Better buy: Celsius shares at 52-week low or Kings Pepsi and Coke 50/50 dividend split?

The beverage industry is not easily disrupted. Sure, new products can become fads. But it is rare for a brand to achieve global recognition.

Red Bull pioneered the energy drink industry and remains a top player, but Monster Drink is now clearly the No. 2 player. Shares have risen more than 18-fold in the past 15 years — the company is now worth $47 billion. Celsius (CELCH 4.47%)however, it held a solid position at No. 3 with 11.5% of US energy drink sales.

Just a few months ago, Celsius surpassed a $20 billion market cap, shortly after the company announced it was expanding into Australia and New Zealand. Five years ago, the company was worth just over $200 million. Investors hope Celsius is the next big thing in energy drinks.

Here’s why the stock has sold off lately and whether celsius or a 50/50 split of established beverage companies PepsiCo (PEP 0.48%) and Coca cola (K.O 1.00%) it’s a better buy now.

Image source: Getty Images.

Celsius stock is finally cooling down

Celsius just fell to a 52-week low after forecasting that its distribution partner, Pepsi, would order $100 million to $120 million less than in the third quarter of 2023. The news is particularly troubling given that growth has dropped dramatically from over $100 million. % a year ago to only 23%.

Celsius secured a distribution deal with Pepsi in 2022, which opened the door to a fast and effective international campaign for the energy drink company. In addition to the distribution agreement, Pepsi owns 8.5% of Celsius. It was a game changer for Celsius and its shareholders.

Coca-Cola and Pepsi’s global chains and connections can take a drink to the next level. For example, Coca-Cola bought Topo Chico in September 2017 for just $220 million. Since then, Coca-Cola has opened the doors to Topo Chico’s global footprint and introduced new flavors and flavors. It’s hard to say what Topo Chico is worth today — but it’s likely a multi-billion dollar brand and a brilliant acquisition for Coca-Cola in hindsight.

Celsius is an interesting company because it benefits from Pepsi’s distribution network without being just another beverage owned by the conglomerate. It is a compelling opportunity for growth investors looking to target a specific beverage brand rather than a portfolio of beverages.

Celsius’ assessment became more reasonable

Celsius has enjoyed parabolic growth in revenue and growing operating margins, and is now a very profitable company. Higher earnings, paired with a falling stock price, pushed the price-to-earnings (P/E) ratio to just 31.5.

CELH Revenue (TTM) data by YCharts.

At first glance, Celsius looks like an unusual buy, especially since its P/E ratio is only slightly higher than Coca-Cola’s 28.8 or Pepsi’s 26.

The problem with Celsius is that it could start looking expensive very quickly. Expansion is great when it works, but it also leaves a company much more vulnerable if demand drops. The more production lines, distribution channels, marketing campaigns, promotions and administrative costs are dedicated to Celsius, the bigger the business becomes. For example, Celsius has $1.49 billion in trailing 12-month revenue and $417.6 million in selling, general, and administrative (SG&A) expenses. Just three years ago, Celsius’ revenue was less than half of its current SG&A costs.

I think Celsius is still in the fad stage and hasn’t established itself as an energy drink staple. So, judging it based on the trailing P/E ratio is a mistake because these earnings could change in an instant.

Celsius has yet to suffer a slowdown since the Pepsi partnership, and I think investors are better off waiting to see how this slowdown affects margins and profitability before buying the stock.

The case for the tried and true

A 50/50 split of Coke and Pepsi may be the best all-around buy right now. Coca-Cola focuses on beverages and is a higher-margin business than Pepsi because of its bottling, manufacturing, packaging, marketing and distribution partnerships. Pepsi owns Frito-Lay, Quaker Oats and other food and beverage brands and has a lower margin because it handles its own distribution.

Coca-Cola and Pepsi are both dividend kings that have paid and increased their dividends for over 50 consecutive years. Coke gives 2.7%, while Pepsi has 3% — which is higher than S&P 500 dividend yield of 1.2%. Demand for their products tends to hold up well regardless of the economic cycle, making them good choices for risk-averse investors or anyone looking to increase their passive income stream.

At best, Coke and Pepsi are diversified beverage conglomerates that have the capital to take risks on new acquisitions or internal developments without derailing the company. In comparison, Celsius is a bet on a single beverage brand.

Celsius’ risks outweigh the potential reward

It’s easy to fall in love with a company like Celsius with a skyrocketing growth rate and improved profitability. However, much of this increase could be due to humans being introduced to Celsius for the first time. This original ‘novelty’ factor is essential to any popular product. It’s much harder to stay in style and unlock repeat customers. Most investors would probably be better off taking a wait-and-see approach to Celsius to ensure it can maintain its growth as a mature brand.

If you think Celsius is the real deal and like the product portfolio, now may be a good time to open an initial position in the stock. But for those without lofty convictions, a 50/50 split of Coke and Pepsi is the safest overall bet right now.