Motley Fool Inside Value selection Coca-Cola (NYSE:KO) is a global beverage company whose products include Sprite, Dasani, Fanta, Hi-C, and Minute Maid. Of course, I should have listed the obvious product first: Coke. Then again, these days many consumers are opting for beverages outside the flagship brand, so that's easy to forget. And this has been Coke's challenge as of late -- to grow its core, iconic beverage brands in an era where more and more people are reaching for healthier drinks.

Is Coke up to that challenge? The company's stock used to be one of the greatest growth stories around, but these days, the price action is nonexistent. Take a look at a five-year chart, and you'll see what I mean.

Around the world with Coke
Coca-Cola competes with PepsiCo (NYSE:PEP) in an eternal battle for the coveted title of cola champ (if you want to check on some fundamental data comparisons between the two, see this great article by fellow Fool Ryan Fuhrmann). Coke also spars with Cadbury Schweppes (NYSE:CSG) and all manner of private-label drinks. The company is striving to maximize the demand of its products, and then see that reflected in the metric known as unit case volume growth.

On a total worldwide basis, Coke realized 4% unit case volume growth in 2006, the same growth rate as in 2005. The company is still a consistent grower, but it's perhaps a bit disappointing that it couldn't expand on the metric.

Although international markets grew case volume by 6%, the North American market was flat (calling anything about Coke "flat" is a pretty big insult, as you can imagine). It would be difficult for a large, mature business like Coke ever to grow its worldwide case volumes by double digits at this point, but approaching high single digits is what the company should strive for. Emerging markets will help out in this effort, such as further exploitation of territories like China.

Coke's bubbly cash flow
Let's examine the cash-flow statements. Feast your thirsty eyes on the following chart (numbers in millions):

2006

2005

2004

Net cash from operations

$5,957

$6,423

$5,968

Capital expenditures

$1,407

$899

$755

Free cash flow

$4,550

$5,524

$5,213

Dividends

$2,911

$2,678

$2,429

Share repurchases

$2,416

$2,055

$1,739

You'll notice that operational cash flow has been fairly static the last few years. Is this a sign for worry? Not in Coke's case, in my opinion. I think it has years of cash-flow growth ahead of it. The important thing here is that the company is still able to ensure value-adding initiatives. Remember, too, that Coke has a great dividend-raising reputation -- in fact, it recently hiked its quarterly payment. That reveals confidence by those in the know that cash will still be flowing years from now.

Coke's GAAP growth: Not so refreshing?
It might not be so surprising to see that Coke's cash flow has been a bit of a downer the last few years when one looks at the GAAP bottom-line numbers. For the years 2004, 2005, and 2006, the company earned, on a diluted per-share basis, $2.00, $2.04, and $2.16, respectively. This isn't a growth story.

What does Coke need to do to boost those per-share figures as high as possible? Pretty much the only thing it can do: market itself out of the stagnation. It's been tackling this problem by increasing its advertising expenditures. Coming up with impressive campaigns to counteract PepsiCo's youthful image is also important, and Coke's association with American Idol is one way that the company is trying to impress its icon status into the minds of younger consumers.

Besides marketing, product innovation is also a key driver of shareholder value. Beverages such as Coca-Cola Blak and Coca-Cola Zero, as well as a new drink that is supposed to help burn calories, will hopefully aid long-term returns. The company needs to be smart about every new drink it brings to retail shelves -- shareholders have long memories and don't want another C2 debacle.

Coke's outlook
Thinking about the short term, the next fiscal year will present a challenge in terms of maintaining margins. Coke does well with its profit margins, but it does expect raw-material costs to increase. The company will use pricing techniques (i.e., increases) when feasible to help offset inflation. Commodities can wreak havoc on a consumer-products business, but Coke thankfully has such strong brand equity behind it that people buy it every day no matter what.

At a yield approaching 3%, Coke is a compelling investment idea. Like other blue-chip consumer-products companies, this beverage giant might be suitable as a core holding in a diversified portfolio. Sure, the stock has been stagnant in recent years, but I think the best is yet to come.

What does the Motley Fool CAPS community think about Coke? Players are pretty bullish right now.

Coca-Cola

CAPS Rating  *** (out of five)

Bulls

833

Bears

104

Bull Ratio

89%

Bear Ratio

11%

Data current as of March 29, 2007.

Philip Durell believes Coca-Cola's shares offer good potential for investors, and he recommends it to subscribers of his Motley Fool Inside Value service. Philip digs deep to find market-beating returns, so he's always on the lookout for companies trading below their intrinsic value, with a comfortable margin of safety to boot. Try the service out free for 30 days -- there is absolutely no risk and no obligation to subscribe.

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Fool contributor Steven Mallas owns shares of Coca-Cola. As of this writing, he was ranked 11,749 out of 24,388 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.