It wasn’t a good quarter for the Cola-Cola Company (KO), but it wasn’t all bad either. If I had to describe it in a single word, it would be “stagnant.”
Coca-Cola’s third-quarter earnings report told a familiar story and one that we’ve heard a lot this earnings season: The company beat earnings estimates by a penny, but revenues came in well below forecast.
Wall Street expected quarterly earnings of 50 cents per share and got 51 cents. But on the revenue front, things were ugly. Wall Street expected $11.54 billion but only got $11.43. That’s a shortfall of $110 million — not exactly rounding error.
And in fact, revenues were a full 5% below last year’s figures. In words that could have been copied and pasted from almost any major multinational earnings release, Coca-Cola CEO Muhtar Kent spoke of a “challenging macro environment.”
Coca-Cola Still Can’t Regain Momentum
In plain English, a strong dollar and weak overseas demand were a major drag on performance. These factors have been a major issue for American multinationals for the past year, and Coca-Cola gets more than half its revenues from overseas.
In Coca-Cola’s defense, sales volumes did indeed grow by a modest 3%, meaning that the company did manage to move more product. And adjusted for currency moves, Coca-Cola stock saw revenue growth of 3%. That’s nothing to write home about, but at least it’s beating the inflation rate.
The large revenue decline really was a matter of foreign sales being translated at worse exchange rates. Currency moves knocked a full 8% off the growth rate for the quarter.
But that said, currency moves are little more than a sideshow for healthy companies with robust growth prospects, and Coca-Cola faces the issue of secular decline in its core products: sugary soft drinks. An aging and increasingly health conscious population is drinking less Coke per capita. According to research site Statistica, per capita consumption of soft drinks in the United States was 53 gallons per person per year in 2000. As of last year, that number had fallen to just 41.4 gallons — a decline of 22%.
Furthermore, soft drinks today have become a target for health officials the same way that cigarettes were a few decades ago. Being branded a menace to public health is a PR disaster and something that even a brand juggernaut like Coca-Cola is having a hard time navigating. (See “Are Coke and Pepsi the New Big Tobacco?”)
Now, like any good Texan, I love to wash down a greasy burger with an ice-cold Dr Pepper made by our very own Dr Pepper Snapple Group (DPS). But I drink a lot less of it than I used to … and with a tinge of sadness for my state, I see younger people drinking it even less. I suppose we’ll have to satisfy our prickly state pride by drinking more Shiner Bock beer instead.
But I digress.
Coca-Cola’s management is not stupid. They are well aware of the issues they face in changing consumer tastes and are adjusting their product mix accordingly. There has been a much greater emphasis on still beverages, and earlier this year Coca-Cola announced a strategic partnership with energy drink maker Monster Beverage (MNST). Coca-Cola owns 17% of monster beverage and has been very aggressive in stepping up marketing efforts.
But you can’t change a company the size of Coca-Cola on a dime. Even in a best-case scenario, this company has a long road in front of it, and sales stagnation is not a recent phenomenon. Revenue per share hit a brick wall three years ago and has yet to show any sign of improvement.
So, can Coca-Cola stock turn around? Maybe. But I think the more likely outcome is that KO and its soft-drink peers evolve into something close to today’s Big Tobacco companies: Large, slow-growth companies that generate most of their total returns via dividends and share buybacks. At today’s dividend yield of 3.1%, I don’t consider Coca-Cola stock quite cheap enough to consider for investment right now. But it’s one to consider on a major pullback.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
