Seeking Alpha
Long-term horizon
Profile| Send Message| ()  

Selling beverages with the trademark since 1886, Coca-Cola (KO) has been around a long time. This article will take a look at the last 10 years of the company's history. Coca-Cola is a global company so we'll start by looking at some ways in which the world has changed.

The world population went from 6.3b in 2003 to 7b in 2012 per.

The world GDP changed dramatically between 2003 and 2012.

Obviously we want to see the company's earning power grow significantly faster than inflation. Here are some inflation numbers from westegg.com:

What cost $1 in 2003 would cost $1.24 in 2012.

Also, if you were to buy exactly the same products in 2012 and 2003, they would cost you $1 and $0.81 respectively.

The 2003 10-K and the 2012 10-K are by far the biggest sources for this article. Here are the 10-Ks for all years between 2003 and 2012.

Operating Income

Operating Income went from 5,221m in 2003 to 10,779m in 2012.

2003 Operating Income (in millions USD)

(click to enlarge)

*Pie charts can't have negative slices so a weighted % of Corporate losses are backed out of each segment.

*The company has Mexico under the Latin America segment - not the North American segment.

Source: 10-K

2012 Operating Income (in millions USD)

(click to enlarge)

*Pie charts can't have negative slices so a weighted % of Corporate losses are backed out of each segment.

*The company has Mexico under the Latin America segment - not the North American segment.

Source: 10-K

The Latin American slice is now a bigger piece of the pie.

The N. America segment now has lower margins due to the 2010 CCE acquisition - bevnet.com summarizes this 2010 transaction.

In February, The Coca-Cola Company entered into a definitive agreement to acquire the assets and liabilities of CCE's entire North American business for a total value of approximately $12.3 billion. The acquisition of CCE's North American business includes consideration of The Coca-Cola Company's 34 percent equity ownership in CCE, valued at $3.4 billion at the date of the announcement, and the assumption of $8.88 billion in debt. Concurrently, CCE acquired the Company's bottling operations in Norway and Sweden for $822 million. Additionally, CCE will have the right to acquire The Coca-Cola Company's majority interest in its German bottler for fair value, 18 to 39 months after the deal announcement.

Let's compare world population and world GDP numbers to 2012 KO operating income numbers.

World Population by Continent (in millions)

(click to enlarge)

*The company has Mexico under the Latin America segment - not the North American segment. In order to compare apples to apples, we should move the population of Mexico from the N. America slice to the S. America slice above.

2010 World GDP by Continent (in millions USD)

(click to enlarge)

*Ideally we'd be looking at 2012 World GDP data but this source didn't have it broken down by continent.

*The company has Mexico under the Latin America segment - not the North American segment. In order to compare apples to apples, we should move the GDP of Mexico from the N. America slice to the S. America slice above.

As you can see, the 2012 Latin American slice for operating income is disproportionately large when measured against either population or GDP.

Source: wikipedia.org

Population Source Screen Shot:

(click to enlarge)

GDP Source Screen Shot:

Volume and Market Share

The 10-Ks tell us that the number of beverage servings of all types consumed worldwide every day grew from 50b in 2003 to 57b in 2012.

They also tell us that the number of beverages served worldwide every day bearing the company trademarks grew from 1.2b in 2003 to 1.8b in 2012.

Note that the number of beverages bearing the company trademark grew much more than the number of overall beverages.

2003 U.S. Market Share

(click to enlarge)

Others:

  • National Beverage 2.4
  • Big Red 0.4
  • Red Bull 0.2
  • Hansen Natural 0.1
  • Monarch Co. 0.1
  • Carolina Beverage <0.1
  • Private 2.0

Source: beverage-digest.com

2012 U.S. Market Share

(click to enlarge)

Others:

  • National Beverage 2.9
  • Monster Beverage 1.4
  • Red Bull 1.1
  • Rockstar 0.7
  • Big Red 0.6
  • Private 1.7

Source: beverage-digest.com

Most of the company's volume is now outside the U.S. Much of the 2003 volume specifics are given in gallons whereas in 2012 they are given in unit case volume. This makes comparisons difficult but we do see still beverages becoming more important.

In 2003, gallon sales outside the United States represented approximately 72% of the Company's worldwide gallon sales. The countries outside the United States in which our gallon sales were the largest in 2003 were Mexico, Brazil, Japan and Germany, which together accounted for approximately 25% of our worldwide gallon sales. Approximately 91% of non-U.S. unit case volume for 2003 was attributable to sales of beverage concentrates and syrups to authorized bottlers in approximately 544 licensed territories, together with sales by the Company of finished beverages other than juice and juice-drink products. Approximately 6% of 2003 non-U.S. unit case volume was attributable to fountain syrups. The remaining approximately 3% of 2003 non-U.S. unit case volume was attributable to juice and juice-drink products.

Unit case volume outside the United States represented approximately 81 percent of the Company's worldwide unit case volume for 2012. The countries outside the United States in which our unit case volumes were the largest in 2012 were Mexico, China, Brazil and Japan, which together accounted for approximately 31 percent of our worldwide unit case volume. Of the non-U.S. unit case volume for 2012, approximately 76 percent was attributable to sparkling beverages and approximately 24 percent to still beverages. Trademark Coca-Cola Beverages accounted for approximately 48 percent of non-U.S. unit case volume for 2012.

Employees

Per the 10-Ks, there are about three times as many employees today as 10 years ago.

As of December 31, 2003, our Company employed approximately 49,000 persons, compared to approximately 56,000 at the end of 2002.

As of December 31, 2012 and 2011, our Company had approximately 150,900 and 146,200 employees, respectively, of which approximately 4,400 and 4,700, respectively, were employed by consolidated variable interest entities ("VIEs").

There was a jump in 2010 because of the CCE acquisition. Here is what the 2010 10-K says about it.

We refer to our employees as "associates." As of December 31, 2010 and 2009, our Company had approximately 139,600 and 92,800 associates, respectively, of which approximately 4,900 and 17,900, respectively, were employed by consolidated variable interest entities ("VIEs"). The increase in the total number of associates in 2010 was primarily due to the impact of our acquisition of CCE's North American business, partially offset by the sale of our Norwegian and Swedish bottling operations to New CCE and the deconsolidation of certain entities due to the Company's adoption of new accounting guidance issued by the Financial Accounting Standards Board ("FASB").

Leadership

The 10-Ks tell us about the leaders over the last 10 years.

Douglas N. Daft

He was elected President and Chief Operating Officer and a Director of the Company in December 1999.

E. Neville Isdell

Mr. Isdell was elected Chairman of the Board of Directors and Chief Executive Officer of the Company on June 1, 2004, and served as Chief Executive Officer of the Company until June 30, 2008. In December 2008, Mr. Isdell informed the Board of Directors of the Company that he did not intend to stand for re-election to the Board of Directors at the Company's Annual Meeting of Shareowners in April 2009.

Muhtar Kent

Muhtar Kent, 60, is Chairman of the Board of Directors, Chief Executive Officer and President of the Company. Mr. Kent joined the Company in 1978 and held a variety of marketing and operations roles throughout his career with the Company.

Mr. Kent was elected Chief Executive Officer of the Company effective July 1, 2008, and was elected Chairman of the Board of Directors of the Company in April 2009.

Fair Value

Here are the fair value versus carrying value numbers for significant publicly traded bottlers accounted for as equity method investees (in millions):

2003: $8,094 $4,056
2012: $15,900 $5,536

Goodwill

Goodwill grew from 1,029m in 2003 to 12,255m in 2012.

Per the 2012 10-K, the CCE acquisition added a big chunk of goodwill.

The Company recorded $8,050 million of goodwill in connection with this acquisition that was assigned to the North America operating segment, of which $170 million has been, and will continue to be, amortized for tax purposes.

Debt

Long-term debt grew from 2,517m in 2003 to 14,736m in 2012. Much of this happened when the company acquired the part of CCE it did not already own as explained in the 2012 10-K.

As of October 1, 2010, our Company owned 33 percent of the outstanding common stock of CCE. Based on the closing price of CCE's common stock on the last day of trading prior to the acquisition date, the fair value of our investment in CCE was $5,373 million, which reflected the fair value of our ownership in both CCE's European operations and its former North America business. We remeasured our equity interest in CCE to fair value upon the close of the transaction. As a result, we recognized a gain of $4,978 million, which was classified in the line item other income (loss) - net in our consolidated statement of income.

Although the CCE transaction was structured to be primarily cashless, under the terms of the merger agreement, we agreed to assume $8.9 billion of CCE debt.

The debt ratings in 2003 and 2012 aren't that different per the 10-Ks.

As of December 31, 2003, our long-term debt was rated "A+" by Standard & Poor's and "Aa3" by Moody's,

and our commercial paper program was rated "A-1" and "P-1" by Standard & Poor's and Moody's, respectively.

As of December 31, 2012, our long-term debt was rated "AA-" by Standard & Poor's, "Aa3" by Moody's and "A+" by Fitch.

Our commercial paper program was rated "A-1+" by Standard & Poor's, "P-1" by Moody's and "F-1" by Fitch.

Net Profit Margin

Coca-Cola has a higher net profit margin than competitors.

(click to enlarge)

Source: gurufocus.com

*In 2010 I backed out the 4,733m one-time unusual income from the cce transaction.

PEP isn't apples to apples because snack foods make up a large part of its business.

Capital Allocation

The cash flow statements from the 10-K filings tell us how much the company spends on dividends, buybacks and acquisitions (numbers in millions):

(click to enlarge)

Dividends have gone up consistently. In 2003 the company paid $2,166m in dividends. By 2012 this more than doubled to $4,595m.

Adjusted for the recent split, buybacks have lowered the number of shares outstanding from 4,924m in 2003 to 4,584m in 2012.

2007 was higher than normal in terms of acquisitions. Here is what the 2007 10-K says about the big acquisition from that year.

On June 7, 2007, in an effort to expand our still beverage offerings, our Company acquired Energy Brands Inc., also known as glacéau, the maker of enhanced water brands such as vitaminwater, fruitwater and smartwater, and vitaminenergy, for approximately $4.1 billion.

Brand

Interbrand.com had KO as the No. 1 global brand in 2003 with a value of 70,453m. It was No. 1 in 2012 as well with a value of 77,839m.

In both 2003 and 2012 the 10-K filings said the following:

We are the world's largest beverage company, with four of the world's top five soft-drink brands-Coca-Cola, Diet Coke, Fanta and Sprite.

Valuation

Adjusted for the 2012 split, the stock price went from about $25 per share at the end of 2003 to about $37 per share at the end of 2012.

Equity

Total equity has grown from 14,090m in 2003 to 33,168m in 2012.

Undistributed Earnings of Foreign Subsidiaries

They were 8.2b in 2003 and 26.9b in 2012.

Conclusion

Being a U.S. company, we're not surprised that Coca-Cola does well in the U.S.

Given the company's history in Europe, success there isn't surprising either. Part of this history includes Fanta - it was invented in Germany during WWII:

While rationing Coca-Cola carefully to the different plants, he [Keith] asked his chemists to invent an alternative drink which would see the Company through the war. They created a fruit-flavored drink. Like Coca-Cola, it was a unique caffeinated blend not readily identifiable as orange, grape or lemon. Relying on available ingredients - often the leavings from the other food industries - the new drink used whey, a cheese by-product, as well as apple fiber from cider presses. Keith later commented that the drink was made of "left-overs from left-overs." The mix of fruit ingredients shifted, depending on the availability of Italian produce. At first, the drink had to be sweetened with saccharin, but in 1941, it was exempted from sugar rationing and allowed to use 3.5 percent beet sugar, resulting in a beverage far better than any wartime competitor's.

In a christening contest, Keith asked his assembled employees to let their fantasy - Fantasie in German - run wild, and veteran salesman Joe Knipp immediately blurted the winning name, Fanta. Walter Oppenhoff registered the new trademark in Germany as well as all occupied countries.

[For God, Country & Coca-Cola page 222]

Latin America is an interesting slice of the operating income pie. This area is relatively small in terms of world population and world GDP but it is very important to Coca-Cola. Note that Latin America and Europe have better margins than other markets so their operating income slices are bigger than their revenue slices.

Source: Coca-Cola 10 Years Ago And Today

Additional disclosure: Any material in this article should not be relied on as a formal investment recommendation.