There’s something that The Coca-Cola Company (NYSE:KO) kicked off many years ago that I love. They reimagined how they marketed products so that they would be story and content driven. Their advertising is really quite exceptional. The problem KO stock has faced is that the world pivoted away from sugar.
That means its great marketing approach is being squandered to sell products that are facing secular headwinds. Fortunately, Coke management gets it. They are turning their ship around, and it is big ship to turn. We’re talking about one of the world’s greatest, and largest, brands. It takes time to become, as the CEO says, “a total beverage company.”
What Coca-Cola has that not every beverage company has is an incredibly recognizable brand image. Thus, it starts with that huge leg up and can piggyback off its iconic container images to reformulate its products into things like Coca-Cola Zero Sugar.
A Management Plan for KO Stock
Management changed the taste, evolved the marketing, put in new packaging and upgraded execution. The result has been a double digit revenue increase in markets with the product, which will begin to help KO stock.
Now, as KO stock has kind of wobbled around, and management remakes the company, there were some very clever moves taken in terms of packaging. We’ve seen this from virtually every food and beverage manufacturer, but I want to highlight it in the case of Coke.
Let’s suppose you go to the store and grab a 12-pack of 12 ounce cans. You pay $5.69. That comes to $0.0395 per ounce. Well, Coca-Cola decided to offer up six-packs of 7.5 ounce cans for $3.09. That comes to $0.069 per ounce.
This is genius. I, the consumer, like Coke. But I don’t like the idea of drinking 12 ounces. That’s a lot of sugar. But if I drink a smaller can, then that’s less sugar I’ll be consuming, right? I get my Coke but don’t get as much of the bad stuff.
KO stock benefits by getting a massive 75% bump in per ounce revenue. That means higher margins. It’s all psychology, but it works. We see it show up in the earnings report. Unit case volume was flat, but organic revenue grew 6% driven by an 8% increase in EMEA, 13% in Latin America, 3% in North America, and 1% in Asia-Pacific.
It’s price increases and the mix of products that get sold that result in this higher organic revenue, the only explanation because unit sales volume was flat.
This filtered down to the point where comparable operating margins expanded by 530bps, although that was also assisted by divesting the bottling business. Coca-Cola stock has partially suffered because the company tried to purchase bottling operations from franchises, but that is a terribly low-margin business.
Coke is now re-franchising those operations, which will help in keeping the company focused on its core competency.
The Bottom Line on KO Stock
So KO stock trades at around 21x FY18 earnings. I think that’s rich for a company in turnaround mode that will last for quite some time. Coke is a good company and stock but not as compelling as it used to be, yet. I suspect it will be again at some point.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
