Between skyrocketing commodity costs and a dependence predominantly on developed markets with low volume growth prospects, I'm not sure why investors would want to bottle up shares of Coca-Cola Enterprises (NYSE: CCE) in their portfolios. While the family's head honcho, Coca-Cola (NYSE: KO), has experienced exploding performance of late, CCE's stock has pretty much flatlined over the past several years.
The company's first-quarter 2008 results don't reflect much change. The top line grew 7% compared to the year-ago period. Keep in mind, however, that revenue growth of any company facing commodity cost inflation can't be analyzed alone. This is because companies are rarely able to pass through the full extent of input cost increases in short periods, and thus a closer look at the cost of inputs, along with gross margin, will paint a better picture. In CCE's case, the cost of goods sold rose 10.5% and left the gross profit margin rising just 2%. The anemic performance made its way down the line, as selling, general, and administrative (SG&A) costs rose 4% and comparable operating income plunged 10.5%.
A sliver of a silver lining in the quarter was the company's European volume growth, which came in at a strong 7% on a comparable basis. This looked especially great considering that North America delivered no volume growth at all. The European revenue growth rate was 15.5%, with management citing strong performance in the sparkling-beverages portfolio. However, roughly 9.5% of that growth was generated from currency benefits.
CCE's continued struggles will likely lead to further tension with the Coca-Cola Co. With Coca-Cola owning a 35% stake in the company, CCE is at the mercy of its big brother, as Coke has control over the prices CCE pays it for its syrups and concentrates. This has been thinning CCE's margins in the past and could cause further erosion as Coke also has to pass on the rising costs it is experiencing.
As an investor, I'd rather own the company holding the wallet than the one looking for an allowance. With the American economy at the very least in a funk, and more likely in a full-blown recession, I'd also rather own the company that will benefit from rapidly growing international markets -- especially the BRIC (Brazil, Russia, India, China) countries -- like Coca-Cola FEMSA (NYSE: KOF) or Andina Bottling (NYSE: AKO.A). Now more than ever, the Coca-Cola Co. makes a vastly superior holding to its largest bottler.
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