The Coca-Cola Company (NYSE:KO) is undoubtedly a powerhouse in the beverage business.
But as an investment, KO stock has left much to be desired lately. Coca-Cola shares have been flat year-to-date in 2014, and are up just 22% in the last three years vs. three times that for the S&P 500.
Sure, Coke stock pays a good 3% dividend and has the endorsement of Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK.B) via the investment firm’s massive 400 million-share stake in KO.
But stability is not growth, that’s for sure.
This challenge to growth is the biggest reason Coke just announced a deeper partnership with energy drink giant Monster Beverage Corp (NASDAQ:MNST). Coca-Cola will acquire a 16.7% minority interest in Monster for $2.15 billion with a chance to increase its exposure further going forward.
Coke and Monster Make Sense
The fast-growing Monster is a great contrast to the sluggish sales of Coca-Cola, which has seen pressure thanks to a focus on healthy diets and fighting childhood obesity.
Revenue just declined again in Coke’s Q2 earnings report, the sixth-straight quarter of top-line trouble according to Standard & Poor’s data. Contrast that with MNST stock, which has seen revenue grow like clockwork for years, and whose sales are tracking $2.5 billion in revenue for fiscal 2014 — roughly double the $1.3 billion that Monster Beverage posted in FY2010.
This momentum is great for Coke in the short term. And furthermore, KO can increase its stake to 25% across the next four years on its own — and even beyond that, with Monster Beverage approval.
To me, this seems to set up the stage for an acquisition after the companies figure out how to work together and get comfortable. The current deal is much more than just an equity stake, with Coke transferring over ownership of its energy drink lines to Monster, including the brands NOS and Full Throttle.
If this move can help Coca-Cola focus on its core business while the minds at Monster continue to find ways to capitalize on a growing energy drink marketplace, it’s a win-win.
The only thing that’s left now is for Coke to get more deeply involved with Monster and purchase the remainder of the company across the next few years.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP