Concentrated Results at Coca-Cola

The business of selling syrupy soda-pop concentrate isn't what it used to be, but beverage giant Coca-Cola (NYSE: KO) looks to have figured out how to stay true to its roots and find complementary growth avenues. It's not out of the woods yet, but it's hard to argue against Coke's long-term investment appeal.

Coke's roots lie here at home, and the company has been working to "reinvigorate" weak case volume trends and an over-reliance on namesake soft drinks and other sugary offerings such as Diet Coke, Fanta, and Sprite. A recent acquisition of glaceau and its mineralwater brand meant the company further diversified into the faster-growing markets for water and sports drinks. The purchase helped boost second-quarter North American sales growth by 9%, while operating income grew a measly 1%.

Fortunately, those sales accounted for only about a quarter of second-quarter sales, because Coke is growing in the double digits elsewhere. In Africa and Latin America, there were at least 20% top-line improvements, while in Europe, sales improved more than 15% and operating income grew more than 20%. Only in Africa and the bottling investments segment was there a fall in operating income. That was because of marketing spending and the purchase of a couple of international bottlers as the company works to create stable relationships like the ones it has with Coca-Cola Enterprises (NYSE: CCE) and Coca-Cola Bottling (Nasdaq: COKE) here at home.  

As with restaurant giant Yum! Brands (NYSE: YUM), the mature U.S. business isn't proving to be enough to offset strong international trends. In Coke's case, investors still appear to be skeptical that it has returned to its roots as a sustainable grower and innovator. The third quarter should be a good test because it marks the anniversary of the successful release of Coke Zero, meaning comparable trends could prove tough to match.

Fellow Fool Rich Smith recently pointed out that Coke has consistently beat earnings expectations for four years running. But as long as the company press release continues to be scattered with words like "restore" and phrases such as "return the business to sustainable growth," Fools should keep a close eye on recent momentum for signs it is running out of steam.

Also, archrival PepsiCo (NYSE: PEP) trades at a similar valuation, has a more stable track record of sales and earnings gains, and operates a highly profitable and dominant snack food operation. But still, it's hard to argue against Coke -- it just posted a quarter with 23% net margins and more than $3 billion in operating cash flow. Indeed, Coke is a Rule Maker that is here to stay.                                  

For related Foolishness:

• Zero Is a Hero for Coke
• Coke Is Virtually It
• It's a Matter of Taste: Pepsi vs. Coca-Cola

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.