5 Reasons Why Coca-Cola Is Still A Solid Buy

| About: The Coca-Cola (KO)


Coca-Cola is increasing its marketing spend to spur growth.

Coca-Cola is focusing on efficiencies in the business and is trying to attain cost savings wherever possible.

Coca-Cola's Keurig Green Mountain deal can expand its addressable market.

Coca-Cola is seeing positive trends in some of its end-markets, indicating that it can resume volume growth.

Coca-Cola's fundamentals are still strong, making it a solid investment.

Coca-Cola (NYSE:KO) is one of the most well-known brands in the world. The stock is a Buffett favorite and is a dividend aristocrat as it has paid uninterrupted dividends for more than 25 years. However, it looks like Coca-Cola is stagnating. In the last two years, the stock has appreciated less than 12%, grossly underperforming the S&P 500's gain of around 47%. So, has Coca-Cola lost its charm, and should investors move on for greener pastures? Let's find out.

Increasing marketing spend to overcome weaknesses

Coca-Cola's performance is driven by the strength of its brand, price, pack and channel architecture across its entire portfolio. The company has been increasing its marketing investments rapidly, and is simultaneously focused on decreasing other costs in line with its commitment to identify savings opportunities and to increase support for its brands.

However, the company is facing certain weaknesses. Its volume in its developed markets was down 1% in the first quarter. As a result, Coca-Cola is investing in marketing with renewed vigor. Earlier this year, the company had to boost its marketing budget due to weak demand. As reported in AdAge:

"Demand for Coca-Cola's soft drinks is shrinking in North America, while growth in emerging markets shows signs of slowing. CEO Muhtar Kent believes increased marketing and media investment is the answer.

During an earnings call with analysts, Mr. Kent said that by 2016 the company plans to increase media spending and brand-building initiatives by up to $1 billion. He noted the marketing investments would be felt "in every country that we operate in large or small." Those investments will be funded through a combination of cost-cutting initiatives and improved utilization of the company's global marketing network."

Focus on efficiency

Coca-Cola is focused on certain strategic priorities. First, accelerate growth in sparkling beverages. Second, strategically expand its portfolio. Third, increase brand investments by maximizing productivity. Fourth, lead points-of-sale.

Coca-Cola has established a comprehensive set of strategies to accelerate sparkling beverage growth. It is focusing on investments and is delivering strong marketing to support the sparkling brand. It is working with its bottling partners to increase sparkling brand penetration as well as cold drink availability. In addition, it's cautiously choosing disciplined occasion, brand, price, packed channel strategies, coupled with revenue growth management capabilities to drive sustained value growth.

Management is also looking at innovation to meet evolving consumer needs, coupled with strong engagement with partners and stakeholders to promote trust and to address category misperception. The company believes that there's tremendous growth potential in the sparkling category, and with the help of Coca-Cola's system partners, it's investing in a wide range of sparkling innovation to satisfy the demand of its consumers.

A key deal

Moreover, Coca-Cola is looking to increase its reach with diverse products. Earlier this year, the company picked up a stake in Keurig Green Mountain (NASDAQ:GMCR) to penetrate households through another channel. As reported on CNN Money:

"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 Green Mountain's forthcoming Keurig Cold at-home beverage system. As part of the deal, Coca-Cola is paying $1.25 billion for a 10% stake in Green Mountain, and will help market the new product.

The Keurig Cold system will be likely be released in late 2014 or 2015. It will dispense cold beverages "including carbonated drinks, enhanced waters, juice drinks, sports drinks and teas," the companies said in a joint statement."

Hence, Coca-Cola is making the right move by partnering with Green Mountain. In addition, Coca-Cola recently increased its stake in Green Mountain to 16%. So, the company is confident regarding the prospects of this deal.

Positive trends

The company is also undertaking efforts such as the Share a Coke program, with individualized personalized Coca-Cola bottles and cans, continuous support and innovation on Sprite and Fanta, and diversified new package introductions across its entire sparkling portfolio. These moves are expected to generate excitement and engagement among customers, leading to growth of its sparkling brands all around the world.

The non-alcoholic beverage major is keenly focused on working with its global system partners to build strong, profitable and competitively advantageous brands in a fast growing and profitable still beverage category. For example, Coca-Cola's efforts on its juice drinks portfolio have reaped results as volumes were up 3% in the first quarter. This was a result of brands such as Simply, which grew in the double digits in North America, and Minute Maid Pulpy, which grew 8% in China. These robust efforts marked Coca-Cola's ninth consecutive quarter of gains in juices and juice drinks.

The global tea portfolio of Coca-Cola also increased 4%, owing to double-digit growth across Honest and Gold Peak brands in North America, as well as Ayataka and Sokenbicha in China and Japan.

For North America, Coca-Cola remains focused on building strong brands, creating customer value and enhancing its capabilities. It's streamlining its operations and identifying ways to operate more effectively and efficiently.

Moreover, Coca-Cola is highly optimistic about its outlook in Europe, fueled by strong and integrated programs that it has developed together with its bottling partners. These initiatives are expected to display the company's marketing assets, implement crucial and innovative packaging and implementing initiatives, and run result-oriented marketing programs.

Fundamentals and conclusion

So, Coca-Cola is making a number of impressive moves. In addition, the company's valuation is also quite attractive. The stock trades at 22 times last year's earnings, which is way below the industry average of 46. Moreover, on a forward P/E basis, the stock trades at a P/E ratio of just under 19, signifying earnings growth going forward. Finally, over the next five years, Coca-Cola's earnings are expected to grow at a CAGR of 6.70%, which is better than the growth of 6.05% seen in the last five years. So, Coca-Cola looks like a solid bet from several angles, and improvements in the business can make it even better going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.