Less Fizz More Profits
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know what I'm about to say might shock you, but Coca-Cola (NYSE: KO) should invest more in their still beverages and less in their traditional sparkling beverages. Coca-Cola recently reported earnings that exceeded forecasts. The really interesting numbers though, are found below the headline numbers that everyone reads. Truthfully, the more the company invests in growing their still beverages line, the better this growth story will be.
First, let me clarify, Coca-Cola is the company they are because of several of their main brands. The Coke brand is the most recognized brand in the world, and commands a large percentage of sparkling beverages. Following in Coke's footsteps are Sprite and Diet Coke. PepsiCo (NYSE: PEP) and their core Pepsi products also rank in the top 5 in gallon sales in the U.S. Dr Pepper Snapple's (NYSE: DPS) brand, 7-Up ranks in the top 5 as well. Here is the problem, in the last 10 years all of these top brands have seen anywhere from a 20% to an over 50% drop in gallons sold in the U.S. Even while these brands grow overseas, the sparkling beverage business is not what it used to be. If you want proof, consider that Coca-Cola turned in just 4% volume growth in their sparkling beverage business in the last quarter, and this was considered a major achievement. The still beverage business, now that's another story.
Still beverage volumes grew at 9% versus just 4% for sparkling. The really amazing numbers can be found in certain sub-categories of the still beverage brands. In the most recent quarter, Coca-Cola sold 15% more volume in packaged water, 10% more ready-to-drink tea, and 25% more energy drinks. Compare these numbers to the 4% growth in Coke, 4% growth in Sprite, and 4% growth in Fanta, and you can see that still beverages are what could really move Coca-Cola into a faster growth cycle.
So how could Coca-Cola move even faster into these quicker growing segments? I would suggest that the company look at snapping up Monster Beverage (NASDAQ: MNST). Monster has been growing earnings at a much faster rate than Coca-Cola, mainly due to its size and focus on the energy drinks market. In addition, the acquisition should in theory add to Coca-Cola's massive cash flow. Monster has no long-term debt, and has a market cap of $11.3 billion. While this sounds like a lot, Coca-Cola is more than 10 times the size when it comes to market cap.
How much growth and cash flow could Monster bring to the table? Consider this, Coca-Cola generated about $0.08 of free cash flow per $1 of assets in the last year. Monster generated $0.24 of free cash flow per $1 of assets in the last year. The fact that Monster is expected to grow earnings by more than 20% going forward, versus about 6% growth for Coca-Cola, would help as well. The fact that Coca-Cola already is partnered to distribute Monster in the U.S. makes this seem like a natural fit.
Coca-Cola is doing many things right. The company is buying back shares ($2.5 - $3 billion planned for 2012), and is introducing new formulas of their existing brands and launching new ones. At current count there are more than 50 different versions of Coca-Cola products available in the U.S. alone. However, because of the company's size it might be time to look at an acquisition or two that would make Coca-Cola even more formidable. The fact that Monster Beverage doesn't advertise in mainstream media like Coca-Cola does is another factor. If Monster has been able to grow earnings by over 20% in the past without much mainstream advertising, imagine what might happen with Coca-Cola's advertising machine behind the brand. I haven't heard any rumors that this might happen, it's just a thought for Coca-Cola management to consider. After all, imagine what would happen if either Pepsi or Dr Pepper Snapple got this same idea. I believe both Coca-Cola and Monster Beverage will do well on their own, but a combination would make a monster competitor indeed.
MHenage 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.