Should I Buy Coca-Cola? 3 Pros, 3 Cons

by Tom Taulli | October 16, 2012 11:18 am

Coca Cola Should I Buy Coca Cola? 3 Pros, 3 Cons[1]The third quarter was a mixed bag for Coca-Cola[2] (NYSE:KO[3]). Earnings came to $2.31 billion, or 50 cents a share, which was off by only one cent from the Wall Street consensus. Revenues increased by 1% to $12.34 billion. The estimate was for $12.41 billion.

Interestingly enough, Coca-Cola’s stock has been a laggard for 2012, with a gain of 7%.  Keep in mind that the S&P 500 is up about 15%.

So, could this be the right time to buy shares of Coca-Cola? To see, here’s a look at the pros and cons:

Pros

Mega Competitive Advantages. Coca-Cola has over 3,500 products, which span key areas like sparking beverages (Fanta/Sprite), energy drinks (Burn), juice drinks (Minute Maid/Hi-C), coffees and teas (Nestea) and waters (Dasani). Distribution is massive, covering over 200 countries.

But Coca-Cola’s success is about more than just spending huge sums on marketing. Consider that the company continues to be an innovator with its product offerings. For example, it has seen lots of success with its PlantBottle packaging, which is completely recyclable.

Emerging Markets. It’s not easy to find growth in North America and Europe. But Coca-Cola was smart to invest aggressively in emerging markets.

In fact, CEO Muhtar Kent has extensive experience in global markets. Joining Coca-Cola in the late 1970s, he has served posts in Turkey, China, Japan, Russia and Eastern Europe.

Financials. Coca-Cola generates huge cash flows, which came to $7.8 billion for the first nine months of 2012. And yes, this has provided the resources to pay a healthy dividend (the yield is 2.7%).

Actually, Coca-Cola has raised its dividend for 50 consecutive years. It’s the kind of stability that few companies can match.

Cons

Macroeconomy. Coca-Cola is a habit for millions of people. Yet if the global economy continues to weaken, it seems inevitable that consumers will start cutting their spending. For example, in order to deal with declines in places like Asia and Europe, Coca-Cola has had little choice but to lower prices on some of its drinks.

Competition. Coca-Cola consistently beats out archrival Pepsi (NYSE:PEP[4]). But things may change. For the most part, Pepsi has been taking actions to focus more on its beverage segment.

At the same time, Coca-Cola is likely to face more pressure from smaller operators that have strong product offerings, such as Monster Beverage (NASDAQ:MNST[5]) and Dr Pepper Snapple Group (NYSE:DPS[6]).

Consumer Changes. Obesity is a terrible problem in the U.S. As a result, companies like Coca-Cola will be under ever-more scrutiny.

Verdict

While Coca-Cola has challenges — such as with the competition and a slowing global economy — the long-term prospects continue to look bright. Its strong presence in emerging markets should allow for continued growth.

Now the valuation is a bit pricey, with a forward price-to-earnings ratio of 17x. Yet, world-class companies usually command a premium. So all in all, the pros outweigh the cons for Coca-Cola’s stock.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[7], a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.[8]”  Follow him on Twitter at @ttaulli[9]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/07/Coca-Cola.jpg
  2. mixed bag for Coca-Cola: http://investorplace.com/2012/10/coca-cola-matches-q3-estimates-with-higher-earnings/
  3. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  4. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  5. MNST: http://studio-5.financialcontent.com/investplace/quote?Symbol=MNST
  6. DPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPS
  7. IPOPlaybook: http://investorplace.com/ipo-playbook/
  8. How to Create the Next Facebook.: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  9. @ttaulli: https://twitter.com/ttaulli

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