Seeking Alpha
Long/short equity, growth at reasonable price, contrarian, growth
Profile| Send Message|
( followers)  

Summary

  • FIFA World Cup and the summer Olympics will build the strong momentum for the company to boost its revenues and income in Brazil.
  • Diet Coke Frost will help recover the company’s sparkling beverages volume sale in 2014.
  • Demand for carbonated beverages remains strong in the emerging markets and will improve the company’s performance in 2014.

The Coca-Cola Company (NYSE:KO) is the world's largest beverage company. The company owns and markets four of the world's top five nonalcoholic sparkling beverages: Coca-Cola, diet Coke, Fanta, and Sprite.

The company's performance in 2013 was not up to the mark as total revenues and operating income declined in 2013. However, I'm very optimistic about the company and I will discuss in my article how the Brazilian market, recent developments, and NARTD industry trends will repair the company's performance in the coming years.

Partnership with GMCR:

Back in February, Coca Cola announced a partnership with Keurig Green Mountain (NASDAQ:GMCR), the maker of the Keurig single-serving coffee machine. The company bought a 10% stake in Green Mountain Coffee Roasters for $1.25 billion. Coca Cola will be the first company to feature its brands in Green Mountain's new Keurig cold machines. The firms will collaborate over the next 10 years to produce Coca-Cola products in single-serving plastic pods, also known as k-cups, for use with the upcoming Keurig machine. The Keurig cold system will be released in late 2014 or 2015. I believe that this partnership will help the company to capitalize on more growth opportunities in the single-serve, pod-based segment of the cold beverage industry in future

Non-Alcohol Ready-to-drink (NARTD) Industry:

The health and wellness trend continues to push demand for non-alcoholic drinks within the emerging markets of Latin America. Argentina has one of the highest per capita carbonate consumption levels in the world due to widespread acceptance of carbonated beverages. Last year the company launched a greener Coke line called "Coca-Cola Life" in Argentina with a natural sweetener and fully recyclable bottle. The new Coke has 100 calories per 20 ounces versus the 250 calories in a regular can of Coke. The green bottles and cans are expected to be introduced in 2014 to the European markets in an attempt to aid the recovery of their sales, so I believe that the new product featuring healthy ingredients will boost the revenues in these markets.

Future of NARTD Industry:

(click to enlarge)

Source:Company presentation.

The projected growth of NARTD is 5.8% over the coming three years. Since 2010, NARTD retail value has increased by $135 billion and is expected to grow by more than $300 billion by 2020 as researched by Euro monitor.

The demand for sparkling beverages in India will remain strong in the future as the consumption of non-alcoholic beverages is expected to increase by 16.5-19% over the next three years according to a report by ICRIER and IBA. I believe that the industry will benefit from the better economic condition in the emerging markets with rising income levels and urbanization. They will drive the demand for both carbonated and non-carbonated products for the company in India and other Asian countries.

Diet Coke Frost:

This product was introduced a week after the company reported low Diet Coke sales in the quarterly earnings conference call. Sparkling beverages volume fell 2% largely due to softer Diet Coke volume. To repair the sales the Diet Coke brand launched Diet Coke Frost. This is the first frozen product offered by the Coca-Cola Diet Coke brand in the brand's 31 year history. Diet Coke Frost includes natural cherry flavorings.

Each serving will have 30 calories and 12 grams of carbohydrates. The frost drink is available exclusively at 7-eleven locations nationwide and as summer weather starts, Diet Coke Frost will be available at frozen carbonated beverage machines in various retailers throughout the U.S. by the end of May. So this new product will help to boost revenues in the U.S market in 2014.

Brazilian market:

Brazil is the third largest international market for the company and contributed around 7% of the company's worldwide volume in 2013. The country's liquid refreshment beverage market was worth nearly $43 billion in 2013. Coca-Cola has an approximate 27% market share in the Brazilian beverage industry. At the current market share level the company can generate $3 billion in annual sales from Brazil by 2017. Due to the economic growth and increased disposable income levels in Brazil the market is expected to further grow at a CAGR of 6% to more than $54 billion by 2017.

Source: Company presentation.

Edge Over Competitors:

Coca-Cola is one of the biggest sponsors of the 2014 FIFA World Cup and the 2016 Summer Olympics to be held in Brazil so these events will drive the demand for the company's sparkling beverages. The company is also focusing on boosting sales of the sports drink brand Powerade as famous footballer Iniesta will be featured in the new Powerade campaign for the World Cup. The campaign will be launched in 40 markets around the world and will drive the demand for the company's sport drink in 2014.

Demand for energy drinks remains strong in the Brazilian market and will continue for the next 3 years. Red Bull is the market leader in the energy drinks market with an approximate 40% market share. Coke has advantage over Red Bull as the company's energy drink is around 40% cheaper than Red Bull. The country's middle class population in 2013 was around 50% of the total population, so on the basis of low pricing strategies the company will boost its revenues by gaining more market share in the energy drink market.

Conclusion:

The company's overall performance in 2013 was not satisfying but I believe that the future growth prospects are bright for the Coca-Cola Company as the Brazilian market will favorably impact the company's financial position in the future. The new products and NARTD industry trends will further strengthen the company's future position in the beverage market. I offer a strong buy recommendation.

Source: Coca-Cola: A Long-Term Buy