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Tickers in this Article: HANS, JSDA, FIZZ, KO, PEP
In April 2002, a small juice and soda company from Corona, California introduced an alternative energy drink called Monster. It, along with Europe's Red Bull now own 52% of the energy drinks market in the U.S. Since Hansen Natural (Nasdaq:HANS) introduced Monster, sales have sharply increased, growing from $93.3 million in 2001, the year prior to Monster's introduction, to $1.025 billion in 2007.

It's no wonder Hansen is Business Week's choice as the No.1 hot growth company for 2008. However, in early May, Hansen announced sales and earnings for the first quarter of 2008 that were a little less than expected, prompting some analysts to pull their buy ratings on the stock. Add to that Coca Cola (NYSE:KO) and Pepsi's (NYSE:PEP) shrinking cola business and you begin to wonder what the future holds for the soda market.

What's Going On
From a stock point of view, it's definitely not been a good year for the soda business. Year-to-date Hansen Natural, Coca Cola, Pepsi, National Beverage (Nasdaq:FIZZ) and Jones Soda (Nasdaq:JSDA) are all trading in the red. Both Hanson (down 27%) and Jones (down 62%) have been hit especially hard. I hope you didn't have all your money tied up with them.

Compare the performance of all five to the S&P 500. Each has done worse than the index in the first five months of the year, ranging from Coke's 1.5% underperformance all the way down to a jaw-dropping 57.7% miss by Jones Soda. But, let's not jump to conclusions. Jones has lost money in three out of the past four quarters, but even its distribution partner in the U.S., National Beverage, is making money.

Jones Needs A Lifeline
Quirky founder and former CEO Peter van Stolk stepped down as chairman and CEO at the end of 2007. On an interim basis, Scott Bedbury became chairman and Steve Jones CEO. Both are current board members. The company is facing several lawsuits from investors claiming company insiders were exaggerating the business potential of its 12-ounce can introduction at Wal-Mart and other stores in order to keep the stock price up long enough to unload some or all of their holdings.

The SEC was unable to find evidence of such action; however, a Seattle newspaper did show in an August 2007 report that five insiders dumped 333,000 shares over an 85-day period earlier in the year for a total value of $6.5 million. That's an average price of $19.70, about $16.90 higher than where it sits today. If not illegal, it's certainly a clear sign the wheels were about to fall off the truck. (For more on corporate executives' uncanny ability to time stocks, see Uncovering Insider Trading.)

Margins Disappearing
Jones troubles aren't just limited to corporate governance. Its gross margins are disappearing faster than you can say "fizz". The trailing twelve-month gross margin is 20.1%, about half what it was just two years earlier in 2006. It's hard to make money with margins so tight.

The other four also have seen margins shrink by a couple of percentage points in the same timeframe. However, this is nothing close to the reduction faced by Jones. According to the first quarter press release from May 1, there was a one-time inventory provision of $514,000 for discontinued specialty packages. Otherwise, gross margins would have been 26%. That's still four percentage points lower than National Beverage, itself the worst of the rest. Apparently, Jones sees 2008 as the first in a multi-year transition for the company. I wish the company good luck. It's going to need it. (Learn to understand financial statements, check out Fundamental Analysis: Introduction.)

Soda's Not Dead
What two corporations have a more storied and competitive past than Coke and Pepsi? I can't think of two brands that have battled as hard as these two have since World War II. Certainly, the Pepsi challenge, unveiled in 1975 as part of a marketing campaign to get Coke users to switch, was effective and enabled it to grow its share of the cola market.

However, according to a recent survey from Habbo, the online social community, teens aged 11 to 18 picked Coke as one of their favorite brands. Hence, the difference in market caps between the two. Coke, despite $10 billion less in revenue, has a market cap of $132 million, which is $25 billion higher than Pepsi. Mr. Market obviously feels Coke is it.

Bottom Line
Consumers are looking for alternatives to sugary soda. Coke's purchase last year of Glaceau Energy Brands for $4.1 billion and Pepsi's purchase of Naked Juice in late 2006 is proof positive the soda market is changing. That doesn't mean there isn't any growth potential - just that it's going to come when and where we least expect it.

For related reading, check out Demographic Trends And The Implications For Investment.

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