Coca-Cola (NYSE:KO) — the iconic blue-chip dividend stock that everyone knows and most people love — has had a rough go of it lately. In the past three months, KO’s 3% returns have greatly lagged the S&P 500‘s 10%, thanks in part to some weakness following its Tuesday morning earnings report.
Coca-Cola reported earnings of 45 cents per share that only beat expectations by a penny, and its $11.47 billion — while 4% better than in Q4 2011 — actually fell short of analyst calls for $12.01 billion. Wall Street responded with a solid 3% thumping.
So, should you buy Coca-Cola at a bit of a relative discount, or has this Warren Buffett favorite come up against a wall? To see, let’s take a look at the pros and cons:
A Big, Wide Moat: Speaking of the Oracle of Omaha, this is exactly what the Berkshire Hathaway (NYSE:BRK.A, BRK.B) founder — whose biggest position is in KO, with 400 million shares — looks for when buying a stock. Coca-Cola’s moat is its massive spread, with more than 3,500 products that span categories like sparkling beverages (Fanta/Sprite), energy drinks (Burn), juice drinks (Minute Maid/Hi-C), sports drinks (Powerade) and waters (Dasani). The distribution footprint covers more than 200 countries. Its social media reach is equally as impressive, with Coca-Cola boasting 1.3 million tweets per quarter and 60 million friends on its Facebook (NASDAQ:FB) page.
Growth Potential: Even with its huge scale, Coca-Cola still has opportunities to find more revenues, primarily in emerging markets over the long-term. Examples of impressive full-year volume growth from this year include like Thailand (+22%), India (+16%) and Russia (+8%). And the company couldn’t have a better man at the helm for this kind of goal — CEO Muhtar Kent has a stellar background with foreign markets, having served in posts in Turkey, China, Japan, Russia and Eastern Europe since joining Coca-Cola in the late 1970s.
Valuation: Coca-Cola’s stock isn’t cheap by traditional metrics; the forward price-to-earnings ratio, for example is 17. Then again, investors are putting a premium on the company’s significant competitive advantages and stable revenue streams. They’re also factoring in a healthy dividend yielding 2.7% — and considering Coca-Cola’s healthy cash flows, it’s a payout you can depend on, and one that should keep growing.
Slow Economies: The lynchpin for any consumer discretionary stock, and a burden on Coca-Cola’s Q4 results. Sluggishness in the U.S., Europe and China all conspired against KO. Volume declined 5% in Europe and 4% in China; it grew 1% in North America, but that was short of expectations for 1.8% growth.
Competition: Coca-Cola remains the clear leader over its arch rival, PepsiCo (NYSE:PEP), though the company has been focusing more on its beverage business over the past year, including big campaigns to push Diet Pepsi in the increasingly important low-cal battle. The company also has a few other pretenders in the form of Dr Pepper Snapple Group (NYSE:DPS) and energy drink maker Monster Beverage (NASDAQ:MNST) … but consider this a not-too-threatening “con.”
Health & Regulation: At least as far as its sodas are concerned, Coca-Cola is feeling the pressures from the move toward healthy diets in the U.S. — though it does have juice, water and other beverages to fall back on. Also, Congress is in the process of investigating the major beverage companies regarding the potential health issues of energy drinks, and any regulations on that front also could cut into KO’s sales.
The lag in Coca-Cola’s stock price looks like an opportunity for investors. It continues to crank out solid products — in 2012, it created two new billion-dollar franchises in the form of I LOHAS water and Ayataka green tea in Japan — and the company will continue to grow steadily as it makes more inroads into emerging markets.
The U.S., Europe and even China might continue to provide near-term headwinds, but Coca-Cola has been and will continue to be a company more befitting investors willing to hunker down for the long-term.
So should you buy Coca-Cola? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook, 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” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.