Coca-Cola (NYSE:KO) shares declined 3.7% on Tuesday as investors showed their disappointment with the company's challenging quarter to wrap up a difficult year. The poor fourth quarter -- in which volume grew just one-third as much as analysts predicted -- raised questions as to whether or not Coca-Cola can achieve its 2020 Vision. If 2013 was just a speed bump on the path to growth, then the stock is cheap. If 2013 is a sign of things to come, then shareholders ought to consider selling the stock.
Management remains optimistic about 2020 Vision
Coca-Cola's 2020 Vision is a long-term operating goal that was announced in 2009. The vision includes doubling systemwide revenue, increasing margins, and doubling servings to more than 3 billion per day by 2020. To achieve this vision, management says it must meet 3%-4% annual volume growth, 6%-8% annual operating income growth, and high single-digit earnings-per-share growth.
If you can believe what the CEO says, Coca-Cola is still on track to meet its goals. On the fourth-quarter conference call, Coca-Cola CEO Muhtar Kent said that although "2013 was a challenging year, it has certainly not deterred us from our commitment to our 2020 vision."
In 2013, volume growth came in at 2% -- below the company's annual target. However, the company achieved higher rates in the past; volume grew 6% in 2010, 5% in 2011, and 4% in 2012. The downward trend is concerning, but Coca-Cola's strong results in the first three years of its long-term plan give the company some breathing room for challenging years like 2013.
As for earnings per share, Coca-Cola announced a 3% decline in 2013 due to currency headwinds and restructurings. Excluding those factors, EPS growth met the company's high single-digit target, coming in at 8%. Earnings per share grew 9% in 2010, 10% in 2011, and 5% in 2012. The company is still on track to meet its 2020 EPS target, assuming it continues to perform as it has in the past.
If Coca-Cola meets its long-term EPS growth goal, then it trades at a bargain price today. The stock trades at 19 times 2013 earnings. If Coca-Cola paid all of its earnings out in a dividend each year, shareholders would receive a 5.2% yield based on today's price and last year's earnings (1 divided by 19 equals 5.2%).
Moreover, the company aims to grow EPS by high single digits each year through 2020. Let's say it grows EPS at 7% per year through a combination of earnings growth and share repurchases. A shortcut for finding out your long-term return on investment is to simply add annual growth to the initial earnings yield. So, 7% growth plus 5.2% initial yield equals 12.2% long-term annual return on investment for shareholders who buy Coca-Cola's stock today. So, if the company hits its long-term target, shareholders will do well.
What could derail the vision?
Unfortunately, there are a few stumbling blocks that could derail the company's attainment of its goals. Kent addressed them during the fourth-quarter conference call, but the outcome is still far from certain.
First, there is Europe. As Kent said on the call, "Europe is a tale of two cities." Overall, Europe is plagued by high unemployment and low economic growth. However, Northern Europe -- especially England and Germany -- is outperforming Southern Europe. Southern Europe -- which includes heavily indebted nations like Spain, Italy, and Greece -- is still struggling, but showing "some encouraging signs." So Europe is a mixed bag, with some countries growing and others struggling to grow. Once Southern Europe enters a healthier economic recovery, Coca-Cola should recover in the region as well.
Coca-Cola is also battling a secular decline in the United States. However, Kent says that the U.S. remains "the best Western developed economy in the world" and is optimistic about its economic prospects in 2014. The company plans to use part of its $1 billion in planned additional advertising spending in the United States to boost flagging volume. North America case volume was flat in 2013 -- the worst performance of any segment other than Europe. If Coca-Cola can turn things around in the United States, then achieving the 2020 Vision will be a cinch.
Finally, certain developing markets caused problems for Coca-Cola in 2013. For instance, Mexico -- the country with the highest per capita consumption of Coca-Cola beverages -- recently introduced an excise tax on sugary beverages. Kent admitted that the short-term effect of the tax would be lower volume but said it was too early to know what the long-term ramifications will be.
If other developing countries follow suit, Coca-Cola's key growth markets would become more challenging. However, since Mexicans drink nearly eight times more Coca-Cola beverages than the worldwide average, the tax in Mexico may be an outlier in the developing world; for most countries, the sugary beverage problem is not as urgent as it is in Mexico.
Coca-Cola had one rough year after a string of good years. Too often, investors focus on the most recent data point rather than looking at the big picture. The company is still on track to meet its 2020 Vision, but it needs to do better in the years ahead than it did in 2013.
Investors who are interested in Coca-Cola should try to answer just one question: Can it achieve its 2020 Vision? If the answer is yes, the stock is a bargain. If you cannot answer with confidence in the affirmative, then there is nothing wrong with letting this stock go by. There will always be another pitch.