Will Coca-Cola Have a Fizzy or Flat 2013?

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Few companies are as globally known as Coca-Cola (NYSE: KO), the world’s largest beverage company. Few stocks are also as trusted as Coca-Cola, which has generated steady growth and income for conservative investors over the past decade. However, Coca-Cola’s fourth quarter results have some investors doubting the soft drink giant’s ability to continue expanding overseas. Is Coca-Cola still a fizzy investment, or has this stock gone flat?

The Fizzy Fundamentals

Before we analyze Coca-Cola’s fourth quarter earnings, we should first compare its fundamentals against two other industry peers - PepsiCo (NYSE: PEP) and Dr. Pepper Snapple (NYSE: DPS).

<table> <tbody> <tr> <td> </td> <td>Forward P/E</td> <td>5-year PEG</td> <td>Price to Sales (ttm)</td> <td>Return on Equity<br />(ttm)</td> <td>Profit Margin</td> <td>Debt to Equity</td> </tr> <tr> <td><strong>Coca-Cola</strong></td> <td>17.29</td> <td>2.36</td> <td>3.64</td> <td>26.42%</td> <td>18.48%</td> <td>97.47</td> </tr> <tr> <td><strong>PepsiCo</strong></td> <td>16.40</td> <td>4.57</td> <td>1.70</td> <td>26.10%</td> <td>9.03%</td> <td>129.46</td> </tr> <tr> <td><strong>Dr. Pepper Snapple</strong></td> <td>14.15</td> <td>2.26</td> <td>1.58</td> <td>27.33%</td> <td>10.47%</td> <td>119.33</td> </tr> <tr> <td><em>Advantage</em></td> <td>Dr. Pepper</td> <td>Dr. Pepper</td> <td>Dr. Pepper</td> <td>PepsiCo</td> <td>Coca-Cola</td> <td>Coca-Cola</td> </tr> </tbody> </table>

Source: Yahoo Finance

Dr. Pepper Snapple wins in every growth metric. However, this is also because it is a much smaller company, with a market cap of $9 billion compared to Coca-Cola’s $168 billion and PepsiCo’s $112 billion. Coca-Cola comes out on top in two important categories - lower debt and higher profit margins. Both will be extremely important for balancing the company’s overseas expansion with unstable commodity prices.

Let’s also chart Coca-Cola’s top and bottom line performance against PepsiCo and Dr. Pepper Snapple over the past three years.

<img src="http://media.ycharts.com/charts/ce286a04ba20edb593fd639736a16b5e.png" />

KO Revenue TTM data by YCharts

Coca-Cola’s revenue growth is notably outpacing its earnings growth. Although Coca-Cola is still growing its bottom line at a healthy rate, the divergence of PepsiCo’s top and bottom lines should serve as a cautionary tale for Coca-Cola shareholders. Meanwhile, Dr. Pepper has grown its bottom line faster than its top line - a healthy indicator that its margins are still kept in check.

Lastly, we should compare the operating margins of these three companies over the same period.

<img src="http://media.ycharts.com/charts/282e1dafc2cb318b7a100f9f161ea5f0.png" />

KO Operating Margin TTM data by YCharts

Coca-Cola’s margin growth is the healthiest, despite its wide exposure to global markets. 

Based on pure fundamental growth, Coca-Cola is a rock solid stock that trades at a slight premium to its peers but also has the margin and revenue growth to back it up.

The Flat Fourth Quarter Earnings

So if Coca-Cola’s fundamentals are so stable, why are investors worried? Let’s take a look at the key numbers from its fourth quarter earnings.

Coca-Cola’s top line grew 3.8% to $11.46 billion - or 5% excluding currency impacts. Meanwhile, its earnings rose 12.65% to $1.87 billion, or 41 cents per share. Excluding one-time charges, the company earned 45 cents per share.

While earnings topped the Thomson Reuters’ forecast of 44 cents per share, revenue missed the forecast of $11.53 billion. Gross margin also dipped from 60.1% to 59.6%.

Global Growth and Global Losses

Coca-Cola’s global sales volume increased 3%, but that was at the low-end of its own target for 3% to 4% annual growth. While demand was slow in North America, which reported a 1% gain in sales volume, its volume surged in Russia and India, which reported 19% and 32% growth respectively.

While strong numbers in two of the key BRIC markets was encouraging, bleak news from Europe and China poured some cold, flat soda on investor enthusiasm.

Europe reported a 5% decrease in sales volume, due to decreased consumer confidence and aggressive price competition from rival brands.

China, a closely watched market for Coca-Cola, posted a 4% drop in volume, primarily attributed to its economic slowdown over the past year. However, recent signs of life from the Chinese economy hint that this slump may be short-lived.

Coca-Cola’s weakness in Europe and China, exacerbated by a weak U.S. dollar, were the primary causes of the company’s disappointing fourth quarter revenue.

Non-Carbonated Drinks

Demand for Coca-Cola’s non-carbonated drinks grew during the fourth quarter. Bottled water sales rose 12%, while iced tea sales, led by its Gold Peak and Honest Tea brands, grew 16%. This is especially encouraging in developed markets such as North America, where more health-conscious consumers are buying fewer sodas.

Lower Costs in 2013

For beverage makers like Coca-Cola, rising commodity costs are a constant headwind. While the company projects that its total costs for sweeteners, juices, metals and plastic will increase by $100 million in 2013, that represents only half of its bill in 2012. This will give the company more room to change prices according to the demand, without negatively impacting its margins. To offset weaker sales volume, Coca-Cola will likely raise prices to boost its margin per beverage sold, which it has done before successfully thanks to its proven pricing power.

Bottom Line: Fizzy or Flat?

Despite its lackluster numbers in Europe and China, as well as the slight dip in margins, Coca-Cola is a resilient stock that should be bought on weakness. Looking forward, the company’s decreased costs and increased pricing power in 2013 will help it continue to grow its top and bottom lines at a much faster rate than its primary competitor PepsiCo.

I believe that its weakness in China is short-lived, and concerns will wane once the country’s GDP firms up in the second half of the year. While Europe’s unending negative feedback loop will inevitably weigh on earnings throughout 2013, strong growth from India and Russia will more than offset those losses.

So while Coca-Cola is unlikely to explode like a well-shaken soda can, it is still fizzy enough to keep bubbling in 2013 and beyond.


Leo Sun owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. You can follow Leo Sun on Twitter at https://twitter.com/leokornsun for more investing ideas. 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!

blog comments powered by Disqus