By Matt Doiron
Today Coca-Cola (KO) reported $2.8 billion in net income in the second quarter of 2012, slightly down from the previous year and slightly up from analyst expectations. The company earned this income off of $13.1 billion in revenue, which beat the consensus forecast of $12.9 billion (read more details about Coca-Cola's earnings). The stock is up nearly 2% today and is now up 11% on the year, delivering profits for Warren Buffett's Berkshire Hathaway (BRK.A), which owns 200 million shares (see Warren Buffett's top stock picks). The improved performance was primarily due to growth in developing countries such as India, Russia, and China while Europe lagged.
Coca-Cola's appeal to investors comes from its combination of market leadership in soft drinks, a global growth thesis, and a fair amount of insulation from a potential downturn. The stock's beta is 0.43, which is attractive to investors who fear that low growth or a recession in the U.S. could hammer broader market indexes. Yet as its proprietary drink formulas continue to make inroads around the world, where tens of millions of people are joining the global middle class and increasing their consumption of goods and services, the company also has opportunities to achieve growth.
In addition, KO's business has been strong enough to resist the adverse effects of the rising U.S. dollar, unlike other multinational consumer companies such as Procter and Gamble (PG). An appreciating dollar reduces the revenue of a company's foreign operations in terms of U.S. dollars. In the case of Coca-Cola, "currency neutral" net revenue was up 7%, so this factor cut its revenue growth rate in half and the company was still left with respectable numbers. Notably, 15% currency neutral growth in operating income in Eurasia and Africa became 5% growth after accounting for changes in exchange rates.
Coca-Cola can be evaluated alongside several other large soft drink companies. The most obvious peer is its competitor Pepsico (PEP), which at a market cap of $110 billion is closest to Coca-Cola's $176 billion and it has a beverage division that closely parallels Coca-Cola's (Pepsico also owns a portfolio of food brands which includes Quaker, Lays, and Tostitos). In many ways Pepsi is a more attractive value investment: it pays a slightly higher dividend yield than KO (3.1% versus 2.6%); it trades at lower trailing and forward P/E ratios (for example, its trailing P/E is 17 compared with KO's 21); and it trades at a lower multiple of EBITDA. However, it does not have Coca-Cola's leadership position in the market. Ralph Whitworth's Relational Investments initiated a position in PEP in the first quarter of 2012, buying 9 million shares of the company's stock (see other stock picks from Relational Investments). Obviously PEP is also a multinational consumer business in many of the same verticals as Coca-Cola. This means that it also must deal with the rising U.S. dollar in foreign markets, but the fact that Coca-Cola was able to continue to grow its business and beat market expectations suggests that it is possible that Pepsi will do so as well. However, the stock price is relatively flat today.
A much smaller comparable company, at a market cap of $9.2 billion, is Dr. Pepper Snapple (DPS). Its carbonated beverages include Dr. Pepper, Sunkist, and Schweppes while its non-carbonated beverage brands include Snapple and Hawaiian Punch. It matches Pepsi's dividend yield at 3.1% and carries a trailing P/E of 16. While it is a smaller market cap company and has quite a bit of debt compared with its cash holdings (it has 13 times as much debt as cash while this ratio is only 2 for Coca-Cola) it comes off as the closest to a traditional value investment. Nestle (OTC:NSRGY), which at a $191 billion market cap is larger than Coca-Cola, focuses on its food business but also owns several bottled water brands including Poland Spring, Perrier, and its Nestle Pure Life bottled water. It has a trailing P/E of 20; unlike many of these other large consumer businesses, it does not pay a dividend. Year to date KO and DPS are up about 11%, while PEP and NSRGY are up close to 5%.