Soft-drink stocks traded lower across the board, with Coca-Cola the lone gainer at about 0.3%. The rest posted marginal losses except Celsius, down 3.2%. The whole group - Pepsi, Coca-Cola, Keurig Dr Pepper, Monster, Celsius - is absorbing consumer-trend pressure from GLP-1 weight-loss drugs, the MAHA movement, inflation, and shrinkflation. Pepsi reports earnings tomorrow morning.
The case for Pepsi
Pepsi is the most attractive stock in consumer staples right now. The snack business looks turned around, and analysts will focus on volume and revenue trajectory. The brand remains very strong, Pepsi has made product changes, and it showed some growth in snacks; the open question is whether it can hold that momentum. Gatorade results have been good.
Pepsi has been overly penalized for concerns hanging over the broader snack category - GLP-1s and MAHA - and its multiple has compressed unfairly. On forward earnings it trades at its lowest level relative to the staples sector and relative to Coca-Cola in roughly 20 years, which makes it cheap. Its earnings stability should hold.
International strength is being overlooked. North American growth is decidedly slower than global growth, but the North American business is flattening out while strength continues abroad. Combined, overseas growth should offset American weakness. Gatorade had lost a lot of ground over recent years and has since turned around, making inroads against Celsius and similar beverages. The real test comes in Q2.
Defending margins
The sector faces shrinkflation, higher commodity prices, FX headwinds, tough competition, and difficult comparisons. Pepsi is well equipped to defend margins through its broad distribution network, and Coca-Cola should defend margins well too. The distinction is valuation: Pepsi trades much cheaper than Coke, so it is the more attractive name.
The rest of the group
Celsius has lost a lot of ground and has been cutting its number of SKUs, with a healthy shift of demand toward the newer Alani product line. Its multiple has also compressed heavily, which keeps sentiment low.
Monster keeps delivering and has been hitting on all cylinders. Its edge is brand loyalty the other energy drinks lack, which lets it hold strong margins and keep growing even where category growth has been very flat. There may be room to run, though the valuation is getting stretched.
GLP-1s versus MAHA
The MAHA movement is probably petering out. Diet fads come and go - think Atkins - and they rarely stick, because people are likely biologically programmed to like sweet and salty snacks and sweet drinks, which makes lasting change hard beyond a short-term swing. The main worry around MAHA was cost: reformulation forces spending, illustrated by how much Mars laid out to redesign an M&M.
GLP-1s are probably the bigger long-term impact than MAHA. Even so, these companies, Pepsi in particular, look attractive against a market trading at stretched valuations. They are defensive stocks that protect in down markets, with continuing strength and a degree of earnings protection.
An options trade on Pepsi
Pepsi has lagged the overall market this year and is relatively flat, but it bounced about 7% this month into earnings as money rotated into staples. Expected growth is modest - around 3% revenue, maybe 5% EPS - so expectations aren't large. Implied volatility going into the report isn't elevated; the market prices only a plus-or-minus 3% move, less than $5 in either direction post-earnings.
With the dividend yield just over 4%, a neutral-to-bullish covered call collects yield from both the dividend and the call premium. For every 100 shares bought, sell an out-of-the-money call to the upside. Using the July 17th monthly options expiring in 9 days, the trade sells the 149 strike against long stock. The stock ran to roughly $142.50, probably trading above $143 after bouncing off session lows. The debit paid becomes the break-even, so the shares are effectively bought at a discount because of the call sale. The 149 strike sits near one standard deviation, giving upside room while collecting the dividend on the long stock.
As expiration nears over the nine days, even a flat stock lets you roll or adjust the short call to another weekly or monthly cycle, generating credits that raise potential profit and lower the break-even. Since implied volatility hasn't expanded much, there isn't a lot of extrinsic premium, so this functions as a "paid-to-wait" strategy with upside exposure.
