Coca-Cola: The Pain Is Real

| About: The Coca-Cola (KO)


I opened coverage last fall on Coca-Cola with a buy if you could get shares under $40, but we haven't seen that yet.

The Q4 earnings report shows the pain of currency issues and I discuss the impact on the company.

I discuss the long-term game plan and the importance of picking your spots.

Coca-Cola (NYSE:KO) is a household name that I initiated coverage on this fall with a buy rating, especially if you could get shares for under $40. It has not gotten there. Now I don't need to introduce you to the company, because you have definitely heard of it. Its products reaching nearly every corner of the globe. That said, the stock has been a tough investment lately, not because it has been declining, but because it hasn't really moved. But is that such a bad thing? When I opened coverage I stated that "this is a stock you buy for income/dividend growth. Capital appreciation is secondary." The main complaint remains that there isn't enough growth but I think that the stock is best served in a long-term, tax deferred account like an IRA, with the ultimate goal of reinvesting the dividends and amassing a large position. By doing this you will capture some growth over the years, but you are really building a position from which to live off of in retirement (in conjunction with other holdings). With this understanding of how I think the stock should be owned how is the company doing?

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Of course to answer this question I will examine recent performance and discuss the outlook for the stock. Let me start with some highlights. First the company saw revenue of $10 billion which beat estimates by $90 million but was down 8.3% year-over-year. Earnings came in at $0.38 a $0.01 beat against estimates.

The company saw organic revenue decline in large part due to 6 fewer days in the quarter, which makes a huge difference on the absolute numbers. If we control for this we see that concentrate sales were for the quarter were down 3 points. There was a positive price/mix of 2% in the quarter which I was pleased to see. There was organic growth in each of its operating groups except for Asia Pacific in the quarter.

The company also gained global value share in sparkling beverages in the quarter. Global sparkling beverage volume growth was led by 1% growth in the world famous Coca-Cola soda, as well as 3% growth in Sprite and 8% growth in Coke Zero. However this was partially offset by an 8% decline in Diet Coke. I will say sales of diet declined 5% which struck me as surprising, but I surmise that the Coke Zero and Sprite Zero sales were cannibalizing the Diet sales. The company also gained value and volume share in the juice and juice drinks and ready-to-drink tea categories in the quarter. There was 6% growth in ready-to-drink tea, 2% growth in sports drinks and 8% growth in packaged water. For all of 2015 cash from operations was $10.5 billion, down 1%. This of course is due to the impact of currency issues, which was offset by spending reductions implemented by management.

The impact of currency is a real threat, but one that I anticipate is to be temporary. It could last longer than we'd all like, however. I've discussed the impact of the strong dollar in numerous articles before, but I have to say Coca-Cola is among the hardest hit I have seen. I mentioned the reasons for the decline in revenues above. Despite some positives on volumes and spending plans implemented by the company, it was not enough to offset the impact of currency headwinds. Currency headwinds hit the company in the quarter for 7% with ding to operating revenues, a 4% it to cost of goods sold, and a 9% hit to gross profit. These impacts are exacerbated regionally.

For the total company, it was an -7% change compared to last year. In Eurasia and Africa, the segment saw a -16% change from last year in currency, which led to an 11% decline in reported revenues year-over-year. Ouch. In Europe the impact was smaller, with currency -5% year-over-year, but contributed to a 7% decline in reported revenues versus last year. In Asia-Pacific, it was a -6% year-over-year impact, helping reported net revenues drop 15%. Then there was Latin America. Ouch. The pain is real here. Currency was -25% year-over-year and contributed to an 18% decline in reported revenues. Of course on a constant dollar basis, organic revenues were up 7% in the region thanks to price/mix and volumes. But no matter how you slice it, the currency issue hurts. Financial wizardry is entirely appropriate to allow comparability of the company's results, but the fact of the matter is the company is bringing in less money, even if it is because the exchange rates, is a real risk.

Here's the thing. Strong pricing power and lower commodity costs along with spending controls was a driver of profits here. The dividend continues to grow and the stock sports a 3.1% yield. The company repurchased $2.3 billion in shares in 2015. Looking ahead it expects to purchase $2.0 billion-$2.5 billion in 2016. That's a huge benefit to earnings per share and the ability to grow the dividend in the future. In 2016 the company sees organic revenue growth to be up 4-5%. Divestitures and currency headwinds will combine for an 8 point impact, so we can expect absolute revenues down. While these headwinds continue the long-term game is still intact. I would still like to see the stock pull back before initiating a position. I still think under $40 is an attractive price. This will require a continued broader market pullback, but I think for the long-term, you still need to pick your spots, even if you plan to hold for 30 years.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we 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.