Coca-Cola (KO) announced its quarterly earnings today. The results were somewhat mixed. The company's earnings increased by 3.9% globally and 2% in China, where the company used to enjoy double-digit growth for years. Slowing global economy played a role in this deceleration of growth; however, some think that Coca-Cola is simply too big to post any significant growth in the long term. The company blames China's efforts of restraining inflation for the slowdown in the country and the management expects the slowdown to be a temporary thing.
While the company sold a higher volume of products in Europe compared with the last quarter, it sold cheaper products on average and saw a revenue decline in the continent. The company's products sold better at supermarkets than in restaurants, which could be explained by the recession in Europe. The recent strength of the dollar currency was another problem for the company, which sells its products in more than 190 countries. The company's overall revenue increased by less than 1%; however, the number rises to 6% after adjusting for the fluctuations in the currency exchange rates.
Back to the question, is Coca-Cola too big to grow? I don't think so. I believe that the company still has plenty of growth left in it. For example, it posted 15% of growth in India and 19% of growth in Thailand. While the company sells its products in almost every country in the world, the company still has low market share in some countries like India where there is a huge potential for growth.
As the company improved its margins from 60.2% to 60.7%, it plans to improve these margins even further by shifting around some of its ingredients, particularly sugar. The company will use less sugar and more high-fructose corn syrup, which is a cheaper substitute. The company engages in "contract farming" which involves Coca-Cola providing farmers with seed, chemicals and other ingredients and buying the final product. According to Wall Street Journal, the company also wants to explore opportunities for cheaper production of sugar by using contractors in Africa. At the moment, Coca-Cola enjoys historically high margins and improving the margins further would fuel more growth for the company. Currently, white sugar futures trade for $560 per metric ton (a little over 2,000 pounds) whereas corn futures trade for $292 per metric ton.
As the soda consumption declines in North America, Coca-Cola is able to make up for the loss by selling a larger variety of beverages including healthier options such as orange juice, water and milk. Once the global economical conditions improve, the company can see a stronger growth in Europe and elsewhere. The rapidly growing market of energy drinks also provides another potential for Coca-Cola. I believe that the company could benefit greatly from acquiring Monster Beverage (MNST), which was mentioned earlier in the year but quickly dismissed by the company. Coca-Cola's own brand of energy drinks achieves 10-15% growth annually whereas Monster's growth is closer to 40-50%.
Coca-Cola's management is very focused on growth opportunities and it was very evident in the company's earnings call. Every manager that spoke mentioned at least a thing or two about how they are planning to achieve further growth at the company. Despite its huge size, market share and exposure, the company continues to see a lot of growth through its greatly diversified portfolio of beverages. When one of Coca-Cola's beverages performs poorly, the company makes up for it with its other beverage offerings. According to the company's CEO Muhtar Kent, the company's portfolio of "still beverages" (i.e., non-sparkling drinks) grew by 10% in the quarter.
On a negative development, the company posted a negative cash flow of $3.1 billion in the quarter. According to the company's cash flow statement, Coca-Cola sold $32.88 billion of new debt in the quarter while paying off $28.79 billion in old debt. The company also spent $2.3 billion on dividends and $3.6 billion on stock purchases. Currently the company has enough cash to service its debt and pay dividends; however, if the company's growth slows down, the company's dividend might take a hit. Keep in mind that Coca-Cola has been raising its dividend rate for more than 30 years in a row though.
Coca-Cola is one of the first companies in which I've ever invested. Since my first investment many years ago, the company's share price has appreciated nicely and the dividends kept coming. I don't intend on selling my shares anytime soon, but I don't intend on buying additional shares either. I think Coca-Cola still has a lot of growth left in it as the company increases its portfolio of drinks and gains market share in places where it has low penetration rate. If the company's P/E ratio falls below 15, I will be happy to buy more shares of Coca-Cola, but for now I will wait in the sidelines with my already purchased shares. Value investors could find a lot of potential in this company.
Disclosure: I am long KO.