RealMoney Silver - A KO From Coke

A KO From Coke
By Scott Martin
RealMoney contributor
2/13/2008 12:23 PM EST

Updated from 8:00 a.m. EST on Feb. 13.

Before the bell on Wednesday, Coca-Cola (KO) reported impressive fourth-quarter revenue of $7.33 billion, and earnings of 52 cents per share, or 58 cents per share excluding one-time items. Expectations were for revenue of $7.01 billion and 55 cents per share in earnings. Much like last quarter, when revenue rose 19%, this quarter represented an increase of 24% over the same period a year earlier.

As I noted in my preview, those looking to pick up some Coke now, and certainly those who hold it currently, are aware that this is not your father's Coca-Cola but an improved, refreshed version that has high international exposure and a diversified product line. As seen in the numbers both in the past quarter and ones previous to it, the wide reach of the company has benefited Coke greatly during the economic slowdown in the U.S. and provided necessary insulation from the fickle nature of the consumer, who now is starting to favor healthy alternatives vs. traditional carbonated beverages.

This trend continues to emerge in the breakdown of the numbers, where total carbonated beverage consumption increased by only 4% over the period, while the energy drinks, waters, etc. gained 12%; they gained 4% and 11%, respectively, the quarter prior.

To this end, comments on the conference call were quick to highlight weakness in the U.S. being offset by revenue growth internationally (see my comments about high profit ratios outside the U.S. in the preview of the call) and realized benefits from a weakening U.S. dollar. Additionally, case volume, which is a measurement of essentially how much product the company has sold to customers, rose in the U.S. by 1%; global volume gained 5%. The international market sales will continue to be the main source of growth for the company going forward.

On the negative side (and probably most of the reason the stock is down), while PepsiCo (PEP) delivered what some are calling a more impressive quarter, gross profit margin for Coca-Cola in the fourth quarter slid by a little over 1% as input costs have been on the increase and are likely to continue to rise in 2008. With Pepsi nipping at its heels and carbonated beverage sales slowing in the U.S., it seems reasonable that, given the rise in the stock since early last year, some investors would take some profits here.

My position is that I have been happy with Coke's acquisitions and its adaptations to a changing beverage market. Given current market conditions, I prefer to have a steady performer like Coke in my portfolio, as my outlook for the dollar and the U.S. economy remain slightly cautious for the near term.

KO Preview: Looking Beyond the Fizz

Coca-Cola (KO) reports its fourth quarter this morning before the bell. Revenue is expected come in just over $7 billion, which breaks down to earnings of 55 cents per share and represents a 3-cent gain over last year over the same period and is a 18% increase in sales. My work suggests that we could see sales increase by 10% in 2008, with generous margin expansion throughout the year.

I love how the scheduling of all this works. Much like previous quarters, Coca-Cola is releasing these earnings in the wake of a strong report from its main competitor, PepsiCo (PEP) , on Feb. 7. Unlike the previous quarter, however, Pepsi shares have risen nearly 7% since its earnings report, as strong guidance for 2008 was affirmed and fears of inflation eating into future profits were quelled. This arguably puts a lot of pressure on Coke going into the earnings call on Wednesday.

Those who read my last earnings coverage of Coca-Cola should remember my undying thirst for its shares at the time. Even in the face of a difficult market year-to-date, Coke shares have been holding up nicely and are still up on Pepsi, even with the pop the company got on earnings last week.

While I do think this time around the bar has been raised even further, I still love what is going on at Coca-Cola. From something as simple as Coke Zero to new forays altogether, management has shown the ability to look beyond the carbonation through acquisitions -- first of Energy Brands (Glaceau) and recently of Honest Tea, of which the company purchased a 40% stake. This has lead to a quickly improving product line and successful penetration into a market that is looking for health and wellness alternatives to the traditional products of the brand.

With its international business booming in both developed and emerging markets -- nearly 70% of profits are generated outside of North America -- these acquisitions have become further bolstered by a falling dollar. I expect the call to focus on the recent additions of more health-oriented products mentioned above and how these acquisitions are currently adding to (and/or will add to) the bottom line. Coke management knows that the sweetest part of the company's brand continues to be a focus overseas, so I trust that will be a major highlight.

My clients and I have been owners of Coca-Cola since early 2007 and have little desire to part with the portfolio staple, especially given its recent performance in light of the prevailing market conditions. While the stock was indiscriminately sold like many other good ones were to start the year, I think one can look no further than the improving top and bottom lines to realize this is a stock to own for 2008.