Coca-Cola: A Sparkling Example

| About: The Coca-Cola (KO)

Summary

I want to acquire shares of KO under $40, but its not going to be easy.

Shares are however set to pull back today following some less than stellar results, which I discuss.

KO is also a sparkling example of the impact the stronger dollar has had on domestic companies.

Coca-Cola (NYSE:KO) is a dividend growth machine that I started covering last fall with a buy rating, especially if you could get shares for under $40. Shares appear that they are going to fall today looking at premarket action, but shares under $40 will be tough to come by. Shares are however set to pull back today following some less than stellar results. The stock has been a tough investment lately as it has been a name that has moved sideways. But is that such a bad thing? Remember that when I started coverage I stated that Coca-Cola was a name that "you buy for income/dividend growth. Capital appreciation is secondary." And friends, Coca-Cola is a sparkling example of a dividend growth name. I continue to 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. But is this stock worth holding.

The short answer is yes, but for the long answer to this question I will examine the most recent quarter and discuss the outlook for the stock. Let me start with some highlights. First the company saw revenue of $11.54 billion which missed analyst expectations by $100 million, but it was also down 5.0% year-over-year. Earnings continue to be strong, with Q2 earnings coming in at $0.60, which was a $0.02 beat against estimates.

But we need to dig deeper. What is going on with the revenue? Well the company saw organic revenue growth of 3% in the quarter. This was driven by concentrate sales growth and 3 points of positive price/mix. This was positive. It is important to note that concentrate sales were in line with unit cases sales. The company also gained global value share in sparkling beverages and in still beverages in the quarter. Global sparkling beverage volume was down once again by 1%, but was led by Coca-Cola soda, as well as some growth in Sprite and Coke Zero. In still beverages the company notched gains in global volume and value share. There was volume growth in all still beverage categories, except juice and juice drinks which registered a small decline in the quarter. Overall volume was up 2% in the quarter and is up 4% on the year.

While Coca-Cola is a sparkling example of a buy and hold dividend growth machine, it is also a sparkling example of the impact the stronger dollar has had. I want to reiterate that the impact of currency exchange issues is a real threat for domestic companies with a lot of international sales. While this is an issue, it is one that I anticipate to be temporary, and for many companies has begun to subside. Still it weighs and 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 due to its truly global nature. 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 9% and these currency impacts are exacerbated once again regionally.

In Eurasia and Africa, the segment saw a -10% change from last year in currency, which led to a 6% decline in reported revenues year-over-year. Ouch. In Europe the impact was smaller, with currency issues have been improving and had no impact year-over-year, which helped contribute to a 2% decline in reported revenues versus last year. In Asia-Pacific, it was a positive 1% year-over-year impact, but reported net revenues did fall 2%. Then there was Latin America which saw even more pain. Currency was -20% year-over-year and contributed to a 4% decline in reported revenues. No matter how you adjust it, the currency issue hurts. While it is appropriate to look at adjusted numbers, the fact of the matter is the company is bringing in less money, even if it is because of exchange rates. This is a real risk.

The one thing I like about Coca-Cola is that the company isn't going anywhere. There will always be ups and downs. We need to take advantage of those 'downs' for the long-term. I am still waiting for under $40 to pull the trigger. As a company, strong pricing power and lower commodity costs along with spending controls helps drive profits for Coca-Cola. The dividend continues to grow and the stock sports a 3.1% yield. Net share repurchases for 2016 total 41.1 billion. Now, based on this quarter's results, the company has discussed its expectations for the rest of the year. 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 3%, down from the prior 4-5%. The net impact of acquisitions, divestitures and structural items should be 6-7%, up from 5%. The currency hit is expected to be a 2-3%. Thus we can expect absolute revenues down versus 2015.

These latter adjustments are what I think is about to hit the stock. While the headwinds will continue I suspect them to be temporary, however, it is a question of time. That said, the long-term game is what I am focused on. The stock is going to get hit here on these somewhat weak results. I would still like to see the stock pull back further before initiating a position. I will repeat what I said in the fall. If you can get shares under $40 that is a spectacular price. As of now, under $43 is a reasonable entry point, but there is no rush in this game. Eventually we are due for a continued broader market pullback. Thus you can still 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, but may initiate a long position in KO over 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.