Coca Cola - Global Economic Slowdown And Strong Dollar Are Hurting

Oct.22.12 | About: The Coca-Cola (KO)

Shares of Coca-Cola Company (KO) ended the week with losses of 2%. The global beverage company reported its third quarter results on Tuesday before the market open.

Third Quarter Results

Coca-Cola reported third quarter revenues of $12.34 billion, up 1% on the year. Global volumes rose 4%, driven by a 5% growth in international markets and 2% growth in the US. A strong dollar turned out to be a great headwind for Coca-Cola given the size of its international activities. In constant currencies, revenues would have risen 6%. Revenues fell slightly short of analysts expectations of $12.41 billion.

The company reported a 4% increase in net income to $2.31 billion. Earnings per share rose 4% as well, coming in at $0.50 per diluted share. Operating earnings experienced a 7% headwind as a result of the strong dollar. Adjusted earnings per share came in at $0.51 per diluted share, in line with analysts expectations.

So far, the company repurchased for $2.3 billion of its own shares in 2012, in line with the annual target range of $2.5-$3.0 billion. The company announced a new share repurchase plan to retire 500 million shares outstanding, valued at almost $19 billion. The plan is sufficient to retire 11% of shares outstanding.

CEO and Chairman Muhtar Kent commented on the results, "We are pleased with our third quarter and year-to-date results. We continue to deliver consistent and solid performance, with our business growing worldwide volume by 4% in the quarter and 5% year-to-date. Importantly, we realized growth in the quarter across all five of our global geographic operating groups, despite continued volatility in the worldwide economy. We remain resolutely focused on ensuring that we leverage our wonderful heritage and fuse it with what is expected by our consumers today in order to earn and sustain our place in their daily lives tomorrow."

Segmental Information

Eurasia & Africa

Revenues rose 4% to $749 million, on the back of a solid 11% growth in case volumes. Growth was driven by operations in the Middle-East and Africa which was up 22%, India which was up 15%, and Russia reporting 7% volume growth. Operating income for the division fell 4% to $254 million.


Revenues fell 8% to $1.29 billion on the back of a weaker Euro against the dollar, and lower pricing. Despite the economic worries in the continent, unit case volumes were up by a modest 1%. Operating income fell 14% to $698 million on the back of adverse currency effects, lower pricing, and investments related to the 2012's London Olympics.

Latin America

Revenues for the Latin America division came in unchanged at $1.23 billion. Strong volume and pricing growth was offset by a 13% impact of weaker currencies against the dollar. In constant currencies operating income rose 9%, but adverse currency movements led to a 5% decline in operating income to $734 million.

North America

The North American division reported a solid 5% revenue growth to $5.67 billion, driven by volume growth of 2% and increased pricing of 3%. Operating income rose a spectacular 34% to $832 million as a result of one-offs. Adjusted for one-time items, operating income was up 3%.


Revenues in the Pacific area fell by 4% to $1.59 billion. Unfavorable currency movements masked the 3% growth in volume growth, driven by double-digit growth in Vietnam and South Korea. Operating income fell by 1% to $603 million. Asia has been a driver for a long period of time. The 3% growth in volumes fell short of analysts expectations of 4.5%.


Coca-Cola ended its third quarter with $14.9 billion in cash, equivalents and short term investments. The company operates with $32.7 billion in short and long term debt, for a sizable net debt position of $17.8 billion.

For the first nine months of 2012, Coca-Cola generated revenues of $35.6 billion. The company reported net income of $7.2 billion, or $1.56 per share. At this rate, the company is on track to report annual revenues of $48 billion. Net income could total $9.5 billion, or around $2.05 per share.

Currently, the market values the firm at $168 billion. This values the firm at 3.5 times annual revenues and 17-18 times annual earnings.

Coca-Cola pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 2.7%.

Investment Thesis

Year to date, shares of Coca-Cola have risen some 7%. Shares started the year around $35 per share and steadily rose to $40 during the summer months. Shares fell back slightly, now exchanging hands at $37.60 per share.

Over the past five years, shares have risen some 20%. Shares fell from $30 in the beginning of 2008, to lows of $20 in the beginning of 2009. From that point in time, shares rose steadily to $40 earlier this summer, approaching 1998s all time highs. Between 2008 and 2012, the company grew its annual revenues from $31.9 billion to an estimated $48 billion this year. Net income grew from $5.8 billion, to an expected $9.5 billion.

The main take-away from the latest report is the negative impact of a strong dollar and weaker economic growth. Both factors are hurting the bottom line in the short term. In constant currencies, revenue growth came in at 5%, while earnings would have grown 7%. This is nothing spectacular, but is a decent result given the slowdown in Europe and in certain parts of Asia.

Coca Cola trades at a fair valuation for a global brand with many strong brands in sub-categories. The valuation of 17-18 times earnings seems fair and investors receive a decent 2.7% dividend yield in the meantime. Implicit payouts to shareholders are even higher as the company retires roughly 1.5% of its shares per annum, at today's pace. This results in a cash flow yield of over 4% to shareholders per annum.

Buy on the dips, for an excellent long term addition to your diversified portfolio.

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.