Is Coca-Cola's Growth Story Over?
Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coca-Cola (NYSE: KO) has more than 100 products in nearly every country in the world. When a company reaches the size of Coca-Cola, one can't help but wonder if the company's growth story is nearing the end. After all, unless aliens come down to earth to buy Coca-Cola products, there will be very few people that don't already have exposure to these products. Where does the company go from here?
First, let's review Coca Cola's last quarter. The company reported an increase of 13% even though the amount of products sold increased by only 3%. It looks like the company still suffers greatly from the economic slowdown in Europe and elsewhere. It looks like the company's non-carbonated products will take the driver's seat and carry the company's growth from now as Coca Cola's flagship drink Coke isn't showing as much growth as it once did. As knowledge becomes easier to access, people become more health conscious and they learn to avoid certain products that are perceived to be unhealthy. As a result of this movement, the carbonated drink consumption has been on the decline in North America and much of Europe. In the last quarter, Coca Cola's soda sales in the US fell by 2% which barely got compensated by a small growth in the company's teas and sports drinks.
Coca Cola is doing a great job in diversifying its portfolio of products in order to appeal to the new tastes of the world population. Because the company offers a large variety of products, it can always sell in large numbers when the global taste trends change over time. While healthier beverages are selling better lately, there are also some nice growth opportunities in energy drinks. From here, most of Coca Cola's growth will come from emerging economies, particularly India, China, Southeast Asia and the continent of Africa. In addition, when Europe's economy recovers, Coca Cola might be able to regain some market share in the continent. In the last quarter, Coca Cola's revenue in Europe fell by 6% which is a sharp decline. It will be interesting to see how the company will recover in the continent.
Coca Cola continues to meet or beat its own guidance almost every quarter; however, the analysts have higher expectations compared to the management of the company. Coca Cola's growth is happening in a conservative manner whereas analysts want it to grow more aggressively. Of course, growing aggressively is a difficult task to achieve for a company that is as large as Coca Cola. The company still has a lot of products to launch in a lot of markets; but it can't be done all at once. Currently Coca Cola focuses on launching products that are unique to cultures of different countries to ensure that its new products will be well-received by the target populations.
Currently Coca Cola enjoys healthy margins. While the company's gross margin is down from 60.1% to 59.6% in the last quarter, this is still a number many companies would love to have. Over the years, the margins should stay pretty stable for the company. The company also has healthy amount of cash at $18 billion. This cash can easily support future growth. Coca Cola's operating income grows faster than its revenue, which suggests that the company's cost cutting measures have been working.
The company will continue to have healthy level of growth but there won't be much of aggressive growth for Coca Cola anytime soon unless the company launches some new products no one has heard of before. The company can possibly double its earnings in the next 10 years by increasing its presence in developing markets, which can also double the dividend payments. While this is decent growth, this may not be aggressive enough for many investors. I personally like a mix of fast growth (a growth rate of 20% and above annually) and medium growth (a growth rate of 5% to 20% annually) companies in my portfolio. If an investor will pick a medium growth company over a fast growth company, he or she should also pay attention to the dividend yields so that they can get compensated for the lack of aggressive growth. When it comes to dividends, Coca Cola is the king. The company grew its dividend payments by an average of 10% in the last 40 years. Not many companies can say they did this.
Coca Cola competes with many companies including PepsiCo (NYSE: PEP) and Monster Beverage (NASDAQ: MNST). Pepsi has a snacks division in addition to beverages and Monster mostly focuses on sports drinks such as energy drinks. In the last year or so, Pepsi has been working on a restructuring which is coming near completion. Monster might have some legal troubles, but the company continues to see strong growth all around the world. Last year, many people expected Coca Cola to buy Monster, which didn't happen but I think it will eventually happen. Coca Cola needs the growth rate of Monster while Monster needs the brand name and distribution channels of Coca Cola.
Coca Cola is a medium level growth company with a decent dividend rate which keeps growing every year. The investors that are not necessarily looking for aggressive growth in every stock in their portfolio can gain from this stock. While there isn't much upside for Coca Cola in the short term, the company will continue to be successful in the long term. In conclusion, Coca Cola's growth story is not over, because the company still has a lot of products to launch in a lot of developing markets. The company is well on its way to achieve its 2020 goals.
JacobSteinberg has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage and PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!