This Beverage Company Must Innovate to Thrive

In 2010, Coca-Cola Enterprises (NYSE: CCE  ) sold all of its United States bottling operations to Coca-Cola (NYSE: KO  ) . Now, Coca-Cola Enterprises is operating solely in Europe, where the consumer is especially weak due to austerity measures. However, Coca-Cola Enterprises isn't in the business of quitting.

Recent results
For the second quarter, net sales declined 2.5% to approximately $2.2 billion year over year, and diluted EPS came in at $0.66 versus $0.67. Both declines are concerning, and in regards to earnings, share buybacks boosted the number by $0.06 more than the year-ago quarter. However, while net income dropped to $182 million from $205 million, $34 million invested in a restructuring played a big role.

Costs per bottle/can increased 2%, mostly due to increased sweetener costs. This was partially offset by a decline in commodity costs, especially aluminum. Coca-Cola Enterprises aims to cut costs via renegotiating supplier agreements.

Innovation
For Coca-Cola Enterprises, 90% of sales volume stems from Coca-Cola products. Therefore, demand for the Coca-Cola brand is critical. 

Volume dropped 2.5% in the second quarter, which Coca-Cola Enterprises attributed to poor weather, increased taxes, and an uncertain economic environment that has led to weak consumer-spending habits.

Volume has only increased in two areas: Coca-Cola Zero Cherry and Vanilla Coke, the latter due to expanded distribution. Note that both are innovative products, and that there has been success. Coca-Cola Enterprises also hopes to see positive results with recent innovations like its 205 ml Slimline can (in Great Britain) and Sprite with stevia.

Recent economic conditions have led to net price per bottle/can declining 0.5%. It's hopeful that the "Share a Coke" program will see continued success. This program began in Australia two years ago, when the 150 most popular names in Australia were placed on Coke bottle labels. Consumers had no idea this was going to take place, which added to the excitement.

Since only 50% of young adults and teens in Australia had ever tasted a Coke, it was a worthwhile risk. It paid off, as it led to increased brand loyalty. This program will now be run in 20 markets this year, and the odds of the majority of these campaigns being successful are high.

If you were only looking for a trade, as opposed to an investment, then you might not even need to worry about innovation. Coca-Cola Enterprises is currently in the midst of a $1 billion stock-buyback plan. This will help reduce share count, which will then aid earnings. However, share buybacks aren't long-term solutions, as they don't help grow the underlying business.

Somewhere in the middle
Many investors wonder if Coca-Cole Enterprises presents a better investment opportunity than Coca-Cola. If you look at the performance of these two stocks over the past year, then you might think so.

Coca-Cola Enterprises data by YCharts.

However, that chart doesn't tell the whole story. Coca-Cola sports a higher net margin (percentage of revenue turned into profits) of 18.1% versus 7.6%. It also has a slightly more impressive ROE (percentage of investor dollars turned into profits) of 26.6% versus about 25.0%, and it yields 2.9% versus 2.1%.

Furthermore, Coca-Cola is much larger, with a market cap of $169.7 billion versus slightly less than $10.0 billion. Therefore, Coca-Cola is likely to be more resilient if the market were to falter. When the market is in bull mode, investors want growth, but when the market turns south, they want safety.

Since the market continues to perform well, you might be looking for growth. If that's the case, then Formento Economico Mexicano (NYSE: FMX  ) , also known as FEMSA, might be a better option than Coca-Cola Enterprises. It sports a net margin of 8.5%, an ROE of 13.8%, and it yields 1.4%.

These aren't big selling points when compared to Coca-Cola Enterprises, but FEMSA is the largest Coke bottling company in the world. Plus, Latin America (FEMSA doesn't just operate in Mexico) presents a lot more growth potential than Western Europe right now. If you're looking for more proof, consider the annual comparisons below.

Coca-Cola Enterprises:

Metric 

2010

2011

2012

Revenue (in billions)

$6.71

$8.28

$8.06

Diluted EPS

$1.83

$2.29

$2.25

FEMSA:

 Metric

2010

2011

2012

Revenue (in billions)

$13.41

$16.43

$18.38

Diluted EPS

$9.08

$3.03

$4.46

While neither company has demonstrated perfection, FEMSA is still seeing top-line growth, and EPS improved in 2012 over 2011.

Conclusion
Coca-Cola Enterprises is a strong operation, but based on its region of exposure, this isn't likely to be the best time to invest. Impressive innovations might help, but that's a lot to bank on. If you're looking for a growth play with less downside risk, then consider FEMSA. And if you desire safety because you're concerned about the health of the stock market, then Coca-Cola will likely be the best bet of the three. 

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