Wednesday, October 29, 1997
by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (Oct. 29, 1997) -- Yesterday we began to look at the recent third quarter earnings for the COCA-COLA CO. (NYSE: KO), finding that if you subtract the net income from the sale of bottling operations, the earnings per share for the quarter declined from $0.39 in 1996 to $0.36 this year. Net income declined 10.7% when you deduct the $148 million that the company earned from the sale of bottling interests.

Why deduct this income? Though the company includes the buying and selling of bottlers as part of its core business, we want to see to what degree its real core business -- selling beverages -- is growing. We don't want to assume that the buying and selling of bottlers will lead to consistent market-beating growth over the next twenty years. It could never accomplish that, and the small scale to which these investments impact current numbers attests to that. We want to see how the core business is growing, but this is no small feat when you consider the currency hits that the company took and their impact on earnings. General Foolish thoughts on all of these shenanigans will be at the end of today's recap.

We drew the lucky straw here in having to compare this quarter to last year's third quarter (sarcasm) because last year the company had four strange, non-recurring charges and credits in the quarter. Drawing up the November 1996 10-Q report from EDGAR's SEC files on the Web, we can take out and add in the one-time adjustments to figure out beverage sales growth as best as possible so we can compare it to this year. Let's review the numbers for the two quarters:

Coca-Cola Third Quarter, 1997 vs. 1996

                       1997       1996      % Change
REVENUES              $4,954     $4,687           6
Cost of Goods Sold     1,659      1,814          (9)
GROSS PROFIT           3,295      2,873          15
Selling, Admin. and
General Expenses       2,052      2,419         (15)

OPER. INCOME           1,243        454         174
Interest Income           50          49          2
Interest Expense          58          67        (13)
Equity Income             46          56        (18)
Other Income - Net       224        445          ---

INCOME TAXES           1,505        937          61

Income Taxes             494         (30)        ---
NET INCOME            $1,011     $  967           5
NET INCOME/SHARE      $ 0.41     $ 0.39           5

Shares Outstanding     2,478      2,492          (1)

Remember that not including the money earned from selling an interest in four bottlers, Coca-Cola had $863 million in net icome last quarter, as opposed to the $1,011 million reported in total and highlighted in purple above. $863 million is a 10.7% decline from last year's total net income. But what was earned last year from beverage sales?

Let's take a peek here...

We see top-line revenue of $4.687 billion and gross profit of $2.8 billion (in pink above), each growing 6% and 15% respectively. Because you don't add asset sales (bottlers) to revenues, we can presume this is pretty straightforward beverage growth. Earnings per share growth is where we had the concern yesterday, though -- seeing the 10.7% decline in net income when bottling income was subtracted. But in order to see what really would have been earned on beverage sales last year we need to back out all the one-time charges. The result will probably be an even greater year-over-year decline in earnings per share from the core business. Why?

In the third quarter last year the company added a one-time $28.5 million charge to SG&A (sales, general and administrative expenses) for a contribution to the Coca-Cola Foundation. It also added $80 million to SG&A for its new "Project Infinity," which initiated the redesign of the company's information and communications capabilities. Finally, it added $276 million to SG&A for programs related to strengthening the company's worldwide distribution system. This explains the sharp drop in SG&A this year. As you can see above, the company also had a one-time tax credit in 1996.

We'll figure out the numbers tomorrow. Should we be upset that we didn't get to it today? No. It takes time to figure out the numbers (and hopefully if you're interested you're doing so at home), but meanwhile spread open on my desk are the numbers for the past ten years, and there I see that revenue, net income, and earnings per share have increased -- and increased handsomely -- every single year. No matter how the company is doing it, they're doing it right. We want to understand it, though, and with the stock trading at 32 times earnings estimates for 1998 and expected to grow earnings only 5% next year and 18% over the long-term, we're not in a hurry to buy it at this price. However, that could change with one or two bad market weeks, so we do want to keep a close eye on the company after we know what's going on -- assuming we find it to be Foolish. We're looking for growth, and much more than 5% year-over-year. We'll continue this tomorrow.

Fool on!


              Stock   Close    Change
              Intel  $80 1/4   -4 5/8

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%

        Rec'd   #    Security         In At      
       9/8/97   1      Intel         $94.69      

                        Base: $800.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $649.10
                 Total Value: $735.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.