Coca-Cola’s (NYSE:KO) cash machine continues apace. In its latest quarter reported earlier Tuesday, the company posted net income of $2.8 billion, or $1.20 a share. This was up from last year’s $2.37 billion, or $1.02 a share.
For the past couple years, Coca-Cola’s stock price also has been a winner. In 2009, the return was 29.3% and a year later, it was 18.5%.
However, as for 2011, things have slowed down, with the shares gaining only 3.7%. Perhaps the valuation is a bit too high? Or can Coca-Cola bring another double-digit year for shareholders? Here’s a look at the pros and cons:
Pros
Barriers to entry. When it comes to distribution, Coca-Cola has one of the most extensive footprints. Its beverages are sold in more than 200 countries through bottling operations, partners, wholesalers and retailers. It’s actually the world’s largest beverage distribution system, which accounts for 1.7 billion servings every day.
Brand portfolio. The company has more than 500 beverage brands, with four of the five top in the world, including Fanta, Sprite and of course, Diet Coke.
But Coca-Cola continues to invest huge sums into marketing, and it has also been getting more aggressive with New Media like Facebook and Twitter.
Emerging markets. Coca-Cola is positioned nicely to benefit from the growth in countries like China, Russia and Mexico. There have also been investments in Africa. The good news is that Coca-Cola has the cash flows – and expertise – to make the right moves in these markets.
Consider that in the latest quarter, volume increased by a substantial 21% in China. There were also strong gains in Latin America.
Cons
North America. This segment continues to be a drag. In fact, it looks like the weakness will continue because of the high unemployment in the U.S.
The competition is also intense, especially from Pepsi (NYSE:PEP).
Commodities costs. There is likely to be continued pressure from rising input costs, such as from sugar and cocoa. Interestingly enough, Coca-Cola’s purchase of its major bottler in the U.S. will likely exaggerate this.
The company was able to increase overall prices about 1% to 2% in the quarter. And it hopes to increase this to 3% to 4% in the second half of the year. However, there is certainly a risk that consumers will reduce their purchases.
Consumer changes. There has been a general move away from carbonated beverages in North America because of the health concerns. The trend has been gradual but it is an issue. At the same time, there is a risk of the same problems in other countries.
Verdict
With its powerful distribution and mega brands, it should be no surprise that Coca-Cola is a top holding for Berkshire-Hathaway’s (NYSE:BRKA) Warren Buffett. And, while there is pressure in the North American market, the fact remains that the company should benefit from the long-term growth trends in emerging markets.
In addition, Coca-Cola has a great record rewarding its shareholder and has raised dividends for 49 consecutive years. The current yield is 2.8%.
Coca-Cola remains a solid holding as the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
