Why Coca-Cola Is Heading To $45

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

Summary

Despite the weakness, Coca-Cola still managed to increase its global market share in non-alcoholic/ready-to-drink beverages for the 26th consecutive quarter.

80% of Coca-Cola’s operating profit comes from international markets.

Coca-Cola will return to its innovative edge to deliver the long-term profits investors have come to expect.

Beverage giant Coca-Cola (NYSE:KO) will report earnings on Tuesday April 15. Given the rate at which soft drink volumes have declined over the past couple of years, investors aren't excited about the company's expected results.

With health-related concerns about "liquid candy" and soda's link to obesity, consumers are switching to other beverages. As with rivals PepsiCo (NYSE:PEP) and Dr. Pepper Snapple (NYSE:DPS), Coca-Cola has seen a decline in revenue. In fact, according to Nielsen, Coca-Cola's U.S. diet soda sales declined roughly 6% in the four-week period ending in mid-March. Accordingly, the stock is down roughly 6% year to date.

It's been a while since I've been able to say that shares of look cheap. Given Coca-Cola's history of strong performance, these shares rarely ever fall below their fair-market value. Value-oriented investors would be wise to take a sip here ahead of these results.

On Tuesday, analysts expect a slight decline in profits. But overall, the Street seems somewhat optimistic that the beverage giant will report a "less bad" quarter. The consensus earnings per share estimate is 44 cents per share, which is 4 cents lower than three months ago. For the full year, analysts are projecting earnings of $2.08 per share.

In terms of revenue, analysts are looking for $10.59 billion, which would represent a year-over-year decline of 4%. Last year, Coca-Cola posted sales of $11.04 billion. For the year, revenue is projected to come in at $46.84 billion.

All told, no one is expecting a miracle. A revenue decline of 4% suggests that business conditions are not meaningfully better. Recall, the company posted growth in revenue in the February quarter after two consecutive quarters of revenue declines. Over the previous four quarters, Coca-Cola has averaged a year-over-year revenue drop of 1%, including 3% decline the second quarter.

With the stock down more than 10% from its May 2013 high, I nonetheless see this as a strong opportunity for value investors. I don't expect Coca-Cola's decline to snowball out of control. Weak volume and compressed margins have been the story in the entire food and beverage sector, especially in the U.S.

Despite the weakness, Coca-Cola still managed to increase its global market share in non-alcoholic/ready-to-drink beverages for the 26th consecutive quarter. The company has been able to offset its North American struggles with better volume growth in emerging markets like Africa and Latin America. In fact, 80% of Coca-Cola's operating profit comes from international markets.

Let's also not discount that the February quarter, the company grew volumes by 8% and 6% in India and Africa, respectively. And despite China's economic struggles, China still grew 3%. What this means is that Coca-Cola, despite the downbeat results, doesn't get flat.

As we've seen in reports from global brands like Yum! Brands (NYSE:YUM) and McDonald's (NYSE:MCD), international markets are unpredictable. China's economic conditions, for instance, continue to weigh in on Coca-Cola. But I remain encouraged that the company will turn its business around in a much quicker-than-expected timeframe.

With strategic product mixes and promotional shifts, management will figure out ways to offset weakness in certain areas and find strengths in others. And I haven't even mentioned the company's recent joint-venture with Green Mountain Coffee (NASDAQ:GMCR).

Finally, it really comes down to value. With the stock trading at around $38 with a P/E of close to 20, I don't expect these shares will get cheaper than they are. Coca-Cola will return to its innovative edge to deliver the long-term profits investors have come to expect. On the basis of long-term margin expansion and 4% to 5% volume growth, these shares should trade at $45 by the second half of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's financial sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.