Better Buy: Celsius Stock at a 52-Week Low or a 50/50 Split of Dividend Kings Pepsi and Coca-Cola?

The beverage industry doesn't get disrupted easily. Sure, new products may catch on as fads. But it's rare for a brand to achieve global recognition.

Red Bull pioneered the energy drink industry and remains the top player, but Monster Beverage is now undeniably the No. 2 player. The stock is up over 18-fold in the last 15 years -- with the company now worth a whopping $47 billion. Celsius (NASDAQ: CELH) , though, has carved out a solid No. 3 position with 11.5% of U.S. energy drink sales .

Just a few months ago, Celsius topped $20 billion in market cap shortly after the company announced it was expanding into Australia and New Zealand. Five years ago, the company was worth barely over $200 million. Investors are hoping that 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 (NASDAQ: PEP) and Coca-Cola (NYSE: KO) is a better buy now.

Image source: Getty Images.

Celsius stock finally goes cold

Celsius just plummeted to a 52-week low after estimating that its distribution partner, Pepsi, will order between $100 million and $120 million less than in the third quarter of 2023 . The news is particularly concerning, considering growth has dramatically slowed from more than 100% a year ago to just 23%.

Celsius landed a distribution agreement 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 has been a game-changer for Celsius and its shareholders.

Coke and Pepsi's global supply chains and connections can take a beverage to the next level. For example, Coke bought Topo Chico in September 2017 for a mere $220 million. Since then, Coke has opened the floodgates on Topo Chico's global footprint and introduced new flavors and hard seltzers. It's hard to say how much Topo Chico is worth today -- but it is likely a multi-billion-dollar brand and a brilliant acquisition for Coke in hindsight.

Celsius is an exciting 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' valuation has become more reasonable

Celsius has enjoyed parabolic revenue growth and rising operating margins, and is now a very profitable company. Higher earnings paired with a declining stock price have pushed its price-to-earnings (P/E) ratio down to just 31.5.

CELH Revenue (TTM) data by YCharts.

At first glance, Celsius looks like a no-brainer buy, especially since its P/E ratio is only slightly higher than Coke's 28.8 or Pepsi's 26.

The problem with Celsius is that it could begin to look expensive very quickly. Expansion is great when it's working, but it also leaves a company much more vulnerable if demand falls. The more production lines, distribution avenues, marketing campaigns, promotions, and administrative costs that are devoted to Celsius, the bulkier the business becomes. For example, Celsius has $1.49 billion in trailing 12-month revenue and $417.6 million in sales, 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 its trailing P/E ratio is a mistake, because those earnings could change in a heartbeat.

Celsius has yet to endure a slowdown since the Pepsi partnership, and I think investors are better off waiting to see how that 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 better all-around buy at this point. Coke focuses on beverages and is a higher-margin business than Pepsi because of its bottling, manufacturing, packaging, merchandising, and distribution partnerships. Pepsi owns Frito-Lay, Quaker Oats, and other food and beverage brands and is lower-margin because it handles its own distribution.

Coke and Pepsi are both Dividend Kings that have paid and raised their dividends for over 50 consecutive years. Coke yields 2.7%, while Pepsi yields 3% -- which is higher than the 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 boost their passive income stream.

Best of all, 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 one beverage brand.

Celsius' risks outweigh the potential reward

It's easy to get enamored by a company like Celsius, with a breakneck growth rate and improved profitability. However, a lot of that growth could be due to people being introduced to Celsius for the first time. That original "newness" factor is critical for any popular product. It's much harder to stay in style and unlock repeat customers. Most investors are likely better off taking a wait-and-see approach to Celsius to make sure it can maintain its growth as a mature brand.

If you believe Celsius is the real deal and love its product portfolio, now may be a good time to open a starter position in the stock. But for those without high conviction, a 50/50 split of Coke and Pepsi is the safer all-around bet at this time.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Celsius and Monster Beverage. The Motley Fool has a disclosure policy .