Coke Explodes

Remember that time your kid brother handed you an icy cold can of Coke but neglected to mention that he'd just given it a good shake? Yeah, yesterday's earnings report out of Motley Fool Inside Value recommendation Coca-Cola (NYSE: KO) looked a lot like that.

And the look on your face when the can erupted? The expressions on the faces of Wall Street analysts and Coke's short-sellers pretty much mirrored it.

Stand back -- this thing's gonna explode
Coke blasted its way into fiscal 2008 yesterday with an earnings report that easily topped analyst estimates. Per-share diluted profits grew 19%, and free cash flow was up 22%. More impressive (by contrast) still were the numbers underlying these profits. Coke achieved this feat despite shipping just 6% more soda pop, by volume, this year than last -- and even though the continuing surge in commodities prices outstripped revenue growth 22% to 21%.

So why, one wonders, did Coke more or less sit out yesterday's Wall Street rally? Beating earnings is supposed to be a good thing, after all. Yet Coke's shares ended the day up less than half a percent.

Here's why
The key to Mr. Market's reticence over Coke's apparently superb results is the "ingredients." As company president, Muhtar Kent, pointed out, Coke's "International business once again led the way" in the first quarter, but "there is still much more work to be done, especially in our flagship North America market."

Sing it, brother. And Kent wasn't just talking about international "sales" in the ordinary sense of the word. Check out a few figures comprising Coke's revenue growth last quarter. Making up Coke's 21% revenue growth were 5% from additional concentrate shipments, and 2% from price increases and sales of more expensive products.

Together, those factors accounted for one-third of the revenue growth -- but a third factor -- currency exchange rates -- contributed more revenue growth than those first two put together. Selling goods in countries where people have strong currencies, then transferring the profits back home to be converted into monopoly money (I mean U.S. dollars) boosted Coke's revenues by 9%.

Easy come, easy go
In this Fool's view, that's the real thing, the real story behind Coke's results. And it's a story that plays out well for foreign based bottlers and distributors like Coca-Cola FEMSA (NYSE: KOF), Andina Bottling (NYSE: AKO.A) and Coca-Cola HBC (NYSE: CCH). But it's also a story that should concern not just Coke shareholders, but investors in any company that earns a large portion of revenues abroad, such as rival PepsiCo (NYSE: PEP).

To paraphrase: "Currency exchange rate fluctuations giveth, and currency exchange rate fluctuations taketh away. Blessed be the name of Euro." And the cursing? That's what you'll hear if and when the U.S. dollar strengthens, and those foreign currency gains reverse and become foreign currency losses. Albeit, that could be sometime far in the future.

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