Coca-Cola: Take Profits As Shares Approach All-Time Highs

| About: The Coca-Cola (KO)

Shares of Coca-Cola Company (NYSE:KO) are taking a pop to the upside in Tuesday's trading session. The global beverage company, which owns multiple non-alcoholic sparkling and still drink brands, reported a strong set of first-quarter results. Shares are trading with gains of more than 5% towards the end of the trading session, exchanging hands at little above $42 per share.

First-Quarter Results

Coca-Cola generated first-quarter revenues of $11.03 billion, down 1% on the year before. The company reported a solid 4% volume growth, which was offset by currency headwinds and fewer selling days in the quarter. Revenues came in a little below consensus estimates of $11.08 billion.

As selling, general & administrative expenses stabilized, operating profits fell by 4% towards $2.41 billion. Adjusted operating margins, which account for the currency headwinds and fewer working days, were up 70 basis points to 23.7%.

As a result of higher interest expenses and other one-time charges impacting the bottom line, net earnings fell by 15% to $1.75 billion. As a result of share repurchases, the fall in earnings per share was "limited" to 13%, as earnings came in at $0.39 per share.

Adjusted earnings, which account for fewer working days and currency headwinds, came in at $0.46 per share, beating consensus estimates by a penny.

CEO and Chairman Muhtar Kent commented on the performance, "I am pleased with our first quarter performance results, having once again delivered solid growth against the backdrop of a still uncertain global economy. Guided by our 2020 Vision, our roadmap for winning together with our global system bottling partners, we enter 2013 and the fourth year of our journey to 2020 focused and on track to reach our goals."

International Divisions Drive Growth

Growth at Coca-Cola is still very much driven by the international operations, which reported 5% volume growth compared to 3% for Coca-Cola Americas. The company reported strong volume growth in Thailand (+18%) and reported an 8% growth in volumes in both Russia and India. Chinese growth at 1% was on the low side, partially driven by poor weather circumstances.

While Coca-Cola is often being displayed as a truly global company, the firm generates almost 45% of its revenues in the North American market. Excluding bottling operations, North American revenues exceed the total revenues in Eurasia, Africa, Europe, Latin America and the Pacific region combined.

Note that international markets remain key for the company in terms of profitability. North America only generated 14% of total operating profits over the past quarter. Operating margins for North America came in at merely 7%, which compares to sky-high margins at its international operations. For example, in Latin America the company generated operating margins exceeding 62%.

Valuation

Coca-Cola ended its first quarter of 2013 with $18.4 billion in cash, equivalents, short-term investments and marketable securities. The firm operates with roughly $35.1 billion in short- and long-term debt, for a sizable net debt position of almost $17 billion.

For the full year of 2012, the company generated annual revenues of $48.0 billion on which it net earned $9.0 billion, or $1.97 per diluted share.

Factoring in a 5% jump on Tuesday, the market values Coca-Cola around $188 billion. This values the company at 3.9 times annual revenues and 20-21 times 2012's annual earnings.

Coca-Cola currently pays a quarterly dividend of $0.28 per share, for an annual dividend yield of 2.6%.

Some Historical Perspective

Long-term holders of Coca-Cola's shares have seen some very healthy returns. Over the past decade alone, shares have roughly doubled. These returns exclude the cumulative dividends received in the meantime. The year-to-date returns of 16%, have pushed shares up towards $42 per share. As such, shares are trading near all-time highs set around $44 back in 1998.

Between 2009 and 2012, Coca-Cola has grown its annual revenues by more than 50% from $31 billion in 2009, to $48 billion over the past year. Disappointing is that net income only rose by a third to $9.0 billion. Earnings per share growth came in a touch higher after the company retired some 2% of its shares outstanding over the time period.

Investment Thesis

Shareholders in Coca-Cola are applauding the first-quarter results. Adjusting for divestitures, adverse currency movements and the impact of fewer working days, and the results appear to be quite solid.

While international growth opportunities appear to be plentiful, there is an increasing health consciousness among consumers. Furthermore politicians finally seem to be addressing the rapidly increasing healthcare costs related to obesity. The city of New York is already contemplating special taxes on sugar-sweetened soft drinks.

The shift towards still beverage volumes is already noticeable. Still beverage volumes rose by 6% over the past quarter, while volumes in the sparkling portfolio rose by 3%. Coca-Cola has already built up strong positions in still brands including Minute Maid, Simply, POWERade and its range of teas.

The company still trades at roughly 20 times 2012's annual earnings, and that's for a company showing little earnings growth in recent periods. This valuation is quite rich, but is partially driven by the solid 2.6% dividend yield. Recently the company hiked the quarterly dividend by 10% to $0.28 per share, representing a roughly 50% payout on 2012's earnings. The recent dividend hike marks the 51st-consecutive increase in annual dividends.

While the payout ratio is much lower compared to its net earnings, it exceeds operating cash flows by far, putting long-term pressure on the dividends, as explained by a very interesting article from author "Josh Arnold."

As a result, the company took on more leverage in recent years. While cash balances rose from $9.2 billion to $18.4 billion between 2009 and the first quarter of 2013, the total debt position nearly tripled from $11.8 billion to $35.1 billion in the meantime. Consequently, the net debt position rose from merely $1.6 billion four years ago to almost $17 billion. Increased investments in the firm, a lower return on assets and $8 billion worth of share repurchases over the past four years explain the build-up in leverage.

In October of 2012, I took a look at the prospects for Coca-Cola. At the time shares were exchanging hands around $37.50 per share and represented an excellent addition to any diversified portfolio. Shares have risen some 12% from that point in time. Currently valued at 20 times earnings I remain on the sidelines. The earnings multiple is too high given the modest earnings growth and weakening balance sheet. The recently hiked dividend and share repurchase target of $3.0-$3.5 billion for 2013 will continue to put pressure on an already damaged balance sheet.

With shares approaching all-time highs set back in 1998, this is an excellent moment to take profits and remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.