I am bullish on The Coca-Cola Company (KO), despite the 2Q'13 volume and revenue misses, and I believe that the company is a long-term growth story. The company has a significant developing market exposure that is likely to fuel growth in the upcoming years. Also, the company has been working on its restructuring programs to achieve cost savings. Moreover, KO's strong cash flow position enables it to undertake strategic acquisitions and also boost its ongoing share repurchases, which will increase its future EPS.
KO reported its financial results for 2Q'13 yesterday. Weak volume growth of 1%, that missed the consensus of 3%, was an important debate point after the earnings release. KO posted net operating revenues of $12.75 billion for the recent second quarter; down 3% year on a yearly basis. On a constant currency basis net revenues for 2Q'13 were up 2% year-on-year basis. Weak global volume growth and reported revenues were mainly caused by unfavorable weather conditions across multiple regions and macro economic pressures. External factors, rather than company specific factors, were behind the recent weak performance of the company in the 2Q'13.
Despite registering weak volume and revenue growth, KO's earnings per share of $0.63 was in line with the analysts' consensus. KO was able to improve its margins in the recent second quarter due to cost savings achieved by its productivity programs and a milder commodity environment than earlier. In 2Q'13, KO was able to expand its gross profit margin by 90 bps and operating profit margin by 70 bps on a year-on-year basis. The table below shows the operating results of different regions/segments for 2Q'13:
Developing markets are the main source of growth for KO. The company has a strong product pipeline and clear strategies to improve and expand operations in the key markets; factors that will further help the company to expand its top and bottom lines. Performance of developing markets remains healthy as KO experienced 9% volume growth and 5% net revenue growth in the Eurasia and Africa region. All the business units in Eurasia and Africa experienced volume growth in 2Q'13, led by Middle East and North Africa achieving volume growth of 17%.
I think volume growth for KO should improve in 2H'13, as KO continues to invest in its core brands and weather becomes more favorable (hot summers). In 2Q'13, KO was able to grow global volume and value share in both still and sparkling categories. Still beverage volume grew by 6% in 2Q'13 and YTD. Also, the volume grew by 6% for packaged water in the recent quarter.
As KO generates more than 55% of its sales outside North America, foreign currency is a headwind for the company. Recently, the dollar has been strengthening against other currencies and the trend is expected to continue as a fear prevails that the Fed will taper the ongoing QE. For full-year 2013, foreign currency exposure is expected to shave away 4% of KO's total revenue.
The company is aiming to achieve a long-term comparable operating earnings growth of 6%-8% on a constant currency basis and a 3%-4% volume increase in 2013. Analysts have forecast an earnings growth rate of 8.3% per year for next five years.
In spite of weak volume and revenue growth for KO in the recent quarter, free cash flow was more than $1 billion higher in 1H'13 as compared with the corresponding period last year. I believe the cash flow position of KO will strengthen further as its capital investment needs will moderate over time. As the cash flow position of the company will improve further, free cash flow can be used to buy back shares more aggressively. Currently, KO is expected to buy back shares in the range of $3-$3.5 billion for 2013.
KO is undoubtedly an attractive investment opportunity for investors as the company continues to work on cost-saving initiatives, enjoys and dominant position in the beverage industry, has a strong cash flow position and a significant developing market exposure. Therefore, I recommend investors buy the stock.