Coca-Cola Earnings Preview: Signs Of A Pulse With Green Mountain Deal

Feb.14.14 | About: The Coca-Cola (KO)

Coca-Cola, (NYSE:KO), perhaps the world's best and most iconic consumer brand (albeit with a badly underperforming stock ) reports their calendar q4 '13 earnings before the market opens on Tuesday, February 18th, 2014.

Analyst consensus per ThomsonReuters is expecting $0.46 in earnings per share (EPS) on $11.31 billion in revenue for year-over-year growth in EPS of 2% and a decline in revenues of 1.5%.

Per the same analyst consensus per ThomsonReuters, Wall Street consensus is expecting 3% revenue growth and 6% EPS growth in full-year 2014, as it stands today.

Over the next few years, 2014 - 2016, KO is expected to generate 4% - 8% annual EPS growth on 3% - 5% revenue growth. This is a far cry from the 1990's growth rates of high single digits, low double digits.

KO's problems are legion: very slow (low single digit) worldwide case volume growth, a move in the last decade away from carbonated soft drinks (CSD) to non-carbonated beverages like water, energy drinks, and to ready-to-drink (RTD) beverages like tea, etc., a complex operating structure with the bottlers, which I never fully understood, and which KO recently began to change and simplify (from what I understand).

Our problem with the stock has mainly been performance-related: KO rose just 16% in 2013, or half the SP 500's gain and doesn't include the dividend). However we use KO as a defensive holding in client accounts, for tough years like 2011, where the SP 500 gained just 2.5%, in a very volatile year, while KO rose approximately 6%, before the dividend. KO hit its all-time high in July 1998, just prior to the LongTerm Capital Crisis, when it traded as high as $44.47 in early August, 1998, and then hasn't exceeded that level since, even though the SP 500 has gone on to all-time highs numerous times since.

For some perspective, since the all-time high of $44.47 in August, 1998, KO's capital loss is 15% (excludes the dividend) over that 15 year time period, while the SP 500 is up approximately 70%.

However, the Green Mountain deal just announced in the last few weeks, might be the first sign of life for the brand, as the purchase of a 20% stake in Green Mountain (NASDAQ:GMCR) is thought to be a first strike in an attempt to revolutionize the consumption of traditional CSD's.

KO didn't move nearly as much as GNCR on the news, but for me as a shareholder it represents some out-of-the-box thinking and some sign of a pulse at the top levels of KO management.

Trading at 17(x) cash-flow and 22(x) free-cash-flow, we have never had any interest in increasing our position in the shares, even with a rock-solid balance sheet and decent dividend yield of 3%.

However, with Sodastream (NASDAQ:SODA) thought to have 1% of US household penetration, this might finally be a way for KO to drive brand growth, and to leverage the brand and distribution capability.

In terms of intrinsic value estimates, our own forward earnings-based model and Morningstar's discounted cash-flow model value KO at the same price: $44 - $45 per share. That leaves KO trading at a 15% discount to what is perceived to be "intrinsic value", without much change to its current business.

In this article, written in the Spring of 2013, you can see the vitriolic responses and comments to my opinion that KO may not be doing all that great of a job navigating the beverage market, as evidenced by the stock price. A friend of mine used to call this the "hostile-o-meter" and would use it as a contrarian indicator for whatever stock or company he was writing about.

Perhaps with the Green Mountain deal, this is beginning to change. By the way, the GMCR deal doesn't start for KO until 2015, for whatever reason, so the deal will have no impact in 2014 numbers that I can tell.

KO is a perfect example of how incredibly-successful businesses and brands can become mediocre businesses if they get too big, too bureaucratic, and fail to adjust to changing market dynamics.

Hopefully the GMCR deal is a sign of life at KO.

Disclosure: I am long KO. 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.