Earlier this week, I opined that it's been 17 straight quarters since pop icon Coca-Cola
Investors seemed generally pleased with Coke's performance, bidding the shares up on the news that volume shipped rose 6%, sales were up 19%, and profits per diluted share grew 15%. Am I the only one who thinks there's something funny with those numbers? I mean, it's great that Coke was able to grow revenue from product shipped at more than three times the amount of product shipped. But what's with the slower-than-sales-growth profits?
What's with that
The "what" that goes with that relationship between profits and sales, it seems, is that rising commodity costs cut deeply into gross margin -- a fact that jibes with what Pepsi
The good news for Coke shareholders is that, unlike Pepsi, it managed to make up some of the margin lost to COGS by holding selling, general, and administrative expenses to just 16% growth. (The other good news is that when you peer past the arcane accounting of GAAP, Coke's cash profits closely resembled revenue growth. Free cash flow was up a cool 19%.)
Sugar can rot your profits
Let's look more closely at the COGS problem, though, because I think it's important to not just Coke, but also Pepsi, Hansen
Oil prices are rising. In an effort to find alternatives to pricey oil, the U.S. government encourages the production of even pricier ethanol. This diverts corn crops to ethanol production and away from high fructose corn syrup production. Good news for ADM
The good news here is that Coke CFO Gary Fayard sees commodity costs starting to "moderate." The bad news is that, until the ethanol fad finishes playing itself out, we can expect to see corn syrup continuing to rot away margins.
Meanwhile, Coke continues to earn outsize profits for investors who heeded Motley Fool Inside Value's advice to buy the stock. What? No one told you that value guru Philip Durell was recommending Coke? Well, that's an easy fix. Don't miss his next recommendation -- pick up your free trial subscription to the newsletter today.