Coca-Cola: Still Waiting For Growth Initiatives

| About: The Coca-Cola (KO)
This article is now exclusive for PRO subscribers.

Summary

Management’s evasion of core problem remains troubling.

Long-term revenue decline not inevitable.

Comparison with PepsiCo reveals over-valuation.

Despite recent price drop, my Levered Returns model still predicts some downside.

Overview

Recently, I covered PepsiCo (NYSE:PEP) which despite a slowing Carbonated Soft Drinks "CSD" market, continues to enjoy the luxury of diversification. However, its rival Coca-Cola (NYSE:KO) does not appear that fortunate. Revenue for the company will be declining for two consecutive years, starting in 2013 and I believe this might be part of a long-term trend. Factoring the same in my Levered Returns valuation model reveals that despite taking a serious beating since the beginning of December, the stock is still slightly over-valued by approximately 4% based on its December 12th closing price.

Long-Term Worries?

Coca-Cola currently derives 70% of its revenue from its CSD segment which has been on a decade-long decline amid shifting health concerns. Given management's announcement to restructure its global supply chain, its continued ambivalence about this core issue appears troubling. I believe this could be part of a long-term trend, and factor the same into my model to find that the stock is marginally over-valued despite taking a recent beating.

Comparable Valuations Angle: Not Appealing

The street regularly draws comparisons between Coca-Cola and PepsiCo, and given the conundrum the company has been facing, they are no less relevant, and surprising. The company is trading at a 1% PE premium to PepsiCo, despite facing headwinds, as well the latter's strong fundamentals. So what is it then that explains the company's current valuation?

Activist Investors at Play?

Given the problems the company is facing, it is not surprising that it comes under fire from activist investors such as Wintergreen Advisors' David Winters, who has been gunning the company's executive pay structure, and also has heavyweights like Warren Buffet on his side. These well-known heavyweights may help explain why Coca-Cola trades at a premium as investors expect some type of corporate action to take place.

Levered Returns Valuation Model

I expect Coca-Cola's revenues to grow at a maximum of 2.0% over the next five years, and that too assumes the company is able to ward off current headwinds. The recently launched initiatives at cost saving should help margins, however due to lack of clarity on that part, I am just assuming a 1% margin expansion going forward.

Conclusion

Coca-Cola's vacillation about the core issues facing the company is troublesome and casts a bleak outlook on its growth prospects. While the management is making efforts to save the firm some money by instituting a cost-saving plan, top-line problems will persist. I believe management can turn things around, but I recommend investors stay on the sidelines until a clear-cut plan is put into place that tackles this issue.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.