Coca-Cola Grows Earnings And Restructures; Yield Not High Enough

| About: The Coca-Cola (KO)

Warren Buffett favorite Coca-Cola (NYSE:KO) reported solid first-quarter earnings Tuesday morning. Reported revenues fell 1% year-over-year to $11 billion; falling a touch short of consensus estimates. Comparable earnings per share grew 5% year-over-year to $0.46 per share, a penny above consensus expectations. Total product volumes increased 4% compared to the year prior.

In spite of reporting decent results, Coca-Cola announced a restructuring in the United States that stole the show. The firm will allow five of its largest bottlers to expand their territories, effectively undoing the bottler roll-up of year's past. CEO Muhtar Kent expanded on the announcement on the company's conference call, stating:

In the coming months, we will be collaborating with five of our bottling partners to implement a plan which will include the granting of exclusive territory rights and the sale of distribution assets with cold drink equipment. In the near term, production assets will remain with Coca Cola Refreshments which will facilitate future implementation of a national product supply system. These actions are being taken ahead of our previously stated timeline. The result will be further progress towards a more agile, modern, customer focused franchise business model unique to the United States.

In effect, the deal gets Coca-Cola out of the low margin bottling business and allows the company to further focus on marketing and product development. While acquiring the bottlers helped boost revenues, the business carries poor returns, and it has not helped the firm increase profitability to a great extent.

As for the North American business, volumes grew 1% during the quarter, driven by a strong increase in still beverages (Peak, Honest Tea, Fuze) of 6%, as well as solid performance from juice (up 3%) and Coca-Cola Zero (up 3%). The firm's most mature market posted a 1% decline in revenues to $4.9 billion, with comparable operating income declining 3%. With the new bottling program in-place, we believe North American operating margins could expand over the next few years.

Eurasia and Africa experienced tremendous volume growth of 15%, driving a 9% increase in revenues, and a 13% increase in currency neutral operating income. Sparkling beverage volumes jumped 12% in the region, driven by double-digit increases at Sprite and Coca-Cola brand. The firm continues to focus on pairing its beverages with food, and we believe volumes will continue to grow at strong rate in 2013.

European volumes managed to remain flat even in spite of rough macroeconomic conditions. Revenues fell 2%, but the company gained value and market share in NARTD (non-alcoholic ready-to-drink) beverages in both the UK and Germany. Even though the region was weak, operating income fell only 2% to $683 million.

Although European results were lackluster, the increasingly important Latin American market posted 4% volume growth during the quarter. Thus far, the firm has showed a strong ability to increase prices, as the firm achieved a positive price/mix of 8%, leading to 9% currency neutral growth. Still beverages performed best, achieving 11% volume growth thanks to strong performance from sports drinks and Fuze. We believe the 2014 World Cup and 2016 Olympics could be huge growth drivers in the country, and we believe Coke will be among the primary beneficiaries.

Although China is often seen as the next huge growth market for every brand, volume increased 1% in the region, while total Pacific segment volume grew 3%. We think recent issues impacting the quick-serve restaurant industry have negatively impacted volumes growth in China, but we doubt it will impair the story over the long term. The firm also blamed a broader economic slowdown for weighing on consumption. India Coca-Cola brand volumes jumped a whopping 30%, and we remain optimistic about the region as the firm takes NARTD beverage value share.

Overall, we were pleased by Coca-Cola's results, as well as management's decision to decrease bottling exposure. Unfortunately, we think the acquisition and subsequent divestiture will prove to have lost value for shareholders, but we think growth in Latin America and Asian markets in the coming years will help ease the pain. Nevertheless, we aren't interested in adding shares to the portfolio of our Dividend Growth Newsletter at this time because shares yield 2.6% at current levels.

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.

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Tagged: , Beverages - Soft Drinks, Earnings
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