Coca-Cola: Strong Gains In 2012

| About: The Coca-Cola (KO)
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By Matthew Smith

One of the key cultural battles of the 1980s was the Cola Wars, advertising campaigns waged between the Coca-Cola (KO) and PepsiCo (PEP) to gain the upper-hand in the consumer soft drink market. While the term "war" often suggests that one side wins at the other's expense, in truth, neither side lost. Instead, both sides became incredibly profitable as each tried to outdo the other, though it was Coca-Cola that ultimately became the world's largest beverage company.

Following a downturn of its stock price at the turn of the century and the subsequent decade, Coca-Cola has seen its price creep back up to roughly $73.50 as of late, its highest peak since April of 1998, when it reached $85.50. In the last month alone, the company has seen its price rise from roughly $69.00 to $74.00, which represents a significant amount of growth for such a short time period.

The company's continued growth can perhaps be explained by its efforts to expand its market share through increased partnerships with large-scale beverage distributors, most recently netting an exclusive contract with Dunkin Brands Group (DNKN). The partnership ensures that the roughly 16,800 Dunkin' Donuts and Baskin-Robbins restaurants in the United States will be serving Coke products by August 2012. Over 9,400 of the stores will begin serving Coca-Cola products this month, representing a short-term boon for the company as well.

Additionally, the company stands to benefit from its willingness to expand its already well-known brand to the less explored markets overseas, specifically in India, China and Russia. Over the past 18 years, Coca-Cola has invested $2 billion in India, with the U.S. brand Sprite and Indian brands "Thums Up" and "Maaza" being largely responsible for the double-digit growth rate in India over that time. The company is planning another $2 billion investment to further expand on its consumer marketing and infrastructure efforts, which should result in even more brand growth in the world's second-most populous nation.

China and its 1.3 billion natives also represent a significant market for Coca-Cola, which opened its 42nd bottling plant in the country in March. The new plant is the largest facility the company has created in China, and is a key component of Coca-Cola's $4 billion planned investment in China over the next three years.

The agreement with Dunkin Brands and the company's ever-growing global presence demonstrate why Coca-Cola is appealing to investors. Because of the company's strong revenue growth and sparkling streak of dividend increases, among other reasons, buying Coca-Cola stock remains highly attractive to retirees. As a market force for several decades, Coca-Cola has proven to be low-risk while still producing healthy payouts.

In spite of all the good vibes Coca-Cola has produced with its investors and business partners, input costs and its various competitors remain looming threats that the company must consider.

The main concern, as always, will be PepsiCo. Unlike Coca-Cola, PepsiCo has a more diversified portfolio beyond soft drinks, with snack food giant Frito-Lay and food conglomerate Quaker Oats Company representing important revenue streams. As a result, PepsiCo can afford to linger behind Coca-Cola in the soft drink market, with growth in other segments mitigating the effects of poor soft drink sales.

Rising sugar prices also represent a threat to Coca-Cola, with sugar being a vital input to the soft drinks produced by the company. Since 2007, sugar prices have more than doubled, with 2011 being especially expensive for buyers. Though the prices have receded slightly in 2012, production costs of sugar are expected to increase drastically in areas such as Brazil over the next two decades. Fortunately for Coca-Cola, this is a challenge all soft drink producers will face, though its lack of product diversity compared to companies like PepsiCo could hamper Coca-Cola.

Aside from PepsiCo, Coca-Cola also faces threats in the energy drink sector from Monster Beverage (MNST) and privately-owned Austrian company Red Bull GmbH, which have approximately 40% and 29% shares of the energy drink market, respectively. Coca-Cola lags behind in a thriving market that saw a 14.4% volume increase in 2011, with the company's primary energy drink, Full Throttle, garnering a much smaller share than Monster and Red Bull products. Though the energy drink market represents a small percentage of all non-alcoholic beverages sold, the market continues to experience rapid growth, requiring Coca-Cola to give increased attention to that sector.

These potential threats notwithstanding, Coca-Cola's continued expansion and investment while maintaining strong liquidity should allow the company to continue to be a viable force in the market for the foreseeable future. Its long-term stability and focus on gradual profitability continue to yield steady payoffs, making its stock a relatively low-risk buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.