Can You Believe This Is Coke's Secret Ingredient?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With a company the size of Coca-Cola (NYSE: KO), no one really expects a surprise when they report earnings. However, there are three categories that are really driving the growth in Coca-Cola's earnings, and surprisingly none of them have to do with carbonated beverages.
Looking at the company's overall numbers, revenue increased 3%, on a 4% gain in global volume. International sales were particularly strong, with the usual suspects showing the strongest growth. Specifically, in India, Russia, China, and Brazil, the company saw volume growth of at least 6%. In a continuing trend, the major growth came from the still beverages category. While two of the companies sparkling beverages, Coca-Cola and Sprite, saw volume growth of 2% and 6% respectively, they did not lead the way. With overall volume growth of 9% in still beverages, versus just 2% volume growth in sparkling beverages, investors need to rethink where Coca-Cola will get its future earnings growth from.
For the second consecutive quarter, the categories of prepackaged tea, water, and energy drinks lead volume growth by far. In the package tea segment, volume growth was 13%. Total water volumes increased 10%, and energy drink volume was up 21%. When you consider these three categories helped the company achieve 4% global volume growth, you can see the importance of having the right offerings. By point of comparison, PepsiCo (NYSE: PEP) showed global beverages revenue up just 2% versus nearly double this at Coca-Cola. Another competitor, Dr. Pepper Snapple (NYSE: DPS) saw its mix of offerings hurt the company tremendously, as overall sales volume decreased by 1%. This is primarily due to the fact that Dr. Pepper's focus has been on its carbonated beverages segment. Considering that Coca-Cola saw still beverage volume growth of 9%, and Dr. Pepper saw still beverage volume decline by 7%, you can see that consumers are voting with their dollars for Coca-Cola's brands. In this industry, understanding consumer preferences is everything when it comes to staying competitive. Coca-Cola appears to be leading the way not only in size, but also in offerings that consumers are demanding. PepsiCo has taken its standard second-place position, and Dr. Pepper is far behind in third place. This brings me to my next point, which is Coca-Cola needs to consider revisiting a rumored acquisition from earlier this year.
In the last two quarters, energy drink volume has increased by greater than 20% at Coca-Cola. A few months ago, there was a rumor that the company would consider buying Monster Beverage (NASDAQ: MNST). It seems that this acquisition, though it would be expensive, makes perfect sense with the move consumers are making towards energy drinks. With Monster expected to grow earnings at better than 15%, this acquisition could boost Coca-Cola's growth profile from the less than 8% growth analysts currently expect. In addition, Monster generates more free cash flow per $1 of sales than does Coca-Cola. With better growth, higher free cash flow generation, and a bigger name brand presence in the expanding energy drink market, this acquisition just makes sense.
Looking at the most recent quarter for each company, we see that Coca-Cola generated about $13 billion in total revenue, with a total cost of goods sold at $5.22 billion. Monster, on the other hand, generated total revenue of $409.9 million, with a cost of goods sold of less than $200 million. Looking at these figures, it appears Monster would add about 3% to Coca-Cola's revenue. This doesn't sound like a lot, until you consider that Coca-Cola already handles the manufacturing of Monster's product lineup, and Monster does virtually no advertising. Combining these two companies, would allow Coca-Cola to market Monster to the masses, in a way that the current company cannot achieve. Think about it this way, if Coca-Cola can grow a brand like Full Throttle by over 20%, what could the company do with one of the top name brands in energy drinks? I'll leave others to speculate on what the potential price could be, but it seems like there would be cost synergies to be realized, and greater growth from Monster. This being said, it's not as though Coca-Cola is sitting on its hands waiting around for a good acquisition.
Coca-Cola is doing what it always has done, which is generating plenty of free cash flow, paying dividends, and repurchasing shares. In the last quarter alone, the company generated $2.87 billion in free cash flow and paid out just $1.15 billion in dividends. With a roughly 40% free cash flow payout ratio, it's clear this dividend champion can continue to increase payouts to investors. In the meantime, the company has already repurchased $1.6 billion worth of shares, with a target of $2.5 billion to $3 billion for the full year. Analysts are calling for nearly 8% long-term growth. With a dividend yield of 2.64% that should rise, and international sales propelling growth, it seems Coca-Cola will do just fine.
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.