Why We Like Coca-Cola But Not At Present Levels

| About: The Coca-Cola (KO)

Global beverage giant Coca-Cola (NYSE:KO) reported solid third-quarter results Tuesday morning. The soda giant saw revenues increase 1% (6% currency neutral) year-over-year to $12.3 billion, roughly in-line with consensus expectations. Comparable earnings fell 2% year-over-year to $0.51 per share, also in-line with consensus estimates. To read how we estimate our intrinsic value of this beverage giant, please click here (the article offers the pre-split fair value).

Not surprisingly, North America remained relatively strong, with volumes growing 2% year-over-year during the quarter and revenues up 5% year-over-year. With obesity backlash en vogue, the segment leaders included Coke Zero (up 9%), Seagram (up 11%), juices (up 6%), and Powerade, which grew 9%. We expect these trends to continue, and we wouldn't be too shocked to see Coke Zero eventually become one of Coca-Cola's top North American products, in the realm of Coca-Cola Classic and Diet Coke. Though we think its energy drink profile is fairly average--hence the rumors of acquiring Monster (NASDAQ:MNST)--we really like the firm's non-sparkling beverage profile, which includes Gold Peak Ice Tea and Honest Tea.

Unlike Yum! Brands (NYSE:YUM), which reported solid results in China, Coca-Cola struggled, with volumes growing just 2% year-over-year. Japan also grew 2%, but other Asian countries were relatively strong, as the Pacific segment grew volumes 3% at an aggregate level. Ultimately, we think the popularity of Yum restaurants, which exclusively sell Pepsi (NYSE:PEP) products, could lead to increased market share for Pepsi and negatively impact Coca-Cola's results in the region. However, we think McDonald's (NYSE:MCD) plans for expansion could meaningfully boost the firm's results, especially if the fast-food giant is able to steal some market share.

European volumes grew 1% in spite of an incredibly soft European economy, highlighting the resiliency and defensive nature of the company's products. Profitability did suffer, falling 8% due to incremental investment for the Olympic Games held in London. Latin America was also strong, with revenues growing 12% on a constant currency basis driven by 5% volume growth. The Coca-Cola brand continues to resonate with Latin American consumers, and we're even more bullish about the company's potential in this market than we are about its potential in China. Many of its products, including Fanta and Sprite, are growing strongly and seem to fit naturally in the Latin American taste preferences.

Overall, we liked Coca-Cola's third-quarter results and ability to grow in spite of challenging conditions. The firm has already generated $5.8 billion in free cash flow, and it continues to reward investors with strong returns of capital and targeted investments that should be accretive to shareholders. We like the company, but its shares are fairly valued, in our view. We won't be adding it to the portfolio of our Best Ideas Newsletter at this time.

Disclosure: I 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.