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Coke, Pepsi, Dr Pepper, and Constellation Are Beverages With Pop, Says AnalystCoke, Pepsi, Dr Pepper, and Constellation Are Beverages With Pop, Says AnalystBarron's (Online); New York While consumer staples are looking pricey, some parts of the sector look more attractive than others. That means investors could still take a swig of some of the beverage stocks. "The fundamentals for many of these companies look fantastic," says analyst Gerald Pascarelli, who just launched coverage of the beverage sector for Wedbush. Barron's was the first to speak with Pascarelli following his initiations, and although the market has moved in broad strokes lately on interest-rate and recession worries, he believes that the best positioned of these companies can shine once "earnings start to matter again." We may get a hint of whether or not that will be the case Wednesday morning, when PepsiCo (PEP) reports results. Yet he argues that there's reason to watch the industry regardless of whether or not the market is willing to take its cues from anything beyond the Federal Reserve. "If investors are going to put money to work this year, then the third quarter should matter…and it's probably going to benefit staples," he says. And even if the central bank and interest rates continue to dominate, and investors want to sit on the sidelines, "there's still value in talking about these [stocks] as legitimate companies," rather than just places to hide during times of turmoil. Of course that flight to safety dynamic has been on display lately, with the Consumer Staples Select Sector SPDR exchange-traded fund (XLP) off less than 13% in 2022, roughly half the losses notched by the S&P 500 over the same period. That relative outperformance may be some comfort to investors, but it's also come at a hefty price, as valuations have climbed across the space. Yet Barron's has noted previously, not all staples have been bid up to the same degree, and there's reason to lean more toward food and beverage makers than home and personal-care products companies. Pascarelli highlights that as a group, current multiples for beverages are below their one- and three-year averages from a price-to-earnings standpoint. That may be true of many companies following recent volatility, but he believes that the group's earnings outlook doesn't deserve such a discount. He has an Outperform rating on Pepsi, and is also bullish on Coca-Cola (KO), noting that beverage and snack companies are "getting the highest pricing I've seen since I started covering the space." That trend—of big price increases that aren't denting demand, as measured by volume—is one we've noted before . Pascarelli believes that although high inflation is crimping consumers' budgets, pricing power looks sustainable, not only because these items are needs-based—what parent wouldn't be loath to send their kids to school without a snack?—but because a 10% price increase on a $2 bottle of soda is much less noticeable than one on a $50 pair of jeans. Still, Keurig Dr Pepper (KDP) is his favorite nonalcoholic beverage stock: While bears argue the at-home coffee trend that dominated during the pandemic is waning, he thinks that underestimates the staying power of the hybrid work model, as well as the company's ability to hit their long-term targets. With just over four years lapped since its merger, Keurig Dr Pepper hasn't yet "shown what they can do." Alcoholic beverages are of course a different story: Higher price points and their discretionary nature means that trading down is the bigger threat to the group. After all, kids may have a sixth sense when it comes to parsing Oreos from Hydrox, but adults may be more willing to experiment with cheaper brands to get the same buzz. But by and large that's not happening, Pascarelli says. Looking at data across beer, wine, and spirits, he notes that while trading down is certainly a risk for the category, there's no real evidence for it, beyond some minor weakness in lower-end beer. And as we've seen in other areas of retail , at the high end demand remains robust for premium brands across all alcoholic beverages. His favorite play in the industry is Constellation Brands (STZ), a stock that clearly "should be trading higher" than it does, and the company just reported strong results in its core beer business. The market is still punishing the company for poor capital-allocation decisions in the past, a valid concern , but Pascarelli says Constellation as made moves to "remedy these situations." Moreover, the company will hit its four-year target to return $5 billion to shareholders and plans to democratize shareholder voting power , two catalysts that could lead to multiple expansion. We'd drink to that. |
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