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Coca-Cola (NYSE:KO) has seen its shares fall during the recession but Barron's Christopher C. Williams writes the stock could rebound as overseas markets boost sales.

A shaky economy has depressed soda consumption in the U.S., along with Coke's profits. Earnings are expected to fall another 3% this year. However, on the upside, Coke has a 10% share of the global market for non-alcoholic beverages. It's taking advantage of the downturn to try and steal additional market share from rivals, while simultaneously cutting costs and introducing new products. It also has a strong balance sheet, a strong brand name and good management.

Coke is investing in its U.S. franchise model by trying to improve its relationship with its bottlers and encouraging the bottlers to invest in the long-term growth of the brand. Critically, the company is also expanding aggressively overseas to offset sluggish domestic demand. In China and India, volume is growing by double digits, and Coca-Cola is served in over 200 countries. Over 80% of sales and 95% of operating profits come from abroad, making Coke a great blue-chip play for emerging markets growth.

As consumers have shifted away from carbonated soft drinks, Coke has too, expanding its product line with beverages including Dasani water, VitaminWater and Nestea.

For all its strengths, Coke sells for just 15 times 2009 earnings estimates and 15 times 2010 estimates, close to a 20-year valuation low. Coke deserves to trade for at least 17 times forward earnings. Factoring in its 3.4% dividend yield, that's a 20% return from the stock's recent $48.47.

Long-term, Coke aims to increase annual volume by 3-4%, revenue by 4-5%, operating income by 6-8% and earnings per share by high single digits. CFO Gary Fayard said year-to-date results are mostly on par with long-term goals, and the biggest risk is in currency fluctuations since Coke doesn't hedge in emerging markets.

  • Carlos Laboy, of Credit Suisse, has an Outperform rating on the stock and a price target of $57.
  • Steven Roge, of Roge Partners Fund, estimates the firm is worth $72.50 per share.

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  • Coca-Cola: Q2 EPS of $0.92 beats by $0.03. Revenue of $8.3B (-8.6%) vs. $8.7B. (PR)
  • The recession has taken a toll on brand loyalty. Just four out of 10 brands held on to at least half of their 'highly loyal' customers during 2008; Coca-Cola outperformed with a 25% loss.
  • In April, Coca-Cola reached a deal with McDonald's (NYSE:MCD) to give the beverage company's brand a wider presence in McDonald's stores.
  • While Coca-Cola holds onto its franchise model, rival PepsiCo (NYSE:PEP) recently reached a $7.8B deal to buy bottlers Pepsi Bottling Group (PBG) and PepsiAmericas (PAS).
Source: Time to Refill on Coca-Cola Shares - Barron's