The Coca-Cola Co (NYSE:KO) beat both top- and bottom-line forecasts in its fiscal fourth quarter, the company said Tuesday. KO stock is surging on the news today, rising as much as 4% in early morning trading.
The impressive results send an encouraging message to investors, who have been rightly concerned with how currency headwinds, stagnant U.S. soda sales, and a shift from artificially sweetened diet drinks would impact KO stock.
Coca-Cola’s laundry list of challenges have kept its stock restrained in the last year. KO stock is up 10% in the last 52 weeks, which sounds decent until you consider the returns of the S&P 500 (INDEXSP:.INX), which rose 14% over the same period.
The Coca-Cola Co: Surprising Wall Street Since the 1980s
Thankfully for investors, the Atlanta-based beverage giant was able to overcome all of its formidable challenges last quarter. KO reported $10.9 billion in revenue and 44 cents in EPS in the fourth quarter, topping Wall Street’s expectations for $10.76 billion and 42 cents.
These results tell a far more optimistic story than the last three quarters, when North American sales declined consecutively. While North American sales were up just 2%, that division is easily Coca-Cola’s biggest market, so stability there is important.
Global stability and growth is also important, though international growth is much harder to come by with the surging dollar. KO, along with other blue-chip behemoths like McDonald’s Corporation (NYSE:MCD) and Ford Motor Company (NYSE:F) derives significant revenue from Europe, which hasn’t exactly enjoyed the most lucrative economy recently.
Before getting into how Coca-Cola was able to overcome those challenges, perhaps it’s useful to remember that people back in 1988 thought Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) was loony for buying KO stock at multi-year highs. A quarter-century later, Berkshire owned a 9.1% stake in Coca-Cola worth $16.5 billion, good for returns of 1,172%.
So Does KO Stock Still Have the Magic Sauce?
Cost cutting and margin improvement were behind the soda giant’s blowout quarter this time around. After a disappointing third quarter, Coca-Cola CEO Muhtar Kent initiated a $3 billion cost-cutting program after subpar quarterly results earned blowback from Wall Street.
KO also introduced its new reduced-calorie, naturally sweetened drink, Coca-Cola Life, last quarter. Coca-Cola Life uses cane sugar and stevia leaf extract instead of aspartame and other artificial sweeteners typically used in diet drinks.
It was a blatant and necessary effort by KO to cater to changing consumer tastebuds as the organic food movement makes its presence felt in the beverage market as well. One of the only remaining avenues of growth in non-alcoholic beverages is energy drinks, where Monster Beverage Corp (NASDAQ:MNST) has been killing it recently.
MNST stock is up more than 65% in the last year, and Monster’s success hasn’t been ignored by KO. In August 2014, KO exchanged its own energy drink business and $2.15 billion cash for a 16.7% ownership stake in Monster and an exclusive global distribution agreement.
So as long as Coca-Cola keeps an eye on trends and the up-and-comers in its industry, it looks like Buffett (surprise surprise) had it right all along. With a 2.9% dividend yield, iconic brand, and its age-old secret recipe still intact, KO stock looks as strong as ever.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
