As bad as carbonated sugar water may be for your diet, investors learned yesterday it can be even worse for your portfolio. Granted, caffeine king Coke (NYSE: KO ) -- and I dare you to try and say that one five times fast -- had already broken the bad news to investors back in September, guiding everyone down to expect earnings of about $0.37. So technically, the company did actually "beat estimates" with its $0.39 reported earnings. Regardless, few investors were seen dancing in the streets.
Indeed, the mood was downright somber in Atlanta as Coke described its 22% earnings decline since Q3 2003. Although the company attributed the full amount of the profit deficit to so-called "one-time charges," even were you to back those charges out, the company would have had zero profit growth year-on-year. Compare that to soda nemesisPepsi's (NYSE: PEP ) 35% rise in profits, and it's enough to make a shareholder cry right into his Vanilla Coke.
To that shareholder, I say: "Cheer up, buddy. The news isn't all that bad." Whenever a company you own takes it on the chin for a bad quarter, you owe it to yourself to take a firm grip on your "sell" finger and hold it. That may feel silly, but that's nothing compared with the case of "seller's remorse" you'll endure if you act rashly and the stock later rebounds. Once that dangerous digit is safely otherwise occupied, pull back for a minute and look at the larger picture. Things are rarely as grim as Wall Street and its crazy mood swings make them seem. For instance:
Coke's performance over the past nine months has had a lot more fizz to it than this last flat quarter. Over that longer term, revenues rose 5% year-on-year; net profits 7%; and diluted earnings per share by 8%. That's right: Regardless of what serial diluters such as Lucent (NYSE: LU ) , EMC (NYSE: EMC ) , and Juniper (Nasdaq: JNPR ) might want you to believe, it's possible to actually concentrate a company's stock rather than dilute it. And when a company, such as Coke, retires 1.3% of its shares outstanding, the result is that each share of stock you own gets a couple of cents in extra profit come distribution time. Coke's the kind of company that won't forget the little guy -- the outside shareholder -- just because it's temporarily down on its luck.
And if that's not good enough news for you, take a look behind Coke's GAAP curtain. That 7% rise in net profits may taste good, but wait until you get a load of the 14.4% increase in free cash flow that Coke posted year-on-year. It's the reason Coke's new marketing jingle is rumored to go: "Have some free cash and a smile."
Like this story? Then sit back, stay awhile, and enjoy these sweet and bubbly Foolish concoctions:
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
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