Nestle: Top Bet on Bottled Water

07/02/2015 10:00 am EST

Focus: STOCKS

Tony Daltorio

Editor, Investors Alley Premium Digest

The hottest drink on the planet is water. And it's particularly popular here in the United States, explains Tony Daltorio in Daily Profit.

A survey conducted late last year by Harris Poll showed that 96% of Americans think they should be drinking more water. And 95% thought that bottled water was a healthier choice than soft drinks.

But that's not to say it's only a developed world phenomena. Sales of bottled water in China, for example, have doubled in the past five years.

Overall, global sales of plain bottled water are set to surpass those of soft drinks in 2015. That is a first.

This thirst for bottled water here and around the world has set off a mad scramble among the top four players in the sector: France's Danone (DANOY), Switzerland's Nestle SA (NSRGY), Coca-Cola (KO), which makes Dasani, and PepsiCo (PEP), which bottles Aquafina.

My favorite company among the big four bottled water stocks is Nestle. Unlike Coca-Cola and Pepsi, it is not saddled with the baggage associated with the soft drinks industry.

And I like its emphasis on the US market, where Nestle is the market share leader in bottled water sales by volume.

Nestle is investing $200 million to add seven US production lines for water. The production capacity is double what the company added over the past five years.

The company is also placing greater focus on sparkling waters versus plain water. It is a faster-growing business (14% vs. 8% last year).

Nestle is also moving in a big way into the home water delivery business. It says this business grew twice as fast (by 14%) last year as deliveries to stores.

And in the first quarter of 2015, it grew by 21%. The water delivery business now accounts for about 20% of Nestle's $4 billion US water business.

Can anything slow down the bottled water craze? Environmentalists would like to try. They say most of the plastic bottles are not recycled.

The bottled water companies counter by saying they have greatly reduced the weight of the plastic bottles, thus lowering the environmental impact.

What could change the equation regarding bottled water sales? There could be, at some future date, new technology that will purify tap water in a cost-effective way while producing great-tasting water. No technology has quite hit on the magic formula yet.

Until that happens, demand for bottled water will continue to rise. That's good news for all the major players in the sector and Nestle in particular.

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