Is Now The Perfect Time To Buy Coca-Cola?

| About: The Coca-Cola (KO)

Summary

Coca-Cola’s restructuring will create a leaner, more efficient and more profitable organisation in our view.

Its strategy is sound and has the potential to boost sales and positively catalyse the company’s share price.

Coca-Cola’s exposure to emerging markets holds great promise and looks set to boost earnings and investor sentiment moving forward.

In the last year, shares of Coca-Cola (NYSE: KO) have risen by 11%. That's a significantly better performance than the S&P 500, which is up by just 2% during the same time period. While some investors may feel that Coca-Cola's outperformance of the wider index will now be eroded due in part to profit taking, we think that now is a great time to buy it. In fact, we believe there are three key catalysts which will push its share price higher moving forward.

The first catalyst is Coca-Cola's restructuring. We believe that the changes made to the company's organisation will leave a leaner, more efficient and more profitable business which will positively impact on Coca-Cola's share price moving forward.

For example, Coca-Cola has accelerated the sale of its company-owned bottling territories to its bottling partners, with it aiming to completely refranchise its North American system by the end of 2017. Further, Coca-Cola has also begun the process of reorganizing its Western Europe bottling organisation, with it planning to form a unified bottling partner. It is also improving its bottling system in Africa as well as in Indonesia, while selling its company-owned bottling operations in China.

Additionally, Coca-Cola has reduced costs and reinvested the savings for future growth. For example, it has standardized key processes and switched to a thinner layer of functional management while also ensuring that its regional offices are better connected to its headquarters. It has also become more efficient at allocating resources and the implementation of zero-based work should help to ensure that capital is allocated more efficiently in future.

We feel that this restructure is long overdue and that it will leave a better organised and more productive company. Sure, there will inevitably be challenges as Coca-Cola transitions to a new structure, but we think that it will act as a positive catalyst on its financial performance and share price moving forward.

The second catalyst is Coca-Cola's strategy. Its differentiated stance on developing its sales in developed, developing and emerging markets seems to be a sound means of growing its top line.

For example, in the emerging world Coca-Cola is focused on building volume through investing in pricing. While this hurts margins in the short run, it could lead to higher profitability in the long term. In developing markets, Coca-Cola dilutes this strategy somewhat to gain a balance between pricing improvements and volume, while in the developed world Coca-Cola is able to emphasize price/mix and smaller packages.

Furthermore, we feel that Coca-Cola's continued investment in its brands will boost profitability and its share price moving forward. For example, it has invested in brands such as Suja, which is a line of juices, as well as plant-based protein drinks in China. It has also expanded the US distribution of fairlife milk, while also introducing a new marketing campaign - Taste the Feeling - which we feel has the potential to transform its global sales, improve investor sentiment and act as a positive catalyst on its share price.

The third catalyst which we feel will boost Coca-Cola's share price moving forward is its exposure to fast-growing emerging markets. While price/mix will benefit Coca-Cola in the developed world in our view, we believe that volume and pricing potential exists in emerging economies such as China. For example, in China it is forecast that 75% of people living in cities will be earning between $9,000 and $34,000 per annum within the next six years. We think that this provides Coca-Cola with not just volume growth potential, but also pricing potential since its products will become increasingly affordable for a larger number of people.

Further, it is estimated that discretionary spending in China will exceed 7% growth per annum between 2010 and 2020. This shows that Coca-Cola is well-placed to benefit from an economic tailwind not just in China, but across the developing world in our view. Its strategy of investing in pricing to build volume in the emerging world could lead to major pricing potential in our view, which has the potential to positively catalyse its share price moving forward.

Of course, Coca-Cola is not without risk. A key risk which many investors have raised is the increasingly health conscious consumer. Across the developed and developing world, people are becoming more concerned about the effects of sugary drinks and are therefore seeking healthier options. We feel that this move will continue in future and that's why we're bullish on Coca-Cola's strategy to introduce new versions of its products (as well as new products) in order to remain relevant as consumer tastes change.

For example, Coca-Cola has tripled to 27 the number of markets for Coca-Cola Life, while also testing a new PlantBottle package which is 100% made from plant material. As such, we feel confident in Coca-Cola's ability to overcome health concerns regarding its products, with its ability to transition and adapt being strong in our view. And with its exposure to fast-growing emerging markets, a sound strategy and an improved business model post- restructuring, we think there are three clear catalysts to positively impact on Coca-Cola's share price moving forward.

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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.