Few companies generated the buzz (and returns) of Celsius Holdings (CELH 0.60%) in 2022. The maker of energy drinks more than doubled in value as it hit its stride in the functional-beverage market. Sales soared, profits widened, and it landed PepsiCo as a distribution partner in international markets.
Yet trendy drinks are a dime a dozen, and fads come and go, although there might be greater opportunities for Celsius overseas. Still, over the next decade, there are a number of beverage makers that could provide better opportunities for growth. Let’s see why this pair of beverage stocks might be better investments than the energy drink maker.
1. Dutch Bros
Drive-thru coffee chain Dutch Bros (BROS -0.52%) is the third-largest coffee chain in the U.S., and aims to have 800 stores in operation next year. While that still puts it distantly behind Starbucks (SBUX 0.41%) and Dunkin Brands, Wall Street thinks that kind of store-opening pace could help it produce $1 billion in annual sales in 2023.
Yet where Celsius doubled in value last year, Dutch Bros stock was down 22% as rising interest rates, inflation, and high gasoline prices took a toll on consumer demand, leading same-store sales to fall in the fourth quarter. Because that was partly the result of its “fortressing strategy,” (opening more stores where there are already existing ones, which tends to pull customers away from existing locations), there is still plenty of runway for growth.
First, Dutch Bros has a presence in only 14 states at the moment, giving it plenty of open space to grow, and it anticipates having 1,000 stores by the end of 2025. Its 10-year forecast anticipates revenue growing by 20% annually, same-store sales expanding by low single-digit rates, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growing faster than revenue.
Even so, the near-term road could be bumpy. It will need to get past the immediate impact that cannibalizing sales through its fortressing strategy will have on comparables. And if interest rates keep rising, it could find the cost of building more locations is more expensive.
Trading at more than 8 times sales, the coffee stock also isn’t exactly cheap at the moment despite the hit its stock took last year. But whereas functional energy drinks are the trendy choice of the moment, coffee has staying power. Dutch Bros also has expanded its menu to include cold beverages, and the drive-thru convenience of its shops is a plus.
By the end of 2023, I expect we’ll still see Dutch Bros thriving versus Celsius Holdings, which might be the answer to a trivia question.
One of the things that sets Coca-Cola (KO 0.53%) apart from its peers is its focus on doing one thing and doing it well. While Coke sells more than just soda these days — having branched out to water, tea, juice, sports drinks, and, yes, energy drinks — the Coca-Cola brand is an incredibly valuable asset.
According to the folks at Brand Finance, the Coca-Cola name alone is worth an estimated $35.4 billion, making it the most valuable beverage brand in the world. That makes Coke instantly recognizable no matter where you are on the globe, and it is one of the reasons Warren Buffett bought the stock over 30 years ago and says he will never sell it.
That kind of business throws off substantial amounts of free cash flow (FCF), and Coke forecasts it will produce as much as $10.5 billion this year, up 20% from the year-ago period. And the market has priced that quality into the stock, as shares trade at 23 times next year’s earnings, over 6 times its sales, and almost 60 times the FCF it produces.
What the market prizes is Coke’s ability to generate profits. It produces margins that easily beat the competition, with gross margins of nearly 60% exceeding Pepsi’s 53%, while also trouncing its rival’s operating and net margins by around 2 to 1. Few other beverage makers can produce such results.
Coca-Cola is also highly valued because of its dividend, which it has paid every quarter since 1920 and increased every year for 59 years, making it a Dividend King. This beverage giant will still be dispensing sales, profits, and dividends a decade down the road, making it an easy choice to pick as an enduring winner.
Rich Duprey has positions in Coca-Cola. The Motley Fool has positions in and recommends Celsius and Starbucks. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola and short January 2023 $92.50 puts on Starbucks. The Motley Fool has a disclosure policy.