Food and beverage companies represent an attractive investment option. Many of these companies belong to the consumer staples segment, which tends to be less cyclical and subject to smaller market fluctuations. One metric that investors use to evaluate companies and industries is the profit margin. It provides information about the company's ability to manage its cost and effectively price its products.
- Many food and beverage companies belong to the consumer staples segment, which tends to be less cyclical and subject to smaller market fluctuations.
- There are several ways to calculate the profit margin, such as gross margin, EBITDA margin, and net margin.
- The core components of the food and beverage sector are food processing, nonalcoholic beverages, and alcoholic beverages.
- Within the food and beverage sector, higher profit margins certainly make beverage companies look like better investments than food processing firms.
What Is Profit Margin?
The profit margin is often calculated as net income divided by the company's total revenues. If the company does not generate any revenues or the earnings are negative, the profit margin is either meaningless or negative. Investors often calculate companies' profit margins and then compare them across sector and industry averages to determine where a particular company stands in the overall distribution of margins. There are several different ways of calculating the profit margin, such as gross margin, EBITDA margin, and net margin.
Which Industries Are Part of the Food and Beverage Sector?
What exactly is included in the food and beverage sector can be somewhat difficult to define because there is substantial overlap between businesses. For example, beverage makers like Pepsi (PEP) also own other companies. Some of these firms are not in the beverage business. However, the core components of the food and beverage sector are food processing, nonalcoholic beverages, and alcoholic beverages.
To a lesser extent, grocery stores and restaurants can also be considered part of the food and beverage sector. Grocery stores are often classified as retail instead, while restaurants are frequently considered services. There is also agriculture itself, without which the food and beverage industry would not be possible. However, agriculture is quite different from most other parts of the economy.
Food Processing Profit Margins
According to CSIMarket, the gross profit margin for the food processing industry was 22.05% in 2019. That was considerably below the overall market average of 49.4%. Furthermore, the EBITDA margin for food processing was 9.56%, which was below the total market figure of 16.59%. Finally, the net profit margin in the food processing industry was just 5.16%. The net margin for the total market was once again higher, coming in at 7.81%. It is safe to say that profit margins in the food processing industry are generally lower than average. These small margins may be a result of intense competition in the industry.
Profit margins within industries can fluctuate substantially from one year to the next. However, the food and beverage sector is somewhat more stable than the rest of the market.
Nonalcoholic Beverage Profit Margins
Profit margins in the nonalcoholic beverage market tend to be much higher. Firms in this industry, such as Coca-Cola (KO), often have large economic moats. The gross profit margin for the nonalcoholic beverage industry was 54.87% in 2019. At the same time, the EBITDA margin was 25.16%, and the net profit margin was a very impressive 15.58%.
Alcoholic Beverage Profit Margins
Alcoholic beverage company profit margins were generally very similar to those for nonalcoholic beverage firms during 2019. The gross profit margin was 53.51%, the EBITDA margin came in at 19.37%, and the net profit margin was 15.28%. The similarities with nonalcoholic beverage profit margins should not be surprising, as brand names dominate both industries. If anything, regulatory barriers to entry may make it even harder for new firms to enter the alcoholic beverage market.
The Bottom Line
Higher profit margins certainly make beverage companies look like better investments than food processing firms. In fact, famous investor Warren Buffett built part of his fortune by buying Coca-Cola stock at the right time. However, those high profit margins usually mean that stock prices are also higher. Successful investors must learn to be greedy when others are fearful and to find companies with higher profit margins.