Coco Cola: a Sweet and Sugary Stock
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Coca-Cola Company (NYSE: KO) is a world renowned soft drink producer. With famous brands under their belt such as Coca Cola, Sprite, Fanta and PowerAde, this company is certainly popular. However, so too are two of their main competitors, Dr Pepper Snapple Group Inc. (NYSE: DPS) and PepsiCo, Inc. (NYSE: PEP).
PepsiCo currently own a company called Frito-Lay who is a major salty snack producer, currently holding 60% of the North America market share and 40% of the global market share for salty snacks. This provides a strong position for Pepsi, leaving something to fall back on if their soft drinks start to decline.
Some interesting news to appear for Dr Pepper is they have recently acquired a bottling company. Although they already own a couple of bottling companies, this should help expand their market share within the bottling market. They also are negotiating to buy back rights of distribution in Asia for one of their brands, Snapple. This is another prospect for future growth.
Coca Cola have announced that they will soon be entering the bottled water market. This comes as all three companies are trying to provide healthier options as demand in developed countries for these products is increasing. All three companies are also concentrating on emerging markets, where disposable income is increasing, allowing consumers to buy soft drinks. It is also important to highlight that 44% of Coca Cola's revenue comes from North America, when only 11% comes from Asia.
A small discrepancy that may cause a temporary delay in growth within developing countries is an investigation by the Chinese government into Coca Cola’s employees’ use of GPS devices. The Chinese government believes that certain usage of GPS devices could be a problem for national security.
The financials of these three companies tell an interesting story. KO managed to make a 60.9% gross profit in 2011 with an 18.4% net profit. For every $1 of assets Coca Cola hold, they have $0.60 of debt. This is reasonable and better than both Pepsi and Dr Pepper. Their profit margins also indicate some efficiency and suggest that it will be a long time before they'll make a loss (which is highly unlikely).
Pepsi made a 14.48% gross profit in the same year with a 9.68% net profit. For every $1 of assets they hold, they have $0.713 of debt. This is reasonable, it's not massively high but it's not massively low either. Their profit margins are also reasonable, more so their net profit than their gross profit. However, for the second largest soft drink producer, these profit margins do not match the company’s status.
Dr Pepper made a 60.2% gross profit and a 9.4% net profit. These are similar profit margins to Coca Cola. For every $1 of assets Dr Pepper own, they have $0.756 of debt. This is similar to Pepsi. Their gross profit margins are similar to Coca Cola but their net profit is half that of Coca Cola and similar to Pepsi. This shows that they are on the right track, with the same levels of efficiency as Coca Cola but haven't quite got the same efficiency when it comes to expenses.
With all this said, it's now time to conclude. Here we have the top three soft drink producers, which are of equal structure and operations with little difference apart from financials. The financials would suggest that Coca Cola is ahead of the competition but this doesn't necessarily guarantee that this is a stock to buy. This stock is most certainly a safe stock and offers dividends, so if you're looking for low/slow growth and an income, this stock is certainly a BUY. If you are looking for huge growth and aren't too fussed about an income, this is going to be a SELL. It isn't due to high levels of risk or it being a 'bad' stock, it's purely because there isn't that much risk that it is a SELL for people looking for huge growth. This stock isn't going to provide huge growth because it is already a well-established and globally recognized business, already providing good profit margins and maintaining safe levels of debt. If you are looking for a safe stock, that is unlikely to plummet, and an income along the way, this is most certainly a BUY.
Muhammad Bazil has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of 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!