Don't Miss Out on This Beverage Stock
Waqar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After doing a great job in its first quarter, the beverage giant, Coca-Cola (NYSE: KO), didn’t meet its revenue expectations in the second quarter. As soon as the company’s earnings were released, its share price fell by more than 1% in just a few hours. Before falling to $40.23 on July 16, Coke’s shares had appreciated more than 13% this year. Now, the big question is: Does this low price make Coke a buy?
In the second quarter, Coke’s sales volume grew by 1%, which was lower than its expectations. The company posted earnings of $2.68 billion, or $0.59 per share, versus $2.79 billion, or $0.61 per share, last year. Excluding extraordinary items, Coke earned $0.63 per share.
Revenue slipped by 3% to $12.75 billion, missing expectations by $0.21 billion. Sales declined by 4% in Europe and 1% in North America, but were up 2% in South America, 2% in the Pacific, and 9% in Eurasia and Africa.
According to the company, Europe’s sluggish economic growth, Mexico’s inflation and a credit crunch in Brazil were the core reasons behind a lackluster quarter. Moreover, wet and cold weather in the U.S, flooding in central Europe, and an early monsoon in India didn’t help the cause either.
According to Coke’s CEO, Muthar Kent, dull performance in the second quarter was a result of “confluence of events” that won’t happen again. Company’s CFO, Gary Fayard also said that they are expecting to see significant growth in the latter half of 2013. He further said that the company would meet its long term targets this year.
In the third quarter, analysts expect Coca-Cola to earn $0.55 per share on total revenue of $12.41 billion. For the full year, analysts' expectations stand at $2.12 per share on $48.07 billion revenue.
Coca-Cola is trading at a forward P/E (1yr) of 17.49 and yields a dividend of 2.70%. I'll value Coke using an industry forward P/E (1yr) of 17.55. But, since I expect Coca-Cola to outperform its rivals in the future, I will value it using a premium of 15%. Hence, a forward P/E (1yr) of 20.1 would be used for its valuation.
Using 2014's earnings estimates, I value Coca-Cola at $46. This shows that it’s an undervalued stock and has an upside potential of 14%.
Beverage industry’s major players
Coke’s biggest competitor, PepsiCo (NYSE: PEP), has announced that it will be expanding itself in one of the fastest growing food segments – the U.S. yogurt market. This plan comes as part of company’s latest goal to triple its sales outside its mainstream drinks and chips.
In order to implement the plan successfully, PepsiCo has gone into a strategic partnership with Theo Muller Group of Germany. In June, the Muller Quaker joint venture opened a yogurt manufacturing plant in New York. Pepsi’s strong marketing and distribution channel, combined with Muller’s expertise, is all set to grab a substantial market share in the U.S. PepsiCo is trading at a forward P/E (1yr) of 17.61 and has a dividend yield of 2.70%. A mean recommendation of 2.2 on the sell side shows that it is one of the best buys in the beverage industry.
On the other hand, Dr Pepper Snapple (NYSE: DPS) is trading at a much lower forward P/E (1yr) of 14.25, reflecting that the market doesn’t expect the company to do that well in the near future. As Dr Pepper Snapple expects its raw material costs to remain high this year, it won’t be easy for the company to meet its earnings estimates.
During the last six months, insiders at Dr Pepper Snapple sold more than 335,000 shares. Net shares sold by the insiders stood at a massive 36%, depicting that the future doesn’t look that bright for the company. Furthermore, a mean recommendation of 2.8 on the sell side shows that Dr Pepper Snapple isn’t a good buy at this stage.
The Asian market, particularly India, will continue to serve as one of the biggest catalysts for Coca-Cola. In the East Asian market, Thailand, Indonesia and Vietnam are expected to post double digit growth in the second half. The company won’t be able to grow significantly in China amid weak economic growth. Thanks to improved economic conditions, Europe is expected to generate a little more revenue for the company. In the products category, tea, juices and sports drinks will make further inroads, especially in the North American market.
During the last couple of years, Coke has always remained one of the top buys in the industry. The second quarter was a result of some rare events that occurred together, resulting in slightly lower revenue. That won’t happen in the future. The bottom line is that Coca-Cola will continue to outperform its rivals in the future, making it a great buy. Plus, Coke’s low price makes it even more attractive. In short, buy Coca-Cola for an upside of 14%.
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Waqar Saif 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!