What to Expect From Coca-Cola for the Rest of 2012

While Coca-Cola (NYSE: KO  ) has performed well so far this year, prolonged high input costs and fierce opposition from both likely and unorthodox competitors may hamstring a strong finish for this cola giant. Let's take a look at where Coca-Cola's been so far this year and, more importantly, what to expect for the rest of 2012.

Where Coca-Cola's been
While revenues have increased 50% during the past two years, margins are feeling the pressure because of a mix shift toward lower margin bottling operations as well as higher input costs. All cola companies are facing the challenge of higher impact costs, but you wouldn't guess it glancing at their stock performances so far this year.

KO Total Return Price Chart

KO Total Return Price data by YCharts

All of the major cola companies have enjoyed a decent 2012. Dr Pepper Snapple (NYSE: DPS  ) is up nearly 16%, Coca-Cola stock has gained roughly 12% year to date, and PepsiCo (NYSE: PEP  ) has enjoyed an 8% run-up. SodaStream (Nasdaq: SODA  ) , nipping at competitors' heels, is up nearly 7% during the same period. Meanwhile, the S&P 500 is up just shy of 8% so far this year.

Here's what to expect from Coca-Cola for the rest of this year.

Bitter predicament
High fructose corn syrup is a major ingredient in Coke products. As the ongoing and severe U.S. drought plays out, major producers of high fructose corn syrup like Archer-Daniels Midland (NYSE: ADM  ) are raising their prices, which affects Coke's input costs. Historically, Coca-Cola has successfully hedged corn syrup, but a prolonged drought could negatively affect the company's bottom line.

Bringing sugar water to very specific corners of the globe
Something to expect for the foreseeable future from Coke and its competitors is additional investment in emerging market nations. As you can see from the chart below, there is plenty of opportunity left for Coke in emerging market nations, namely India.

Country

Percent of Coca-Cola's Overall Unit Case Volume

Per Capita Consumption

Population

United States 20% 403 314 million
China 8% 38 1.31 billion
India 2% 12 1.21 billion
Russia 2% 73 138 million

Sources: Coca-Coca 2011 Annual Report. Per capita consumption based on an 8-ounce serving.

Competition popping up
SodaStream's gunning for major competitors, like Coca-Cola, with its "The Cage" marketing campaign. "The Cage" is filled with bottles and cans to remind consumers of SodaStream's merits in reducing the number of plastic water and soda bottles in landfills. Coke's response has been threefold: Threatening lawsuits against SodaStream for use of Coke bottles in its marketing campaign, touting its own PlantBottle made partially from plants as opposed to petrochemicals, and rolling out its Coca-Cola Freestyle dispensing machines in more markets.

But don't expect Israeli SodaStream to fizzle out. Its at-home soda system is making serious inroads overseas and is currently sold in the U.S. at megaretailer Wal-Mart and Best Buy. SodaStream's products will be available on supermarket and drug stores shelves in 2014. This pesky rival boasts virtually no debt and appears undervalued with a PEG ratio of just 0.57 compared to Coke's 2.48.

No crisp dollar bills for the vending machine? No problem.
Coke has partnered with Google to pilot cashless vending machines. The system uses Google Wallet payment service that allows customers to buy vending beverages using a smartphone. Expect future investment from the company in anything that makes it easier for us to enjoy a refreshing Coke without having to dig into our pockets for change.

Stock up
Coca-Cola's upcoming two-for-one stock split will be the eleventh in the stock's 92-year history and the first since 1996. Of course, a stock split has no affect on the fundamental value of the stock.

Foolish bottom line
As you review your portfolio's mid-year performance, keep in mind Coca-Cola's prospects, merits, and challenges for the rest of 2012 and beyond. If you're looking for a great stock to add to your portfolio, check out the one stock our analysts are so excited about they've dubbed it "The Motley Fool's Top Stock for 2012." This company boasts ample emerging market exposure with tons of growth potential. This report won't be available forever, so get your free copy today.

Fool contributor Nicole Seghetti owns shares of PepsiCo. Nicole welcomes you to follow her on Twitter @NicoleSeghetti. The Motley Fool owns shares of Best Buy, Coca-Cola, Google, SodaStream International, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola, SodaStream International, Google, and PepsiCo, have recommended creating a diagonal call position in PepsiCo and a bull call spread position in Wal-Mart Stores. The Motley Fool has a disclosure policy. 


We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On July 19, 2012, at 11:07 AM, sodawarrior wrote:

    The longer Coke holds on to its lower margin bottling operations the more trouble it will see. The bottling operations have become to large a part of its overall operations and will surely put pressure on its growth and margins going forward.

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