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Though many investors are focused on the relatively weak global volume performance in Coca-Cola's (NYSE:KO) fourth-quarter results released February 18, we're not worried about the beverage giant's fundamental strength. Excluding the impact of structural changes, comparable currency-neutral net revenues advanced 4% in the period, while comparable currency-neutral operating income jumped 6%, in line with its long-term growth target. Comparable currency-neutral earnings per share jumped 7% in the fourth quarter, roughly in-line with the full-year pace. This isn't terrible performance by any stretch of the imagination, and the company continues to achieve global value share gains in nonalcoholic ready-to-drink beverages.

Coca-Cola's cash flow from operations declined modestly during the year, but greater scrutiny with respect to capital spending facilitated free cash flow expansion during the year. Free cash flow of $8 billion was roughly 17.1% of sales, revealing solid free-cash-flow conversion of sales. PepsiCo's (NYSE:PEP) $6.9 billion in free cash flow represented about 10.4% of its revenue during 2013, so Coca-Cola clearly is doing a better job of converting a dollar of sales into free cash flow. Coca-Cola also announced that it is expanding its previously-announced productivity initiatives to generate an incremental $1 billion in savings by 2016. This trails the ambitions of PepsiCo's productivity initiatives,which include a new 5-year, $5 billion productivity program (2015-2019), but Coca-Cola remains focused on controlling costs all the same.

Though both Coca-Cola and PepsiCo each have solid balance sheets, Coca-Cola's significantly lower net debt position offers it greater financial flexibility in pursuing opportunistic value-creating endeavors. For example, earlier in February, Coca-Cola announced that it is collaborating with Green Mountain (NASDAQ:GMCR) on the introduction of its brand portfolio for use in the Keurig Cold at-home beverage system. We think Coca-Cola taking a 10% equity stake in the coffee-machine innovator had a lot to do with inking the deal. Such a collaboration may force other beverage makers, including PepsiCo and Dr. Pepper (NYSE:DPS), to enter this business line. Though we fall short of speculating that either PepsiCo or Dr. Pepper may take a leap at buying SodaStream (NASDAQ:SODA), a home soda maker, we're not completely ruling it out. Needless to say, Coca-Cola's agreement with Green Mountain has shaken up the beverage industry.

Valuentum's Take

Potential upside related to its deal with Green Mountain has some investors excited, but we remain focused on Coca-Cola's key long-term fundamental drivers: a rising middle-class, greater urbanization and increasing personal consumption expenditures in markets around the world. Coca-Cola's balance sheet is strong, and its dividend is supported by an impressive free cash flow stream. Though we acknowledge the risks related to potential excessive taxation on sugar beverages (see recent developments in Illinois here), we like Coca-Cola quite a bit and would not hesitate to add the firm to the Dividend Growth portfolio at the right price (in the low-$30s). Click here to see how we derive the forecasts in our stock and dividend reports. Shares of Coca-Cola remain on our watch list.

Source: Beverage Industry: Shaken And Stirred