Coca-Cola (NYSE:KO), an Inside Value recommendation, is one of my favorite stocks. It had better be: I own it for the long term. I admit, however, that certain aspects of the last quarter didn't exactly show why Coke is such a great investment.
Based on the very useful Fool by Numbers, I see that revenue growth was nonexistent in the first quarter; the top line barely moved compared with last year, coming in at $5.2 billion. Operating income increased 3% to $1.4 billion. Net income increased 10% to $1.1 billion, or $0.47 per diluted share.
Although currency rates (as well as a transfer of canning rights involving Spanish bottlers) affected the numbers, no one can call the operating performance stellar. Plus, many will notice that the cash flow production wasn't up to snuff this quarter, especially relative to Coke's history of cash-generation prowess. Cash from operations decreased more than 48% to $707 million. Growth in capital spending flirted with the 200% level, good for about $500 million. And one of the best metrics of all for valuing a company -- free cash flow -- dived like a sinking submarine: The $208 million left over from the capital spending obligations represented a decrease of 83%.
What caused that dive? As the Fool by Numbers indicated, it was an increase in working capital. Granted, we all want as much free cash at our company's disposal as possible; dividends and share repurchases come from those monies. However, let's think about this: Coca-Cola is putting capital to work for a very good business. Its brand is valuable, and it moves a lot of soda, water, fruit drinks, etc. In fact, on a margin basis, everything went up; gross margin increased 1.9%, operating margin jumped 0.6%, and the net margin expanded by 1.9%. Coke, as many have pointed out, is a highly focused, efficient operation, and the positive margins indicate that. So while there were decreases in cash and equivalents, inventories rose, and accounts payable fell, I'm confident Coke will be able to generate more cash down the road because it can sell its products.
Coca-Cola continues to buy back shares and increase its dividend. It's had problems growing its case volume in the past, and probably will continue to have problems doing so, but at least for this quarter, worldwide case volume growth hit a decent 5%. That might not be enough to send the stock's price up a long way, but I think investors should remember that Coke has terrific total-return potential in its solid dividend.
To sum up, I think investors should temper the seemingly disappointing cash flow numbers by considering the profit-margin expansion. Coca-Cola has a great distribution and marketing system, but I do concede that the company still has a ways to go in terms of improving its advertising campaigns: In my opinion, PepsiCo (NYSE:PEP) is a very formidable challenger here, leveraging its snacks business to full advantage. Coke is a worthy idea for the long term; like another stock I recently wrote about, Kraft (NYSE:KFT), it is trading at about a 3% yield. Fans of dividend reinvestment will want to consider investing in this company as well as drinking its beverages (after proper due diligence, of course).
For related Foolishness:
- Coke's Bubbly Bottom Line: Fool by Numbers
- Will You Take Your Coke Blak?
- Best Blue Chip: Coca-Cola
- Coke's a Bit Flat
Philip Durell looks for good stocks at bargain prices in Inside Value; Mathew Emmert finds stocks that pay generous dividends for Income Investor.Emmert recommendedKraft for subscribers, and we're offering a free trial to any of our newsletters.
Fool contributor Steven Mallas owns shares of Coca-Cola. The Fool has a disclosure policy.
