Why Is Coca-Cola’s Stock Fizzling?

Source: Getty Images

Source: Getty Images

The Coca-Cola Corporation (NYSE:KO) is a brand we all know. It has long been a blue chip stock that could be relied on. But in the huge rally of the last two years, Coca-Cola has lagged. Even rival PepsiCo Inc. (NYSE:PEP) has more than tripled Coca-Cola’s pace in the last two years. Coca-Cola is up 7 percent in that time frame, whereas PepsiCo is up over 30 percent. Both stocks pay good dividends, while both operate in the same sector. So why is PepsiCo doing so much better as a stock? The answer is because Coca-Cola’s performance is lagging. In this article, I will review Coca-Cola’s recent quarter, specifically as it relates to its global performance. We have all seen the headline earnings, that is, Coca-Cola missed badly on revenues, while essentially reporting in line earnings per share.

Let’s start in North America. Coca-Cola’s North American group accelerated revenue growth in the most recent quarter, led by its sparkling beverage business. It gained value share and maintained volume share in total beverages, driven by increased media investments around the FIFA World Cup and the launch of the Share a Coke campaign. Sparkling beverage volume was even in the quarter compared to last year, outperforming the rest of the industry to deliver volume and value share gains.

Brand Coca-Cola volume grew 1 percent in the quarter, a sequential improvement, while it’s flavored sparkling portfolio also performed well, with Fanta up 4 percent and Sprite up 2 percent. Juices and juice drinks saw lower volume due to significant price increases taken to cover higher commodity costs. The price to mix ratio (price/mix) for its sparkling business increased 3 percent in the quarter, reflecting the continued implementation of its new pricing strategy, while overall price/mix for the group increased 1 percent. Reported operating income increased 13 percent in the quarter.

Turning to Europe there was improvement in the business during the second-quarter as a result of strong activation around the FIFA World Cup, a shift in the Easter holiday, and stabilizing economic conditions in certain markets. Low single-digit volume growth in its Northwest Europe and Nordics, Germany and Iberia business units was however offset by a 4 percent decline in its Central and Southern Europe business unit, resulting in even volume for the group in the quarter. Sparkling beverage volume was even in the quarter, with brand Coca-Cola and Coca-Cola Zero both delivering positive results. Operating income increased 1 percent in the quarter as pricing and product mix within certain markets coupled with favorable timing of operating expenses were offset by lower concentrate shipments in the quarter.

The Eurasia and Africa Group grew volume 5 percent in the quarter. Double-digit volume growth in the Middle East, South Africa, East Africa and Pakistan was tempered by a mid single-digit decline in Russia. Coca-Cola gained volume share in sparkling beverages while growing volume 3 percent, led by brand Coca-Cola. Still beverage volume grew 12 percent in the quarter. Price/mix increased 3 percent in the quarter due to positive pricing in the majority of markets coupled with favorable geographic mix. Reported operating income declined 13 percent in the quarter.

Latin America’s volume was even in the quarter, as strong 8 percent volume growth in its Latin Center business unit was offset by a 3 percent volume decline in Mexico. Brazil’s volume was even as strong due to the FIFA World Cupand improved execution of key entry-level packages. An aggressive market of competitors and a deteriorating macroeconomic environment in the quarter offset some of these gains. Price/mix increased 7 percent in the quarter, reflecting positive pricing in all fits business units, particularly in the higher inflationary markets within Southern Latin America. Reported operating income decreased 13 percent in the quarter.

Finally, the Asia Pacific Group grew volume 8 percent in the quarter, with all five business units contributing growth. The groups sparkling portfolio grew volume 9 percent in the quarter, with Coca-Cola and Sprite both contributing significantly to this growth. Still beverage volume grew 7 percent in the quarter, with volume share gains in ready-to-drink teas and packaged water. China continued its momentum into the second-quarter, delivering 9 percent volume growth behind a strong start to the summer’s brand new Share a Coke campaign and new product innovations targeting higher price points. Even India grew volume double digits due to an extended summer. Despite the first increase in Japan’s consumption tax in over 15 years, its business grew volume 1 percent, leading to volume share gains in both core sparkling and still beverages. Price/mix in the quarter was even. Reported operating income was also even in the quarter.

So there you have it. Overall, most segments are showing extremely slow growth with the exception of the Asia Pacific group. Still, others are showing declines. This informational article shows that Coca-Cola is really focused on improving the price/mix ratio as well as maintaining market share and growing volumes. You see, Coca-Cola has penetrated many markets, while rival PepsiCo still has room for growth. That is the challenge with owning Coca-Cola. Sure, it is a ‘safe’ stock. It is a good dividend payer. But it lacks overall growth, and the segment specific results clearly show this.

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Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no plans to initiate a position in the next 72 hours. He has hold rating on Coca-Cola and a $38 price target.

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