant is going head-to-head with the leader in the coffee space, Starbucks (NASDAQ: SBUX).
2018 has been an ugly year for SBUX shares, with the stock down 7.5% year-to-date, after several bad headlines, declining same-store sales, and the announcement of the departure of founder and chairman Howard Schultz, all of which have caused the stock’s valuation multiples to contract.
However, at the same time, Starbucks’ dividend yield has been climbing, and shares now yield 2.3% – an all-time high for the business. And what’s even more exciting is that the coffee giant is making a massive move into Asia, where ultra-premium coffee and tea remain massive growth opportunities.
Starbucks now has 3,300 stores in mainland China, a 27% increase over 17 months, and has plans for 6,000 stores in the country by the end of 2022. With the addition of these stores in China, Starbucks expects to triple revenues in the five-year period from fiscal year 2017 and fiscal year 2022, while also doubling operating income.
Between Starbucks’ growth in China and licensing deal with Nestle, the tide may soon turn for the stock. The average 12-month price target for SBUX is $60, implying possible upside of 13%. Last week, Piper Jaffray set a price target for the stock of $72, or 36% higher than the current price as of this writing.