Coca-Cola's Global Network Puts It Ahead Of Peers

By Maxwell Fisher - April 24, 2012 | Tickers: KO, DPS, MNST | 0 Comments

• Email
• Print

Coca-Cola (NYSE: KO) is an American institution. It is more or less a worldwide company nowadays, and sales outside America comprise about 70% of sales. Its revenues have taken a substantial jump recently due to the acquisitions of some of its bottling acquisitions. Even after the company’s $12 billion acquisition of Coca-Cola Enterprises, its largest bottler, in 2011, Coca-Cola's debt is just 31% of its capitalization, and another sizeable acquisition is always possible. Here is a fine site to keep up with rumors and news in the soft drink business.

With all of the recent studies relating soft drinks to cancers, obesity, diabetes, tooth decay, and other maladies, it is something of a wonder that Coca-Cola volumes continue to increase annually, even in developed countries. In its first quarter of 2012, Coca-Cola posted earnings of $2.07 billion, or $0.89 per share. That represented a 9% advance from the first quarter of 2011. The profit number matched analyst estimates, and was revenue driven as the company's sales increased by six percent, to $11.14 billion. Analysts were forecasting $10.8 billion.

While North American and European sales eked out narrow gains, tremendous growth occurred in developing economies such as Russia (20%) and India (27%). The North American market remains Coca-Cola's largest volume market by far, with about $4.9 billion in sales in the quarter; it is the least profitable in terms of margins of Coca-Cola's geographic divisions. Its operating profits in the first quarter of 2012 were $451 million, for a nine percent pretax profit margin. Both the European and Latin American units run at over 50% pretax profit margins. The company recently opened its 42^nd bottling facility in China which will allow for additional growth in that major and growing market.

Looking at the last 12 months, Coca-Cola's operating profit margin of 23.4% beats Dr. Pepper Snapple Group’s (NYSE: DPS) margin of 17.4% and Pepsico’s (PEP) margin of 15.6%. Continued focus on non-American consumers will allow Coca-Cola's margin to expand further. Coca-Cola's margins also easily outpace its biggest worldwide food and juice competitor, Nestle, whose 12 month trailing operating profit margin is 15.6%

Coca-Cola sells over 500 different brands and styles of nonalcoholic beverages around the world. With a company of that size and scope, bad things are bound to happen somewhere. In January, 2012, its Minute Maid orange juice brand suffered the indignity of being linked with imported orange juice containing trace amounts of an illegal (in this country) fungicide. In the great scheme of things, the incident was little more than a reminder of what it is like to run an integrated multinational. A potentially far more serious issue arose in New Zealand when a 30 year old woman with a two gallon a day Coca-Cola habit died of a heart attack.

Few could contest that with its 100 year history, that Coca-Cola is a premier company. I have often written there is no bad time to buy such a company.  But current valuations for Coca-Cola do give me pause. Its price to earnings ratio of 19.6, while expensive, concerns me less than the company's estimated 5 year PEG of 2.7. Generally, a PEG much above 2.0 is a sign of an overvalued company. Analysts see profits for the company at $4.10 per share this year and $4.49 in 2013. Balancing the less than blistering profit growth pace is that Coca-Cola currently pays an above average dividend yield of 2.8%, and has raised its dividend each of the past 49 years in a row.

I believe that Coca-Cola should be a core holding for many investors. But I would be even more emphatic on that point if the entry point were below $66 per share.

Monster Beverage (NASDAQ: MNST) was known until recently as Hansen Natural. Monster is the maker of a variety of natural beverages sold under the Hansen name at higher end grocers and specialty shops in addition to the ubiquitous energy drinks.  It has had a tremendous run the past several years. The question is, are the good times over for this growth company?

Over the past ten years, Monster's sales growth improvement has averaged an annual 31%. Its profit growth over the same period has averaged 47%. This brilliant pace cannot be sustained, but Monster is far from a dud. The Monster brands of beverages are being introduced in numerous overseas countries. About 30% of sales are outside the U.S. The stock price's assent from a split adjusted penny stock in 2004 to over $60 per share today has been a delight to investors. But again, we have a case of inflated valuations for Monster. It is trading today at a price to earnings ratio of 41, and a 5 year PEG of 2.17. It pays no dividend, despite a tremendously healthy balance sheet that could easily support a dividend.

I like Monster. Over the past 12 months its operating margin is at the head of the soft drink class at 26.8%. I wonder though, how the market will react if the company starts to show 10 – 15% year over year profit growth, which is likely out to mid-decade. I do believe Monster's best years are behind it, and the stock has gotten ahead of itself. Buyers beware.

Dr. Pepper Snapple Group was created in a spinoff from Cadbury Schweppes in 2008. At the time, the British consumer product conglomerate was under pressure to enhance shareholder value from activist investors, and in those days of the recession, lining up a buyer for the unit proved impossible. The resulting Dr. Pepper has over 50 brands, highlighted by the names in its title. All of its sales are in North America, and 89% are specifically in the United States. Because of that singular reliance on mature markets, Dr. Pepper has limited growth prospects. Analysts see earnings of $2.93 in 2012 and $3.19 in 2013. That on its own does not excite me. But that, along with a generous, 3.4% dividend does the trick. I think Dr. Pepper is a fine choice for income oriented accounts. 

• Email
• Print
• Feedback