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Coca-Cola Pushes Through Global Challenges

publication date: Jul 17, 2012
author/source: RJ Towner

Global beverage giant Coca-Cola (click ticker for report: KO) reported a solid second quarter Tuesday morning, despite weakness in Europe and worries about a global slowdown. The firm earned $1.22 per share versus the $1.19 per share that consensus was expecting (and up 4% year-over-year). Revenues also climbed 3% year-over-year to $13.1 billion, driven primarily by a 4% growth in volumes (revenue advanced 7% on a constant currency basis).

Aside from Europe, which has challenged virtually every international company, Coca-Cola announced good results across every segment. North America, by far the firm’s most saturated region, saw volumes grow modestly on a year-over-year basis, while revenues jumped 5%. Sparkling beverage volume decreased 2% as US consumers seem to be moving away from sugary sodas, though revenue for sparkling beverages climbed thanks to a mix shift and strong gains from Coca-Cola Zero, Fanta, and new Seagram’s products. Still-beverage sales were stronger, as volume grew 8% on the heels of increased Powerade volumes (up 13% from the same period last year). We believe Coca-Cola’s willingness to sell its Powerade products at price points lower than Gatorade (click ticker for report: PEP) has led to strong market share gains and customer willingness to switch brands. Further, Powerade Zero is a large volume, no-calorie beverage that Gatorade has yet to truly compete with, as customers shift to less calorie-dense beverage options.

In addition to North American strength, the firm’s Eurasian-Africa unit experienced particularly robust growth. After some negative effects of currency, revenues grew 5% thanks to 12% volume growth. India led the charge, with volume surging 20%. Unlike the US where the market for Coca-Cola itself is saturated and facing government backlash for its calorie content, the beverages are welcomed in India, where volume of the American classic grew 35% year-over-year. Sprite volume also grew 29%. Russia also continues to soak up soft drinks, as the firm experienced strong double-digit growth in brand Coca-Cola, Fanta, and Sprite. We think these emerging markets will continue to be growth drivers going forward. Since there is less of a concern over obesity, it could be decades before the high calorie beverages face the same backlash felt in the United States.

Growth in Latin America and the firm’s Pacific region also remain strong. Though Coca-Cola volumes only grew 2%, volumes in ready-to-drink teas and sports drinks in Latin America surged ahead, growing 37% and 28%, respectively. In spite of 8% volume growth in the Pacific region, we are a bit disappointed that Coca-Cola hasn’t quite been able to take advantage of income growth in China. Volume grew only 7% in China, versus 20% growth in Thailand and even 4% volume growth in Japan. However, we think growth at McDonald’s (click ticker for report: MCD) in the region could translate into market share gains for Coca-Cola since the world’s largest fast-food restaurant chain doesn’t (yet) have the same presence of Pepsi-ally YUM! Brands (click ticker for report: YUM). Bottling investments also continue to perform well, with volumes increasing 12% for the quarter, generating currency-neutral earnings growth of 19%.

Overall, we think Coca-Cola continues to execute a strong plan for global expansion that is leading to robust cash flow generation and market share gains. However, we think shares are fairly valued at current levels. Though we like the firm and think it will be selling its classic beverages for some time to come, we aren’t too excited about its prospects in the near-term. Further, we don’t think Coca-Cola provides investors with a great margin of safety at this time (based on our fair value estimate range), and we remain on the sidelines.

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