A Soda Stock with Great Upside Moving Forward!

Muhammad 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) has been manufacturing, distributing and selling its carbonated soft drinks since 1886. Coca-Cola is an established brand known worldwide. The company has been generating and sharing some of the best returns possible in the market among its shareholders for over 100 years. Coca-Cola is unarguably a stock with a good track record of solid dividend payouts. PepsiCo, Inc. (NYSE: PEP) is another giant producer of non-alcoholic beverages with global spread and recognizable brands in this market. Other peers in the beverage industry include Dr Pepper Snapple (NYSE: DPS) and Molson Coors Brewing Company, but Coca-Cola maintains the largest market share in this industry. In the U.S. alone, Coca-Cola leads the way with 41.9 percent market share followed by PepsiCo with 28.5 percent market share and Dr. Pepper Snapple in third position with 16.7 percent market share.

Coke and Coca-Cola’s diet coke, two of the main products of Coca-Cola, are leading brands in the U.S. with 17 percent and 9.6 percent market shares respectively among the available carbonated soft drinks. However, unlike Coca-Cola that is restricted to beverages, PepsiCo has a more diversified product portfolio with its foray into the production and distribution of food products like Doritos, Frito-Lays, and Quaker. Therefore, Pepsi generates more revenue than Coca-Cola from its larger and more diversified range of products. Notwithstanding, Coca-Cola is well diversified globally with its effective supply chain system second to none in the industry. It efficiently supplies consumers in more than 200 countries worldwide.

Coca-Cola’s Financial Performance

Because of consistent increases in its margin of profitability over the past years, Coca-Cola has been continuously ahead of its rival, Pepsi. Though PepsiCo now offers a better dividend yield than Coca-Cola, since the two companies started giving shareholders dividend payouts many decades ago, Coca-Cola has been more regular in its dividend payouts than Pepsi. Coca-Cola’s earnings per share have been tremendous over the years. For the 2011 and 2012 financial years alone, the combined earnings per share of the Coca-Cola stock maintains an average of 14.0 percent while PepsiCo could only manage a combined average of 7.9 percent for the same period. Also, with 18.5% & 18.75% respectively as shown in the figure below, the net margin of Coca-Cola for 2011 and 2012 more than doubled that of Pepsi which stood at 9.70% & 9.44% respectively for the same period.

Profitability Analysis:

<table> <thead> <tr><th> </th><th> <p>PEP Stock</p> </th><th> <p>KO Stock</p> </th><th> <p>TAP Stock</p> </th></tr> </thead> <tbody> <tr> <td> </td> <td> <p>2011</p> </td> <td> <p>2012</p> </td> <td> <p>2011</p> </td> <td> <p>2012</p> </td> <td> <p>2011</p> </td> <td> <p>2012</p> </td> </tr> <tr> <td> <p>Pre-tax profit (Millions)</p> </td> <td> <p>8,834</p> </td> <td> <p>8,300</p> </td> <td> <p>10,627</p> </td> <td> <p>11,810</p> </td> <td> <p>925</p> </td> <td> <p>978</p> </td> </tr> <tr> <td> <p>Margin</p> </td> <td> <p>13.30%</p> </td> <td> <p>12.67%</p> </td> <td> <p>22.70%</p> </td> <td> <p>24.60%</p> </td> <td> <p>15.70%</p> </td> <td> <p>16.30%</p> </td> </tr> <tr> <td> <p>Net profit</p> </td> <td> <p>6,462</p> </td> <td> <p>6,180</p> </td> <td> <p>8,634</p> </td> <td> <p>9,000</p> </td> <td> <p>606</p> </td> <td> <p>629</p> </td> </tr> <tr> <td> <p>Margin</p> </td> <td> <p>9.70%</p> </td> <td> <p>9.44%</p> </td> <td> <p>18.50%</p> </td> <td> <p>18.75%</p> </td> <td> <p>10.30%</p> </td> <td> <p>10.48%</p> </td> </tr> </tbody> </table>

The profitability analysis in the table above shows that Coca-Cola has got more cash to return to shareholders than Pepsi and Dr. Pepper Snapple. Though Pepsi recorded larger incomes, the company couldn’t transform all excess revenues into profits and cash payments to its shareholders.

On debt management, Coca-Cola takes the lead over Pepsi. The debt/equity ratio favors Coca-Cola more than Pepsi, though Coca-Cola’s debt profile in absolute terms weighs more. The reason is simply because Coca-Cola is a bigger company compared with Pepsi. Also, Coca-Cola’s debt is largely short term compared with PepsiCo’s long term debt profile.

Coca-Cola’s Outlook

In the last ten years, Coca-Cola has consistently given investors 10 percent raises without any bumps in the way. Apart from the slight declines in earnings that the company recorded from 2008 to 2009, Coca-Cola has been increasing its income yearly which makes increases in dividends possible each year. Just as the company has been able to consistently increase its earnings and dividend payouts in the range of 8-10 percent each year for the last ten years, it should be expected that such a trend will continue into the foreseeable future.

Coca-Cola’s new product, Caffeine Free Coke Zero, will launch mid-July according to a recent press release. I expect this product to create a relentless growth in the earnings capacity of Coca-Cola for the 2013 financial year. This is because it is the product most people have been waiting for. Right now, the demand for caffeine-free beverages is growing by almost 30 percent in the U.S. So, such a product from Coca-Cola is certain to receive immediate acceptance from the teeming fans of the company’s already existing brands. Undoubtedly, Coca-Cola has strong metrics, and as it continues to maintain its growth momentum, it is sure to offer a more stable and consistent return.

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!

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