Coca-Cola: This American Staple Should Be in Your Portfolio
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Coca-Cola (NYSE: KO) has proposed a 2-for-1 stock split which would be its first in 16 years. The split is part of its plan to double its revenues during this decade. Since 1919, when the stock first began to trade, the largest beverages company in the world has split its stock only 10 times. As a strategy, stock splits are used to encourage trading when a company feels that its stock has become too expensive. It can also be used when a company feels that the price of its stock is well above the price of stock of its competition. If the stockholders approve, each shareholder will get one additional share for each share held and the total number of shares outstanding will double from 5.6 billion shares to 11.2 billion shares. Coke had earlier reported first-quarter profits that exceeded expectations and the strong performance was the result of higher sales of drinks especially in developing markets such as India and China. The company has successfully managed commodity price inflation while catering to customers who care about price with smaller pack sizes. Incidentally, the smaller sizes also have higher profit margins.
Earlier, Coke had reported a solid performance for the first quarter of 2012. There was 5% growth in global volumes well distributed over the world. Important developed markets such as North America (+2%), Japan (+3%) and Germany (+3%) all showed satisfactory growth but the real strength came from the developing countries India (+20%), China (+9%) and Brazil (+4%). Sparkling beverage volumes were up 4% with contributions from the Coca-Cola, Sprite and Fanta brands. For the quarter, still beverages such as water, tea, coffee and energy drinks grew by 9% globally. Net income for the quarter was $2.05 billion ($.89 a share) against $1.9 billion ($.82 a share) for the same quarter in the previous year. Revenue for the quarter at $11.14 billion was up 6% over the figure of $10.82 billion for the corresponding quarter in the previous year.
Despite a commendable performance in a declining North American market, the near future for Coke lies in the developing markets and particularly in Asia. You just have to look at the growth in India and China to see where the focus should be. The company expects that the middle class in these markets will add to between 800 million and one billion people in the rest of this decade. It is investing $4 billion in China where growth has doubled over the last few years and is expected to double again by the end of the decade. With over 40 bottling facilities and 60% or more of the market, there is no reason why this objective is not achievable. The key to this growth is not just sparkling beverages like the flagship brand but also beverages like green tea and mineral water in markets like Japan. I personally believe that the blockbuster growth will come from bottled water because many of these countries do not have safe and reliable drinking water and public utilities just do not have the same credibility as a company like Coke. Add to this Coke's ability to invest large amounts in brand building and its expertise in building brands on a long-term basis and you have a powerful recipe for success. In India, the company is looking to invest $2 billion more in order to boost its marketing efforts and its production and distribution infrastructure.
The top beverages in terms of volume sales in the US are Coke, Diet Coke and Sprite all from the Coke stable, Pepsi and 7-Up from Pepsico (NYSE: PEP) and Snapple from Dr Pepper Snapple Group. Globally there is no doubt that this is a two horse race between Coke and Pepsi and no other beverage company can even be remotely considered as competition. I consider quite likely that both Pepsi and Coke could make some strategic acquisitions of brands with large domestic market share. This has worked successfully in India where the Coke acquisition of local cola brand Thums Up has proved to be successful with the local cola out selling its flagship brand. The energy drinks sector is small but growing rapidly and further attention is required. The market leaders are Monster Beverage with a market share of approximately 40% and privately-owned Austrian company Red Bull GmbH with a market share of just under 30%. The Coke energy drink offering, Full Throttle is quite a long way behind and has some catching up to do.
Coke continues an aggressive growth strategy by using partnerships with large beverage distributors and their most recent and notable success has been the exclusive tie up with Dunkin’ Brands Group (NASDAQ: DNKN). This would give them access to more than 16,000 Dunkin' Donuts and Baskin-Robbins restaurants in the US. Its willingness to expand its brand portfolio to accommodate local tastes is evidenced by the contribution of local Indian mango beverage "Maaza" to the continued growth. Success for Coke in the beverages market is far more critical than Pepsi because Coke does not have the cushion of the foods businesses that Pepsi does. A major area of concern is the continuously rising sugar prices because sugar is an important input. Production costs continue to increase sharply and, though all beverage manufacturers would be affected, Coke could have the bigger problem because it does not have other diversified businesses.
Because of its solid performance over many years and leadership qualities that it has demonstrated, Coke has always been a high priority as far as equity investors are concerned. In fact, this presents a problem as you will rarely find that the stock market undervalues Coke stock. Most certainly, if you have an investment in Coke, you should consider it as an anchor stock in your portfolio. You should look to add to your holdings on declines in the market price.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.