Coca-Cola Company (KO)

The stock sold off sharply at the beginning of the year after large holder SunTrust banks was forced to sell Coke holdings in order to pump up its Tier 1 capital ratio; the stock based shortly thereafter for 2 months and recently ramped out and will likely base again in the low 60s: an attractive entry point. 50 billion total servings are consumed everyday worldwide and KO only sells 2% of that (~1.3B beverage servings) -- the Street’s already punished Coke for the secular shift away from carbonated drinks and the stock should retest the upper 60s soon, particularly if the markets continue to melt down and the buy side chooses to play defense throughout 2008. Because consolidation among food retailers might further reduce Coke’s pricing flexibility, we’d use protective stops and scale them up as Coke runs higher. We’re happy sitting tight on a solid franchise and 2% yield – and if Coke grows earnings at ~8%, which is what we're modeling, investors should see a 10% return with limited downside.

KO has been expanding into the growing non-CSD market by speeding up internal development of new products and acquiring companies that produce non-CSD. KO’s efforts to bolster its non-CSD offerings should prove to be profitable, given increased consumer demand for healthier beverage options. Coca-Cola (KO) has responded with alternative beverages, like the mid-calorie soda. The Atlanta-based company has been on an acquisition tear to boost holdings in this segment of the market: in 2008 the company acquired a 40% ownership of Honest Tea, following buyouts of NutriJoy, Fuze, and Glacéau. Two things we’re excited about: sell thru data of Vitamin Water looks promising and the weak dollar is helping Coke offset some of the pressure it’s seeing in the states; growth coming from the international business is ripping at ~9% and the addition of high-margin non-carbonated soft drinks into Coke’s portfolio is reinvigorating growth in the flagging North American market.

KO has been expanding into the growing non-CSD market by speeding up internal development of new products and acquiring companies that produce non-CSD. KO’s efforts to bolster its non-CSD offerings should prove to be profitable, given increased consumer demand for healthier beverage options.

The Coca-Cola Company’s brands, specifically the Coca-Cola trademark, are some of the best-known beverage brands in the world. The value of this brand recognition gives KO a significant advantage in both domestic and international markets.

Despite slowing consumption growth rates, carbonated soft drinks still provide high margins and are nowhere near extinction. KO’s CSD products provide the company with roughly 75% of its total revenues, giving KO a pretty reliable flow of income.

With 80% of profit generated outside of the US and all of these profits translated to US dollars, the projections of a lower US dollar relative to other major currencies will drive EPS growth for KO into 2010 and beyond. This should translate into higher share prices. Futher, KO's opportunities for beverage sales growth are much higher outside the US.

Growth in emerging markets continues rising at a brisk pace. In the second quarter of this year, Coca-Cola enjoyed 33% sales growth in India and 14% sales growth in China. And they remain untapped gushers if you look at both countries through the company’s measuring scale of bottles consumer per capita,

The average American drinks 412 bottles of Coke products a year. In China, that figure drops to 28 bottles and Indians consume only 7.

For example, India has a high birthrate and 1 billion people with an average age of 25… and trending lower. Since young people are particularly susceptible to the lure of carbonated, sugary drinks, that creates a particularly attractive Coke, especially as family incomes in India continue to rise.

Investors should step back a moment and think about those facts and figures … and the opportunities they raise. Because you can bet that Coca-Cola has The Chinese Ingredient. Coca-Cola has already proven it can go the distance in China, a country that used to be its seventh biggest market back in 2001. Today, China ranks third on that list, behind only the US and Mexico^[1].

1. ↑ "Coca-Cola’s Secret Ingredient To Success Revealed" Article from InvestmentU

As one of the prime sponsors of the 2008 Beijing Olympics, Coke stands to benefit greatly from enhanced awareness and rising market share internationally, especially in the huge Chinese consumer market. In the third quarter of 2008, Coke saw across the board increases in international volume. China was a particularly bright spot as unit case volume increased 17%. The Coca-Cola Co. (KO) said Friday that it would invest $2 billion in China over the next three years.

That’s 25% more than the $1.6 billion Coke has invested in China during the past 30 years.

As Coke’s third largest market – trailing only the United States and Mexico – China is already a centerpiece of the company’s global growth strategy. When the company announced better-than-expected fourth-quarter results last month, it reported that China jumped 29% last year, while U.S. sales actually fell by 1%.

So it’s no surprise that China will overtake both Mexico and the United States to become the company’s largest market by 2018, Coke President and Chief Executive Officer Muhtar Kent told The Financial Times.

The $2 billion Coke has earmarked for China includes $90 million for a research-and-development center in Shanghai, the financial center on China’s East Coast. It also includes capital for new production plants, distribution infrastructure, and sales and marketing. However, it does not include Coke’s pending buyout of China Huiyuan Juice Group Ltd., China’s largest juice company.

Coke launched a $2.4 billion bid for Huiyuan Juice last September. At HK$12.20 a share, the deal valued Huiyuan at a 195% premium to its market value prior to the offer. But even though the deal is generous by most standards, government approval is still pending.

Huiyuan Juice is a household name in China, and controls 42% of the country’s pure-fruit-juice market. Regulators are debating whether a partnership with Coca-Cola – which controls 54% of China’s soda market – would be in violation of newly enacted monopoly laws. PepsiCo Inc. (PEP) has just a 31% share of China’s soda market

Though Coca-Cola reported a decrease in FY2008 profits, this was mainly due to a strong dollar hurting international sales. Case volume was actually up 4% in Q4. The company is fiscally sound, and it has actually increased its dividend 8%. This shows shareholders that the company is well-positioned despite the current global economic slowdown.

even during past recessions ko has been able to increase dividends each year since they started to pay a dividend in 1987

ko also has a collector cult following and in the history of companies and tv shows a cult following in collectible markets has the ability to put in earnings support levels and survive any economic condition and you only need to look to the star trek conventions to show a business thought to die can come back stronger than expected

you also need to remember the coke rewards program that collectors of ko logo items will keep buying ko products to collect the points to trade for items and this is what will create the earnings support levels

In March 2009, several Coca-Cola executives bought huge amounts of Coca-Cola shares, signaling that they believe the company has reached its bottom and is on its way back up. Director Barry Diller bought 500,000 shares and CEO Muhtar Ken bought 13,000 shares, bringing his holdings up to 138,000 shares. Investors should take heed of this vote of confidence in the company.