Just Buy This Beverage Giant

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On Feb. 12, the beverage giant, Coca-Cola (NYSE: KO), announced its fourth quarter earnings.

Coca-Cola’s Earnings

Coca-Cola earned $1.87 billion, or $0.41 per share in 4Q12, which was up from $0.36 per share from the same quarter last year. Revenues for the quarter grew 4% to $11.46 billion; analysts had estimated revenues of $11.53 billion. The core reason behind this awesome performance was a high sales volume in tea, water and soda.

In case of sparkling beverages, company’s portfolio was up 3% for the year that was led by brand Coca-Cola that grew by 3%. Coming to the still beverages, Coca-Cola’s portfolio grew 10% for the year, thanks to PowerAde and Dasani.

North America

The North American region grew 1% for the quarter and 2% for the year, showing a quarterly growth for the 11th consecutive time. In the U.S, the company saw an increase in the “consumer dollar spent” from $56 to $60 per person in 2012. This tremendous growth was mainly led by company’s still beverages portfolio which grew by 8% in the quarter and also for the year.

Smartwater saw double digit growth for the fifth consecutive year. Moreover, the juice drinks portfolio also had remarkable growth during the year. In the case of tea, Gold Peak had remarkable growth of 36% for the year. Moreover, the sparkling beverages’ transactions were up 1% for the year.

South America & Pacific

The South American region grew 3% for the year. Brazil and Mexico, which are company’s biggest markets, grew by 6% and 4% respectively. The Pacific group was up 2% for the quarter and 5% for the year. In case of Japan, sales volume grew for the third consecutive year. As far as China was concerned, sales volume was down 4% for the quarter amid unstable economy and poor weather conditions.

Eurasia & Africa

In Eurasia & Africa, company’s portfolio was up 10% for the quarter and 11% for the year. The region was led by an 8% growth in Russia, where the Coca-Cola and Dobriy juice brands were up 20% and 13%, respectively, for the year. In India, the company saw a growth of 16%. In Europe, the company’s business declined by 5% for the quarter and 1% for the year amid macroeconomic uncertainty.

Valuation

Coca-Cola is currently trading at a forward P/E (1yr) of 17.31x and has a dividend yield of 2.60%. It has a PEG of 2.36; adding its dividend yield into this gives us gives us a PEGY of 1.80. Using an average industry forward P/E of 16.8x, I can value Coca-Cola. However, as Coca-Cola is expected to perform way better than its industry peers in the coming years, I would use a premium of 15% while valuating it.

According to high consensus estimates, Coca-Cola should be trading at $42.89; hence, it is hugely undervalued. It has an upside potential of almost 14%. Adding its dividend yield into this gives us a total return of 16.60%. Hence, Coca-Cola looks really attractive at this moment.

Competitors

Coca-Cola’s biggest competitor, PepsiCo (NYSE: PEP), would be announcing its earnings for 4Q12 on February 14. Analysts expect earnings per share of $1.05 on revenues of $19.70 billion. Pepsi’s great year in the emerging markets would certainly help it in offsetting the global economic downturn. However, in case of developing countries, Pepsi suffered a major setback in the soda sales. The snack division showed a lot of promise especially in the developing and emerging markets. Further, huge amount of money was spent on marketing in order to rebrand itself in North America and Europe. Pepsi is currently trading at a forward P/E (1yr) of 16.37x and has a dividend yield of 3%. Using earnings multiple, I value Pepsi at $81. Hence, it has an upside potential of almost 12% at this point in time.

On the other hand, Dr. Pepper Snapple (NYSE: DPS) is trading at a forward P/E (1yr) of 14.16x, showing that the investors aren’t expecting that much from the company in the near future. Further, a mean recommendation of 2.6 on the sell side depicts that it’s not as attractive as Coca-Cola and Pepsi. Moreover, its mean target price on the sell side is $47 which shows that it has a meager upside potential of 3%. In short, I remain neutral on Dr. Pepper Snapple.

Conclusion

Coca-Cola is still the market leader in the U.S. carbonated soft drinks industry (CSD) with a whopping 41.9% market share. The great hallmark of Coca-Cola has been its consistency over the years. In 2012 as well, it almost showed a flawless performance. The only region where Coca-Cola didn’t do well was China and Europe. As these regions continue to battle with slow economic growth, it had an effect on almost every consumer goods industry. Therefore, Coca-Cola should be patient and wait for the economic revival before it starts to make significant inroads over there as well. The bottom line is that Coca-Cola is still the biggest player in its industry and will continue to mint substantial profits in the years ahead. In short, I recommend buying Coca-Cola for a yield of at least 16%.


Vamosrafa7 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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