The search for undervalued industry giants yields few results in a high-flying market. However, when Coca-Cola (KO 0.63%) scrolls across the screen, trading 10.5% below its 52-week high, sporting a 2.9% dividend yield, a dig deeper is required. This company has been building wealth for decades and could be providing the opportunity of a lifetime once again.

The beverage king
Coca-Cola is the global nonalcoholic beverage leader with more than 3,500 products offered in more than 200 countries. Its most popular products include Coca-Cola, Diet Coke, Sprite, Fanta, Dasani, Powerade, Fuze, and VitaminWater. The company leads the industry with 16 $1 billion brands, and this number could grow with its constant innovation and strategic acquisitions.

July mixer 
On July 16, Coca-Cola reported second-quarter results. Here's a look at the key statistics:

  • Earnings per share of $0.63, in line with expectations
  • Revenue of $12.75 billion versus estimates of $12.97 billion
  • Volume increased 1% globally
From the date of this release, Coca-Cola's stock has fallen about 3.6%. There was no "wow factor" in the report as earnings per share grew by $0.02, or 3.8%, and revenue fell $350 million, or 2.7%, year over year. The company needs to do much better if it is going to entice new investors to pile in or analysts to upgrade the stock. 

Third quarter's a charm?
In October, Coca-Cola will report third-quarter earnings. The company has yet to record a blowout quarter in 2013, and this could be its time to shine. Currently, analysts expect the following numbers:

Earnings per share $0.54
EPS growth YOY 5.9%
Revenue  $12.1 billion
Revenue growth YOY (1.6%)

Whether it's a beat on both the top and bottom lines, increased earnings outlook for the full year, a buyback, or a new product announcement, Coca-Cola needs to do something to get people talking. The stock has moved less than 1% over the last 52 weeks, so unless something positive comes out of this report, it could continue trading sideways. 

2013 and beyond
According to consensus analyst estimates, through 2015, Coca-Cola is expected to earn the following:

  • 2013: 5% growth
  • 2014: 7.6% growth
  • 2015: 8.8% growth
Currently, Coca-Cola trades at 20.48 times earnings. If it were to continue trading at this multiple, the stock would exceed $50 per share by 2015; this represents a growth of more than 25% from today's stock price. A 25% return in just two years is enough to entice almost any investor. 

Dividend aristocrat
Like Church & Dwight, as I mentioned in a previous article, Coca-Cola is home to one of the best dividends in the investment world. It currently pays out $1.12 annually, resulting in a yield of roughly 2.9%. The most impressive thing about this dividend is that it has been raised for 51 consecutive years, including a 9.8% increase in 2013. With the company's consistent free cash flow generation, it is safe to assume the streak of consecutive raises is going to continue for decades to come. 

A peek at the competition
PepsiCo (PEP 1.34%), Dr Pepper Snapple (DPS), and Coca-Cola are home to all of the top-10-selling soft drinks in the world: 

  1. Coca-Cola Classic (Coca-Cola)
  2. Diet Coke (Coca-Cola)
  3. Pepsi-Cola (PepsiCo)
  4. Mountain Dew (PepsiCo)
  5. Dr Pepper (Dr Pepper Snapple)
  6. Sprite (Coca-Cola)
  7. Diet Pepsi (PepsiCo)
  8. Diet Mountain Dew (PepsiCo)
  9. Diet Dr Pepper (Dr Pepper Snapple)
  10. Fanta (Coca-Cola)
Needless to say, if you are going to compare the best beverage and soft drink companies in the world, these are the three to choose.
 
CompanyCoca-ColaPepsiCoDr Pepper Snapple
Market cap  $172.3 billion  $125.86 billion  $9.24 billion
No. of brands in top 10  4  4  2
P/E  20.48  19.24  15.51
Forward P/E   17.14  17.30  13.84
Dividend yield  2.90%  2.80%  3.40%
Consecutive dividend raises 51 years   41 years  4 years
YTD Performance  3.18%  17.78%  (0.20%)

Source: Yahoo! Finance. 

All three companies have strong fundamentals, but PepsiCo is far outperforming the group year to date. PepsiCo has become a darling to investors, but I think it has run too much and will trade sideways for the rest of the year. However, another 15%-plus return in 2014 could easily take place, as this company has been firing on all cylinders. 

The underperformance of Coca-Cola and Dr Pepper Snapple Group leaves the two with plenty of room to run and provides the highest potential short-term return for new investments. With that said, this is not a short-term idea, the two simply have higher upside potential for the remainder of 2013 paired with consistent projected growth in the coming years. Coca-Cola is my favorite play of the three, as I believe it will turn it around in the third quarter. However, Dr Pepper Snapple Group is a close second, because of its very low multiple, favorable forward multiple, and hefty dividend.

The bottom line
Coca Cola has been a moneymaking machine since it was founded in 1886. It has been an underperformer in 2013 and could be ready to run. Whether this run happens or not, it can still provide a consistent stream of income via its rock-solid dividend. Watch Coca-Cola closely when it reports earnings on Oct. 15, as this will be the major factor in its performance for the rest of the year.