Coca-Cola Can Still Make Investors Happy

Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Understandably, investors are a little disappointed that Coca-Cola (NYSE: KO) could not meet revenue expectations in the just reported second quarter. Some investors thought that risks from falling soda demand in the US as well as economic uncertainties and currency headwinds are weighing too much on the company’s prospects and chose to sell their stakes. This triggered a 1.9% decline in the stock price upon the earnings announcement.

But, some of the confidence seems to have come back as the stock has almost fully recovered the drop. Maybe the volume weakness subsequently reported by both PepsiCo (NYSE: PEP) and Dr Pepper Snapple (NYSE: DPS) had something to do with it. The trends amply demonstrated that Coca-Cola had little to be blamed for ---  weather woes that caused sales of beverage makers to dip universally.

So where does Coca-Cola stand now? We will take a quick look at the quarterly numbers and try to figure out if the company still has what it takes to satisfy its stakeholders.

Quarter recap

Coca-Cola saw its revenue decrease 3% to $12.75 billion and its net income topple by 4% to $2.68 billion. The company’s sales growth was affected by the unfavorable weather conditions in key markets like the US, Europe, India and the numbers were also hurt by unfavorable currency impact. plus the sale of bottling operations in the Philippines.

The company matched its adjusted earnings of $0.61 per share with analyst expectations but revenue fell short of expectations of $12.96 billion. Volumes were up just 1% lagging Wall Street estimates of 3% to 4% growth.

Market outperformer

The numbers certainly look tepid but in the key North American market Coca-Cola’s volume trends are better than rival PepsiCo’s beverage volumes and also that of Dr Pepper’s. Fundamentally, soda sales in the US have been declining steadily since 1998 and in the second quarter the situation was exacerbated by the unusually wet and chilly weather.

Coca-Cola’s North American volume decreased 1% due to a 4% drop in soda sales, which offset the 5% growth in non-carbonated beverages. This reversed a streak of volume gains in 12 consecutive quarters. In comparison PepsiCo saw a mid-single-digit percentage decline in soda volumes and a low-single-digit percentage decline in non-carbonated drink volumes. Dr Pepper which predominantly operates in North America saw its volumes slip by 4%.

Overall, PepsiCo fared better in the domestic market as its thriving snacks business offset the weakness in beverage volumes. Frito-Lay North America saw a 3% volume growth and mid-single-digit organic revenue growth. The buffer provided by the snacks business is a key positive for the stock which shields it from beverage market volatility. But, Dr Pepper, like Coca-Cola, is also a pure beverage play and had nothing much to fall back on in the face of declining sales of key brands like Sunkist soda, 7UP, and Hawaiian Punch.

Some of the lost beverage sales from both PepsiCo and Dr Pepper may have gone to Coca-Cola, which reported market share gains both in terms of volume and value. Now that the industry is witnessing better demand from improvements at both convenience retailer as well as quick service restaurant channels, Coca-Cola can leverage these gains.

Global business model

It is true that the soft sales volumes are as much a fall-out of poor weather as of uncertain economic conditions in key markets. And Coca-Cola has a tough job at hand in achieving turnarounds in individual markets. Despite these challenges, the fact remains that Coca-Cola’s reach and distribution system is unparalleled in the world. The company does not operate in just two countries – Cuba and North Korea.

So, no matter how much it rains the sun is bound to be shining at some part of the world. In the second quarter some bright spots were the Eurasia and Africa group where volumes grew 9%. The Middle East and North Africa business units as well as the Central, East and West Africa business units all delivered double-digit growth. Similarly, South-east Asian markets of Thailand, Indonesia, and Vietnam also delivered double digit growth.

Strength in still beverages

With anti-obesity movements gathering steam in the US as well as other parts of the world, Coca-Cola has been focusing on growing its non-carbonated beverages business. These currently account for one-fourth of the company’s total global sales and the proportion is on the rise.

There was significant sales momentum in non-carbonated beverages in the second quarter and the strength was broad-based. In North America, non-carbonated beverages witnessed their 24th consecutive quarter of maintaining or increasing market share in terms of value. In Latin America, non-carbonated beverages gained share both in terms of volumes and value. There were double digit growth in Eurasia and Africa group and also good gains in China, India and other markets. Key non-carbonated brands are Gold Peak ready to drink tea, SmartWater and Dasani packaged water, Powerade, Simply and Minute Maid juices, etc.

Conclusion

Coca-Cola is a great company and a great brand. And even great companies have occasional bumps on their roads. There is nothing to suggest that Coca-Cola’s future prospects are stymied. True the US soda market is weakening, but it has the entire globe within its reach where it can increase its sales. The growing non-carbonated business provides an additional support to future sales. Coca-Cola has been increasing the wealth of its investors for many decades and this will continue.


Eshna De 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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