Coca-Cola - Smart Business Strategies And Partnerships Will Generate Profits

Apr.24.14 | About: The Coca-Cola (KO)

Summary

Rising awareness among consumers about the harmful impacts of sugary carbonated drinks has led to a decline in the sales of Coca-Cola's soda drinks.

Soda drink sales plummeted in the developed regions of the world, but were offset by escalating sales in the emerging markets.

Coca-Cola plans to invest $8 billion in China by 2017.

In its efforts to penetrate into alternative markets, the company bought a 10% stake in Keurig Green Mountain Inc.

Coca-Cola Co. (NYSE:KO) ended the quarter on a relatively stronger note compared to the last quarter of FY2013. Coca-Cola's unit volume sales have been a matter of concern for some time, and the developed world is gradually banishing the drink in favor of healthier drinks. Let us see how the company performed over the first quarter of FY2014 and if there are any opportunities for the company to grow.

Declining Revenues

Source: YCharts

Take a look at Coca-Cola's top line performance throughout FY2013 (TTM). Over the recently ended quarter, the net revenues of the company dropped by 4% YoY. However, in constant currency terms and adjusting for one-time operations, the top line increased by 2%, while adjusted operating income escalated by 7% YoY. The company has finally begun to recover after five consecutive quarters of decline. Without any adjustments, however, the operating margin plummeted by 10% YoY as a consequence of weakening foreign currencies and staggering top line growth. Adjusting for the foreign currency impact, the operating margin increased, reflecting cost-saving measures enacted by the CEO, Muhtar Kent, in the wake of the declining sales volume of soda bottles.

Net income endured a double blow: declining soda bottle sales and weakening currencies that led to a 7.5% YoY decline in the company's bottom line, which stalled at $1.62 billion compared to $1.75 billion a year ago. Even so, the company met Wall Street analysts' estimates when adjusted for special events, reporting $0.44 per share.

Sales Volume Headwinds

The declining sales volume of soft drinks, top line, and margins of the company prompted perplexed investors to sell their stock holdings to save themselves from realizing any further losses, hence the reason for the 9.4% drop in the company's stock price since the start of the current year until a week before the earnings release.

Note that the company's carbonated drinks contribute 70% to the top line of the company. The recent quarter's report indicates that volume sales have increased by 2%, barely beating Wall Street's expectations. One reason for the decline in soda bottle sales in the domestic region is the rising awareness among consumers about the harmful impact(s) of sugary carbonated drinks. Considering the fact that the US accounts for the largest chunk of revenues, it is a no-brainer why the top line has been decelerating.

However, Coca-Cola is a well-diversified company in terms of geography. Where sales plummeted in the developed regions of the world, the emerging markets made up for the losses. The North American sales volume has reached a point of stability, while China ended the quarter on a strong positive note, marking a 12% rise compared to 5% growth recorded in the last quarter of FY2013. The sales volume in India and Russia increased by 6% each, while Brazil showed a positive growth of 4%. Europe marked a decline of 4% in sales as well. Segregating sales in terms of type of the drink, non-carbonated drinks' sales escalated by 8%, while sales of carbonated drinks declined by 1% globally.

Cost-Cutting

After reporting disappointing results in the previous quarter, the CEO of the company enacted serious cost-cutting measures to improve the bottom line performance of the company. Following this, SG&A expenses decreased by 4.6% YoY. To fight the competition, the company introduced smaller sizes of its carbonated drinks (1.75 liter) to capture price-sensitive and health-conscious customers. This move did help the company's sales in emerging countries, and improved pricing by 2%.

Going Forward

Coca-Cola plans to invest $8 billion in China by 2017. The region accounts for 16% of the soft drink revenues of the company as of now, while the market is still growing. China is largely responsible for offsetting the faltering sales in the domestic market for the company.

However, considering the plummeting soda volume sales in the domestic region, Coca-Cola is already considering other markets to bring back growth in its top line. In its efforts to penetrate into alternative markets, the company bought a 10% stake in Keurig Green Mountain Inc. (NASDAQ:GMCR) as part of a 10-year agreement that would enable Coca-Cola to enter the DIY beverages market. This partnership will allow consumers to make Coca-Cola's teas and juices at home. The company's drinks have shown a robust growth of 11% last year. Lastly, the company is taking interest in the 2014 FIFA World Cup scheduled this year to market extensively for its soda drinks. Such marketing has previously proven to be successful, and the company hopes to achieve the same results.

Conclusion

The company does not expect to yield exceptional results this year, as indicated by its 2014 guidance. However, considering that soda drink sales are escalating in the emerging markets and non-carbonated drinks sales are expected to rise in the domestic region, there is no doubt that the top line of the company will get back on the growth track in the long term. Since earnings and revenues are directly linked to stock market performances, stock price appreciation is expected as well. Add to that the dividend yield enjoyed by Coca-Cola investors, and the stock becomes a perfect long-term buy. Coca-Cola's dividend yield is 3.04, compared to the market average of 1.69. Investors should consider the current drop in price as an investment opportunity.

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