While its beverages remain bubbly, Coca-Cola
The market didn’t like the slowdown in Coke’s volume growth in the second quarter to 3% from 6% a year ago, but the underlying financial performance was strong. Coke reported a 17% increase in revenue and a 19% increase in earnings per share, ignoring the effects of another massive (noncash) writedown from anchor bottler and equity investee Coca-Cola Enterprises
Coke bears will doubtlessly point out that CCE’s $5.3 billion write-off cannot be dismissed so easily. The bottler has now written off more than $8 billion since 2006 -- coincidentally, about as much as the company’s total market capitalization today. I think this cat has been out of the bag for years -- the vast majority of intangibles on CCE’s balance sheet are worthless, and have been for a long time. Coca-Cola inflated its earnings in the 1990s by selling bottlers to CCE at earnings multiples that implied long-term growth assumptions that have since proven to be ridiculously optimistic.
If you’re an investor in Coke, CCE is a mixed blessing. Because KO owns about a third of CCE, the bottler’s results impact KO’s earnings. But CCE also serves as a shock absorber for KO investors in a time of great commodity cost inflation or weakness in the North American economy. I cannot think of a time when such a relationship has been more beneficial to KO investors than right now -- other than perhaps the 1990s, when the company was selling Florida swampland to CCE investors (in the form of independent bottlers at inflated prices) and claiming prime oceanfront views.
There are still considerable issues facing Coke investors in the short term. SunTrust Banks
Finally, many of Coke’s bottlers, including CCE, will be forced to increase prices dramatically in the second half of this year, with percentage increases even approaching the double digits. My Foolish colleague Alyce Lomax recently lamented this fact and its impact on her cola habit. While I think Alyce and consumers throughout the world might initially balk at higher prices for Coke products, my bet is that these “hardened addicts” won’t stay away for long.