Coca-Cola Still Priced For Premium Performance

For a company with the quality and history of Coca-Cola (NYSE:KO), opportunities to buy in cheaply don't come often. Based on solid ongoing performance and global growth potential, this is not one of those rare down periods at Coke. That leaves investors with the unenviable choice of looking for the cheaper stocks of lesser companies, or accepting less than expected return in Coke shares.

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Familiar Themes In the Fourth Quarter
Even with the acquisition of Coca-Cola Enterprises clouding some of the comps, there weren't any major surprises in Coca-Cola's underlying performance. Global revenue rose a little more than 5%, fueled in part by worldwide volume growth of 3%. By the standards of other global food and beverage companies like Nestle (OTCBB:NSRGY) or Kraft (NYSE:KFT), that's pretty respectable growth and Coke did see double-digit volume growth in China.

Adjusted profitability was likewise sound and solid. Gross margin (again, adjusted) fell a bit more than a point, while operating income rose nearly 11%. Although profitability in Asia looked soft, better performance in North America and Africa offset this. (For related reading, see Analyzing Operating Margins.)

Will the Competition Stay Rational?
While Coca-Cola's earnings basically support the prior thesis on the stock, there is a worry that PepsiCo (NYSE:PEP) is going to get more aggressive about building its beverage market share. To some extent, I think these worries are overblown; as much as investors presently fret about margins, I'm not sure that sacrificing price for share would be received all that well by the Street.

At the same time, Coca-Cola doesn't seem to be resting on its laurels. Categories like fruit juice, bottled water and ready-to-drink tea all seem like areas where Coke could grab incremental share and revenue growth, with a little extra reinvestment and effort. I do also wonder, though, if the company would consider an acquisition, either for an emerging name outside the U.S. or a company like Monster Beverage (Nasdaq:MNST) (formerly known as Hansen Natural), to expand its non-soda business.

Build Versus Buy
It's also worth asking if Coca-Cola plans to get any more aggressive in buying up regional bottlers. This sort of reconsolidation could make some sense if the company sees further opportunities to restructure those operations and drive even more costs out of its global supply chain.

There's also still ample opportunity just in executing the company's basic plan to drive volume growth in the developing world. The company already gets about half of its profits here, even though its volume in areas like India and Russia seem low relative to regions like China and Latin America.

The Bottom Line
A more aggressive PepsiCo is a threat, but it's hard to see what PepsiCo could do to dramatically change market shares on a long-term basis. At worst, it would seem to set up a competition as to which company can run a leaner operation and given Coca-Cola's greater focus on beverages, I would put my money on Coke winning that battle .

These shares are too closely-followed and too well-liked to ever get very cheap, absent some real operating misstep. Perhaps a more aggressive PepsiCo (and some early success there) could drive a little skepticism that would cheapen these shares. As is, though, Coca-Cola seems fully-priced, which may not be so bad for investors with a long-term horizon, but likely won't appeal to investors looking for a bigger capital gains kick in a shorter time frame. (For related reading, see What You Need To Know About Capital Gains And Taxes.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.