Throw This Stock Away

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Can I truly betray the can of Diet Coke in my hand?

Of course I can.

Every week, I take shots at a publicly-traded company. I'm not out to win a popularity contest. I routinely take a bearish turn on some of the country's most loved companies, even if they are active newsletter recommendations. In other words, I almost expect you to disagree with me.

It's not all about the venom, of course. Every week I also come back with three recommendations to replace the stock I'm dissing.

Who gets tossed out this week? Come on down, Coca-Cola (NYSE: KO).

The fizz biz is flat
My timing seems lousy. This week finds Coke delivering healthy quarterly results, hot on the heels of rival PepsiCo's (NYSE: PEP) stinker. Coke has now topped analyst expectations in each of the past 21 quarters.

I can admire the streak, but I'm still not convinced. Coke is a company that has a history of attracting accusations of managing earnings. In the 1990s, it was the flipping of its bottling operations to overcome any quarterly shortfalls. These days it's a craftier mix of winning currency hedges and the auto-pilot benefit of a plunging dollar.

I don't necessarily buy into all of the conspiracy theories, but with 81% of last year's profits coming from its overseas operations, it's easy to imagine how even Coke's bean counters will be hard pressed to get the company over the impact of a strengthening dollar. You saw this happen 11 years ago, when both Morgan Stanley and Salomon Brothers slashed their earnings estimates on Coke given the strengthening greenback at the time.

Can it happen again?

Let's go over the stunning quarter reported this week. Case volume rose just 3%, but revenue and earnings per share climbed 9% and 14%, respectively. What happens when volume holds its own but the currency goes the other way?

Coke isn't necessarily cheap at 15 times this year's projected profitability, especially with analysts eyeing just 5% growth at the top next year, along with an 8% gain in earnings per share.

I love the Coke model. Selling high-margin concentrate to bottlers who do all of the heavy lifting is great. Coke is a cash-generating juggernaut with a killer brand to boot. It also has great investors like Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett on board.

However, with the stock shedding only half the value of the market's 40% decline over the past year, I see bigger opportunities for faster-growing companies to bounce back and even cheaper valuations if the lull continues. 

Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

• Coca-Cola FEMSA (NYSE: KOF) -- The Latin American Coke bottler is the brand's second-largest bottler in the world. It offers a pure play on emerging South American markets. Even Bill Gates is on board with a 20% stake through his Cascade investing arm. Revenue rose 7% through the first half of the year, with operating profits climbing 12%. Trading for less than 10 times this year's expected earnings, analysts see faster top- and bottom-line growth next year for Coca-Cola FEMSA than they do for Coke itself. In short, if you're a believer in Coke based on its strong presence overseas, regional bottlers like FEMSA and Greece's Coca-Cola HBC (NYSE: CCH) offer pure plays at more compelling valuations.
• PepsiAmericas (NYSE: PAS) -- Despite its moniker, this isn't simply PepsiCo's version of Coca-Cola FEMSA. Its region of Pepsi-serving goodness is vast, including 19 states domestically as well as overseas interest throughout Central and Eastern Europe as well as the Caribbean. PepsiAmericas is trading for just eight times next year's Wall Street earnings guesstimates. I should also point out, that personal sipping preferences aside, Motley Fool CAPS members give PepsiCo the highest five-star rating, while Coca-Cola is a four-star general of the cola wars.
• Hansen Natural (Nasdaq: HANS) -- If you're looking for more growth zing out of a beverage stock, Hansen's worth a shot. The company behind the popular Monster energy drinks has proven mortal lately, missing analyst expectations in three of the past four quarters. Then again, the stock has already been slammed for that. It is now fetching lower earnings multiples than both Coke and PepsiCo -- 13 times this year's target and just 11 times next year's goal -- despite growing considerably faster.

There's a world of opportunities out there. Drink it up.

Other headlines out of the weekly trash can:

• Coke won the latest round of the cola wars.
• This isn't the first beverage company to get tossed.
• Coke is a dividend all-star, hiking its dividend in each of the past 46 years.

Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.