Does Coca-Cola Have the Potential to Be a Star Performer in Your Portfolio?

Beverage giant Coca-Cola is expanding across the globe and enjoying relative success in emerging markets. But does it have the potential to outperform the wider market in the future?

May 23, 2014 at 9:19AM

Shares in Coca-Cola (NYSE:KO) have had a rather lackluster start to 2014, with the world-famous beverage company's shares down a little under 1% since the start of the year. This doesn't compare favorably to the S&P 500, which is up 1% in 2014, although Coca-Cola has shown strength in recent weeks, making gains from a 2014 low of $37.10 to hit the current price of $40.85. With shares in Coca-Cola trading in the middle of their 52-week range of $36.83-$43.43, is now a good time to buy? 

How did Coca-Cola's quarterly results shape up?
In its most recent quarterly update released on April 15, Coca Cola reported encouraging results. On the plus side, Coca-Cola delivered global unit case volume growth of 2%, with Coca-Cola international increasing volume by 2%. These are encouraging figures and show that the business continues to provide growth opportunities, with there being particular opportunity in countries such as China and Brazil, where volumes grew by 12% and 4% respectively. Furthermore, India and Russia saw volumes increase by 6% apiece, as Coca-Cola continues to seek growth opportunities from developing as opposed to developed markets.

While on the topic of developed markets, Coca-Cola struggled in Europe and North America, with unit case volume down 4% in Europe and flat in North America. This highlights the 'two-tier' growth rate that Coca-Cola is currently experiencing between developed and developing markets – a trend that could continue in future.

Despite global case volumes growing by 2%, Coca-Cola reported a net revenue decline of 4% in the quarter, although when the impact of negative currency movements and structural changes (mostly the deconsolidation of various company-owned bottling operations during 2013) is excluded Coca-Cola's net revenue growth was 2%. A similar story is present with regard to earnings per share (EPS), with it falling by 6% on a reported basis, although when adjusted for the aforementioned structural changes and currency, EPS increased by 5%.

As ever, Coca-Cola continues to invest heavily in its brands, with 2014 seeing an incremental investment of $400 million in media initiatives across the globe. With strong cash flow (cash from operations was $1.1 billion in the first quarter), Coca-Cola has the financial flexibility to invest now for higher growth later, with the company making continued strong progress in developing markets as a result of this initiative.

Let's take a look at two of Coca-Cola's peers
Dr Pepper Snapple (NYSE:DPS) also reported an encouraging first quarter (released on April 23 2014), with net sales increasing by 1% due a favorable product and package mix, as well as pricing improvements. As with Coca-Cola, currency impacts were negative, with 1% needing to be added to the net sales figure so as to neutralize the impact of foreign exchange. Furthermore, just as Coca-Cola's numbers were hit by structural changes, Dr Pepper Snapple experienced an unfavorable year-on-year LIFO (last in first out inventory accounting, where the cost of sales utilizes the most recent stock purchases), although the difference between reported and adjusted EPS numbers was only $0.04 (around 5%), with both showing a considerable improvement on the first quarter of 2013. For instance, adjusted EPS increased from $0.53 to $0.74 – a gain of 40%.

Meanwhile,  PepsiCo (NYSE:PEP) was also hit by negative currency impacts and structural changes (mainly restructuring costs) in its first quarter results (released 17 April 2014). Despite this, reported revenue was flat for the first quarter of the year and, when these costs are excluded, PepsiCo was able to deliver organic growth in revenue of 4%. This is a highly impressive figure and highlights the strength of the company's brands, with PepsiCo also announcing that it is on-track to deliver around $1 billion in annual productivity savings in 2014. When put together, the bottom-line continues to show strength, with core constant currency EPS increasing by 10% when compared to the first quarter of 2013.

Could Coca-Cola be a star performer?
All three companies delivered relatively strong first quarter updates and have significant potential. Through harnessing efficiency savings and incremental marketing spend for example, they appear to have bright futures. However, going back to the original question posed by this article ('does Coca-Cola have the potential to be a star performer'?), the first quarter results appear to show that it does.

In addition to having the potential to increase sales further in developing markets (where much of the company's incremental media spend will be centered) and having currency neutral comparable EPS gains of 5%, Coca-Cola appears to be performing well. Allied to this is a forward price to earnings (P/E) ratio of 18.2 which, although higher than the S&P 500's forward P/E of 15.8, in my view deserves to be higher as a result of the strength of Coca-Cola's potential and its current performance. As a result, Coca-Cola appears to be well-placed to become a star performer for investors.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Robert Stephens has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers