By almost any measure, Coca-Cola (NYSE: KO) is a remarkable company. Not very many companies produce long term free cash flow margins of 20% or better, nor consistent returns on invested capital in excess of 20%. Even fewer companies manage to do it in the finicky and price-sensitive world of consumer goods. Consider, too, the fact that Coca-Cola is one of the largest companies in the world and is relatively undiversified, and yet still produces pretty solid growth on a consistent basis.
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Even for those who find Coca-Cola to be too boring or too big for the portfolio, there is a lot to learn from following this company and watching how management continues to build value for shareholders.
A Surprisingly Solid End To The Year
From a top line perspective, Coca-Cola had a very good fourth quarter. Worldwide volume increased 6%, or about 5% excluding a deal with Dr Pepper Snapple Group (NYSE:DPS), with decent growth in North America (3%, excluding that deal) and Latin America, but strong performance in Eurasia/Africa and weakness in Europe and Asia. Interestingly, volumes in China were down 3 percent.
Coupled with a 2% increase in price and mix, and 37% growth from so-called "structural changes," Coca-Cola reported revenue growth of just under 45 percent. Excluding all of the special items and changes, core revenue growth of about 8% is still quite good.
In order to really plumb the details of Coca-Cola's earnings statement, readers and investors will probably need a glass of something considerably more potent than soda. For purposes of clarity, brevity and sanity, I will simply focus on some bottom-line adjusted conclusions. Operating income was up about 11%, with adjusted gross margin declining from 65.5% to 61.5 percent. Currency impacts account for how adjusted operating income could outpace revenue growth while the "adjusted" margin declined.
The Road Ahead
Coca-Cola is hardly a one-product company, but clearly has not diversified itself the way Pepsico (NYSE:PEP) has. Looking at these results, though, who cares? If Coca-Cola can outgrow more diversified consumer goods companies like Procter & Gamble (NYSE:PG), Pepsi, or General Mills (NYSE:GIS), why take the risk of wasteful acquisitions?
That said, with a large amount of cash on the balance sheet, there is likely to be some concern about what the company has in mind. Simply letting that cash sit around is actually bad for the company's returns (a good problem to have, though), and a bad acquisition would be even worse. A higher dividend or share buyback seems like the most likely bet, but there could be a little unease in the stock until management is more clear about its plans.
With such a successful business model, it is hard to see what Coca-Cola could do to improve things. The company appears to be rather adamant about not expanding into alcohol, and why should it? Brewers like Molson Coors (NYSE:TAP) and Diageo (NYSE:DEO) have lower returns on capital than Coca-Cola, and it is unclear how exactly Coca-Cola could run them so much better that it would be a value-creating deal. More likely, then, Coca-Cola will stay alert for expansion opportunities and small-scale acquisitions where it could really leverage its global branding and distribution powers. That said, perhaps a move into nutrition could make sense down the line - it has worked for Nestle (Nasdaq:NSRGY), though it arguably has not done much for Abbott Labs (NYSE:ABT) or Bristol Myers (NYSE:BMY) (which chose to spin off Mead Johnson Nutrition (NYSE:MJN)).
The Bottom Line
Coca-Cola does not seem undervalued to the point where there are likely to be sizable quick capital gains for new investors. That said, the company returns capital to its shareholders pretty consistently and should continue to grow the business at a steady clip, perhaps making it a decent enough holding for more income-oriented investors. (For related reading, take a look at Behind The Big Brands.)
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