by Will Ashworth | April 18, 2013 7:00 am
The Coca-Cola Co. (NYSE:KO) announced first quarter earnings Tuesday that can best be described as workmanlike: not spectacular by any means, but good enough to keep blue-chip investors happy.
And investors sure do seem happy. The stock — one of Warren Buffett’s favorites — is up around 17% so far this year, bringing it to a 15-year high.
The thing with the drink giant, though, is that it’s actually so much more than just The Coca-Cola Co. Instead, it has countless cousins that bottle and distribute its array of beverages.
With that in mind, let’s take a quick look at investors’ options in the Coca-Cola network to see which component is the best bet for slurping up some profits.
The big news from The Coca-Cola Co. itself, stationed in Atlanta, is that the company’s returning to a franchise bottling system in North America. The move comes less than three years after Coca-Cola bought its biggest U.S. bottler via a cashless transaction valued at $12.3 billion.
At the time, the goal of taking direct control of 90% of its North American volume was to lower costs and improve business in its biggest market. If the most recent quarter is any indication — with volume only up 1% and currency neutral operating income down 3% — it still has some work to do.
Of course, CEO Muhtar Kent believes moving up the timeline for reintroducing a franchise system in the U.S. makes sense, stating: “A strong franchise system has always been the competitive advantage of the Coca-Cola business globally.”
What’s different this time around is that Coke will continue to bottle the product while the franchisees will focus exclusively on distribution. That’s an eminently sensible plan — producing the product in Atlanta is no different than in Kentucky or Colorado. However, each of these markets are different in terms of the customer base and that’s where the franchisee’s local knowledge comes into play.
All in all, it seems like a decent move for the steady stock.
Coca-Cola’s two bottlers in Europe are Coca-Cola Enterprises (NYSE:CCE) and Coca-Cola Hellenic (NYSE:CCH). Neither had a strong year in 2012, but that’s to be expected given Europe’s still dealing with some serious economic issues.
Of the two, it’s my opinion that CCE had the better year, even though its volume declined 3% while CCH’s was flat. Net sales per case excluding unusual items, on the other hand, was reasonably close with Enterprise’s up 3% compared to a 2.2% gain for Hellenic.
Where CEE seems to have done a better job, though, is in comparable operating profit. It saw a decline of just 4% compared to a 13% drop for CCH. Given CCE’s operating margins are nearly double CCH’s, I don’t think there’s any question which is the better investment.
Still, if you want the best Coca-Cola investment, you’re better off passing on Europe altogether.
Instead, head on down to Latin America. Coca-Cola Femsa (NYSE:KOF) was the best of the Coca-Cola stocks in 2012, gaining over 50% and thus easily outpacing CCH and CC. The world’s largest franchise bottler of Coca-Cola clearly benefits from a healthy Latin American market.
The highlight in 2013 for KOF is the purchase from The Coca-Cola Co. of 51% of Coca-Cola Bottlers Philippines for $689 million. With an option to buy Coke’s remaining 49% interest, it is operating outside the Western Hemisphere for the first time.
At first glance this seems like a far flung acquisition. But if you consider that the Philippines is culturally similar to Latin America, it’s a perfect extension of its business. Heck, perhaps KOF will someday acquire the Coca-Cola bottling assets in Spain and Portugal, which only recently were brought together through the merger of seven different bottlers in the two countries.
Of course, your best bet of all for a taste of the beverage world and Latin America’s growth is to buy Femsa (NYSE:FMX), the Mexican beverage company that owns 49% of KOF (63% of voting rights), 20% of Heineken (PINK:HEINY) and all Oxxo convenience stores. In fact, it was chosen for InvestorPlace‘s Best Stocks of 2013 contest and is currently in the lead with 22% year-to-date gains.
Femsa’s performance hasn’t quite matched KOF’s, but it will still cash in on most of its growth, while I also see its convenience story business driving revenue growth for several years. Plus, if Heineken can simply maintain its position in the world beer market, shares should continue to grow at an annualized rate of 25% or more per year.
Buffett’s Berkshire Hathaway (NYSE:BRK.B) owned 200 million shares of Coca-Cola stock at the end of 2003 with a market value of $10.2 billion. If it had invested the $10 billion in Femsa instead (in theory, since that would have been impossible given Femsa’s market cap in 2003 wasn’t even $10 billion), it would have $112 billion — 10 times as much — today.
The moral: Latin America is where the action is. China’s annual GDP growth is now below 8%, so it’s cooling off while Chile and other economies are coming on. In Coca-Cola’s world, there’s no better investment in 2013 than Femsa … followed closely by Coca-Cola Femsa.
The rest — including Coca-Cola — I would describe as lukewarm investments.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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