Coke reported decent revenue growth and good volume in the third quarter, but it's shares are richly priced for a company with 18% worldwide marketshare in an industry that grew just 2% last year. For the last 10 years, Coke's unit case growth has paced the industry's, an unremarkable feat.
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Analysts expected the Atlanta-based company to earn $0.41, so the company is credited with beating estimates by a penny. Maybe, but a lower tax rate boosted the bottom line $0.02. Shares of Coke fell about 3% in early trading on fears that currency issues in Europe will hurt earnings in 2001.
Focusing too closely on earnings per share can mislead investors from what's really important -- long-term economic growth -- so investors shouldn't let EPS and estimates blind them from taking a longer look at financial performance.
It's all about growth
The issue with Coke these days isn't earnings, or cost savings (though cost savings matter with the restructuring underway) as much as growth and the health of its bottlers, an integral part of Coke's business. I'll tackle the growth issue here.
Revenues jumped nearly 8% to $5.5 billion, up from $5.1 billion a year ago, when sales increased 9%. A stronger world economy spurred sales.
There are two ways Coke measures sales: gallon shipments and case unit volume. Gallon shipments measure how much syrup and concentrate is sold to bottlers, so it's basically a measure of sales to wholesalers. Case unit volume measures customer sales, and Coke regards it as more important since it measures demand at the retail level.
How did they do in Q3? Worldwide unit case volume growth flowed in at 4% (5% for the first nine months of 2000) and gallon shipments at 8%, compared to unit case volume growth of 3.5% last year, and flat gallon shipments.
An uphill climb
Coke expects unit case volume of 5% this year and 6% to 7% next year, and analysts forecast 13% annual earnings growth. These won't be easy targets to hit with 18% of the worldwide nonalcoholic beverage market, an industry that grew just 2% last year. Over the last 10 years, in fact, Coke's unit case growth has increased at the same pace as the industry, unremarkable performance. More people will be drinking Coke products in 20 years, no doubt, but how much is reasonable to pay for a stake in this business, as excellent as it is?
That's the question worth focusing on. Coke trades at a forward P/E of 37x, and 56x trailing free cash flow. At this price, investors expect Coke to do very well. Investors should shop around and weigh these facts, along with relevant business information such as the strength of Coke's brand name, against other investment possibilities, such as PepsiCo (NYSE: PEP), or perhaps Harley-Davidson (NYSE: HDI), or Home Depot (NYSE: HD).
The point here isn't to suggest buying any of these companies or that they represent an apples-to-apples comparison -- they don't. It's just to get a feel for differences in how these stocks are priced and what opportunities the market is making available.
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