Should I Buy KO Stock? 3 Pros, 3 Cons

by Tom Taulli | February 20, 2014 11:38 am

Should I Buy KO Stock? 3 Pros, 3 Cons

Coca-Cola (KO[1]) has been treading water, lately.

Coca Cola 150x150 Should I Buy KO Stock? 3 Pros, 3 ConsDuring the past year, KO stock has been essentially unchanged while the S&P 500 posted a gain of about 20%. Pepsi (PEP[2]) has not done much better either, up about 4% during the same period.

KO’s fourth quarter results only reinforced the company’s woes. Revenues declined by 4% to $11 billion, which compared to the Street consensus $11.3 billion. A big driver was a 1% decline in sales volumes in North America.

So, will the problems continue? Or might KO stock be a bargain at current levels? To see, let’s take a look at the pros and cons:

KO Stock Pros

Global powerhouse: Coca-Cola is a tremendously valuable global brand, which allows the company to charge premium prices for its products. Consider that 16 brands bring in $1 billion or more in annual revenues. Distribution is also another massive competitive advantage and a key for KO stock. For example, the company sells more than 500 brands in more than 200 countries and 23 million retail locations.

Bold bets: Given the scale of Coca-Cola, the company needs to find huge market opportunities to move the needle. The latest move was a $1.25 billion investment in Green Mountain Coffee Roasters (GMCR[3]), which is the maker of Keurig coffee brewers. In the deal, both companies plan to launch a single-serve system for cold drinks. No doubt, this is an ambitious move and full of risks. But KO can leverage its brand expertise and distribution while GMCR will offer its proven technologies. Although, KO may ultimately buy GMCR outright. The company has done this with other investment deals, such as for Zico and Honest Tea.

Financials: Even though growth has stalled, KO stock continues to be a cash machine. During 2013, the company generated $10.5 billion in cash from operations. To pump things up, Coca-Cola has also been more focused on realizing inefficiencies, with the plan to reduce costs by as much as $1 billion by 2016. The effort will include supply-chain optimization, system standardization and better resource allocation across the global organization. And for 2014, it plans to buy back anywhere from $2.5 billion to $3 billion in KO stock. The company has also been aggressive with its dividend, increasing its payout every year since the 1950s.

KO Stock Cons

Emerging markets: Emerging markets have come under lots of pressure. As the Federal Reserve has engaged in the “taper” of its quantitative easing policy, the result has been an outflow of capital from emerging markets, which has muted growth. Unfortunately, this has been a drag on KO stock. While there are some signs of stabilization, it could still take a while for emerging markets to regain their strength.

Health concerns: With the rise of obesity throughout the globe, governments are looking for ways to encourage healthy habits. Of course, one way to do this is to target sugary drinks. Just this week, a California senator even proposed “warning” labels. About three-quarter of Coca-Cola’s sales volume comes from soft drinks, which means the potential trouble is enormous. The company has been making efforts to deal with the situation, though most are still in the early stages. One is Coca-Cola Life, which uses a natural sweetener called stevia. The company has also been changing its marketing message, with some commercials extolling the advantages of exercise and a healthy diet. But it seems like the movies have created more confusion, as the Coca-Cola brand is still mostly about soft drinks.

Competition: Of course, the biggest competitive threat is Pepsi, which has been ramping up its soft drink business. But KO must deal with other players like Monster Beverage (MNST[4]) and Dr Pepper Snapple Group (DPS[5]). These companies have been getting more aggressive with marketing, and may appeal to younger generations who could be turned off by mega brands.

KO Stock Verdict

About a year ago, Warren Buffett said that KO stock could face trouble if management became complacent[6]. This was certainly big news since his firm, Berkshire Hathaway (BRK.B[7]), was the biggest shareholder in the company.

Unfortunately for KO stock, it looks like Buffet was prescient yet again. For the most part, KO stock has been a laggard with its marketing and new products. At the same time, there have been headwinds from emerging markets and health issues.

True, it’s encouraging that KO stock has recently picked up its pace, as with the company’s  investment in Green Mountain. Yet it will probably take time for the deal to get traction.

So should you buy Coca-Cola? No — for now, the pros outweigh the cons. There are too few catalysts to get the company back on track, at least in the short run.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8]. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. 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. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  2. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  3. GMCR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMCR
  4. MNST: http://studio-5.financialcontent.com/investplace/quote?Symbol=MNST
  5. DPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPS
  6. management became complacent: http://www.bloomberg.com/news/2014-02-19/buffett-s-coca-cola-complacency-warning-foretells-troubled-year.html?cmpid=yhoo
  7. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  8. IPO Playbook: http://investorplace.com/ipo-playbook/
  9. @ttaulli: https://twitter.com/ttaulli

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