Soft Drinks

While high-beta equity areas have rebounded smartly in recent trading sessions, we remain skeptical that earnings-follow through will be forthcoming. Instead, our portfolio remains defensively-geared, where profit support is strongest. For instance, the latest manufacturing data showed that pharmaceutical shipments continue to boom, underscoring that top-line momentum has started on a strong foot in the first quarter. That bodes well for pharmaceutical relative performance. Elsewhere, beverage shipments have also soared on a growth rate basis, sending a similar upbeat message for the S&P soft drink index. Importantly, pricing power remains solid in both industries, underscoring that the surge in manufacturer shipments likely remains demand-driven. We reiterate our overweight position in both indexes. Defensive Industry Earnings Are On A Positive Path Defensive Industry Earnings Are On A Positive Path

The defensive consumer staples sector in general, and the soft drinks sub-group in particular, have outperformed smartly of late. Widespread improvement in key soft drink earnings drivers signal additional upside potential. Beverage consumption is outpacing overall PCE, and low energy prices continue to paint a vibrant demand backdrop. Beverage selling prices have spiked, and are rising faster than overall measures of corporate sector pricing power. The upshot is that relative top line growth will expand in the coming quarters (middle panel). This stands in marked contrast with sell-side analysts, who are expecting a relative sales contraction of 180bps in the next 12 months (not shown). Importantly, the industry is enjoying the fruits of the carnage in the commodity pits, as cost relief has generated sizeable gross margin expansion. Rising margins typically lead to a valuation re-rating. We expect ongoing outperformance, despite the steep gains that have already accrued. Stay with a high-conviction overweight. The ticker symbols for the stocks in this index are: KO, PEP, MNST, DPS, CCE. Content bca.uses_in_2016_02_11_001_c1 bca.uses_in_2016_02_11_001_c1 Content