Ready to Deliver
Jordo 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) is the world's largest beverage company. As a testament to the idea of buy and hold investing, SunTrust Bank held $110,000 in Coca-Cola stock in 1918, and by 2007 it had grown to an investment of some $2 billion, yielding dividends of nearly $60 million per year. But obviously, no one can expect the next ninety years to be as kind to investors as the first ninety years were, and there are signs of some struggles emanating from this, one of the true symbols of American capitalism.
In the second quarter of this year, Coca-Cola posted earnings of $2.79 billion, compared to $2.8 billion in the second quarter of last year. Per share earnings came to $1.21 per share, a penny more than last year's quarter due to fewer shares outstanding. Revenues in the quarter came to $13.1 billion, about three percent above last year's second quarter revenue total of $12.7 billion. A planned two for one stock split is scheduled for August 10th, and the numbers in this article do not reflect the split.
Growth occurred pretty much worldwide, with the predictable exception of Europe. There, actual case volume was off by three percent, and adjusted for a currency realignment, revenues were off by 9%, and income was off by 8%. Coca-Cola products are enough of a perceived luxury in Europe that sales will not pick up there as long as the current economic fear in the European Union exists.
In addition to a reversal in European growth, mature markets in general are growing meagerly at best for Coca-Cola. Growth was greatest in developing markets such as India (20%), China (7%) and Brazil (6%). In the most developed parts of the world, including the company's core North American market, it is difficult for me to see any kind of growth in the company's carbonated beverage market, given that sugared sodas have been linked to heart disease, tooth decay, and even cancers.
New York City's limitations on sales of sugared sodas will not help the image of Coca-Cola and its ilk, especially if that partial ban is picked up in other jurisdictions across the country. Coca-Cola's “sparkling” beverage category sales were up 3% in the second quarter, led by the namesake brand, which was up by 35% in India and 23% in Russia. But as information about the health impact of sparkling sodas spreads, I expect growth in Coca-Cola's revenues to come from its burgeoning non-carbonated beverage lineup. The company sells over 500 different beverages worldwide, and the non-carbonated or “still” portion of the lineup is experiencing the most growth. Brands such as Desani, Poweraid and Minute Maid led still beverage volume in the second quarter to increase by 9% from the year earlier quarter, and Coca-Cola is making further investments, such as Odwalla Organics, in those non-carbonated brands.
Coca-Cola also announced a modest reshuffling of its geographic organization, reducing its current five divisions to a three division structure, composed of Coca-Cola Americas, Coca-Cola International, and Bottling Investments. The consolidation is not intended as a direct cost savings mechanism; efficiency and flexibility are the goals.
Coca-Cola has long been known for its sterling balance sheet. At the end of June, the company had over $17 billion cash on hand, and one big question is, what will management do with all that cash flow? Coca-Cola has raised its dividend 49 years in a row. It also is on a steady course of stock buybacks, having retired some 250 million shares since the year 2000. Those returns of capital still leave plenty of excess cash, and rumors abound. One such solid rumor involves Monster Beverage (NASDAQ: MNST). Monster, formerly known as Hansen Natural Beverage until earlier this year, has long had a distribution deal with Coca-Cola. The persistence of the rumor lends some credibility to it. The logic goes that Monster cannot keep up its 20% plus per year growth indefinitely, and the stock's price to earnings ratio in the 30's can also not be maintained. If, as many suggest, the heydays of Monster's namesake beverage growth is behind it, and a declining stock price for Monster might make it more affordable for Coca-Cola. Coca-Cola is an American institution as a company, and there is still plenty of growth available to the company both in this country and abroad.
Monster is a strong company in its own right. It has not reported second quarter earnings yet, but at the end of the first quarter the company held over $800 million in cash and zero debt. Its operating margin of 27.8% and its return on equity of 29.2% compare favorably with the far larger Coca-Cola's operating margin of 27.9% and return on shareholders' equity of 28.2%. In a world where Coca-Cola and Pepsico have virtually saturated the world with their products, Monster still has easier days of growth ahead of it internationally. But with a PEG of 2.22 and no dividend, Monster is still an expensive purchase.
Coca-Cola sells its product with the aid of its bottling network. In recent years, it has acquired many of its former independent bottlers in order to maintain more control over the overall system. The Coca-Cola Bottling Company (NASDAQ: COKE) is the largest domestic independent bottler of Coca-Cola products. It also bottles and distributes Monster, Dr. Pepper, and Nestea products throughout the Southeast.
In its second quarter, Coca-Cola Bottling Company revenues and income should receive a healthy bump due to weather conditions early this summer across the bottler's delivery area. Analysts are expecting second quarter earnings of $1.46 per share, though I am looking for about a dime higher. The bottling company is dependent upon Coca-Cola for innovation and advertising. The two companies are even lobbying together to halt the spread of taxation initiatives by cash strapped states and cities looking for new revenue sources.
The bottling company has paid an annual dividend of $1 per share for at least the last ten years, allowing a current yield of just 1.5%. The bottling company is more exposed to materials cost than Coca-Cola is, and I do not see the sort of upside over either the short or long-term in this company that I see in Coca-Cola.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend Monster Beverage, PepsiCo, and The Coca-Cola Company. 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.