Sugar-elimination diets. Proposed soda taxes in Philadelphia, San Francisco and Boulder. A planned soda tax in the United Kingdom. Sugar is under fire at home and abroad. And while a sugar-free future would help shrink waistlines around the world, it could also shrink the earnings of companies that depend on sales of sugar-laden products -- including
After a recent analysis of the likelihood of soda tax adoption and a debriefing call with Dr. Robert Lustig, an expert on endocrinology and obesity and a professor at UC San Francisco, analysts at CLSA have concluded that the war on sugar poses a risk to soft drink companies -- particularly, they say, Coca-Cola,
"While we lack the expertise to adjudicate the science, we do believe the imposition of taxes does pose a risk to our covered soft drink companies," lead analyst Caroline Levy writes in a new research note. "We believe Coke faces the most risk from consumers’ and regulators’ concerns about sugared drinks globally. Dr Pepper would have the most exposure within the US (which accounts for 90% of sales), but we believe a national soda tax measure is unlikely."
Dr. Lustig, who believes sugar to be an addictive substance, told the CLSA team that the sugar tax in Mexico was successful in reducing regular soda consumption. (And indeed, state records show a 12% decline in sales of sugar-sweetened beverages a year after Mexico first levied the tax in 2014.)
Though Levy notes that Coke and Pepsi's volumes in Mexico recovered after the initial decline, she also found that Coke currently has more grams of sugar per dollar of total earnings before tax and interest (EBIT) than any other beverage company. The second-most sugar dependent? Dr. Pepper.
CLSA figured this out by crunching the beverage producers' average sugar content per 12-ounces sold, total beverage cases, beverage EBIT and grams of sugar per dollar of total EBIT. Though Coke's average sugar content per 12-oz sold isn't vastly higher than its competitors (and in fact, its 27.9 grams is less than Dr. Pepper's 31.6 grams per 12-oz sold), Levy and her team say that the company's concentrate model leads it to produce 13 trillion grams of sugar per year. Coke produced $10.9 billion in 2015 (calendar year) EBIT, which means that the company achieved 1,192 grams -- or 2.6 pounds -- of sugar sold per single dollar of EBIT.
Pepsi only has 413 grams of sugar (that's just less than a pound) per dollar of EBIT due to a more diversified beverage portfolio. Levy and her team note that 42% of the company's worldwide grocery-aisle sales come from non-carbonated drinks thanks to Pepsi's strong market share in sports drinks, ready-to-drink tea (vis-a-vis a joint venture with Lipton) and ready-to-drink coffee (vis-a-vis a joint venture with
Worth noting is that despite the increasingly negative drumbeat against soda and sugar, Coke and Pepsi still get modest valuation premiums when compared to the broader market. Coke's forward price-to-earnings ratio is 23 while Pepsi's is 21; the S&P 500, meanwhile, has a 17 forward p/e ratio. This would indicate that investors are more bullish about the future of Coke and Pepsi than they are the future of soda taxes and a sugar-avoidant culture.
CLSA, for its part, has Coke rated as underperform; Coca-Cola Enterprise, Dr. Pepper Snapple and Pepsi as outperform; and Monster rated as a buy.
