KO Preview: Very Undervalued

Coca-Cola (KO - commentary - Cramer's Take) is expected to report EPS of 77 cents vs. 71 cents last year, for an 8% increase in earnings, on sales growth of 11.2%, to $8.55 billion. Revenue growth will come with maybe 2% concentrate growth, 3% of price, 2% from acquisitions, and the remainder from foreign exchange. Operating income growth will probably be up 10% to 11%.

Using the respective consensus EPS estimates of $3.08 and $3.34 for this year and next, however, the stock (even after the move from $42 to $47.50 on Monday) only discounts a 2% five-year EPS compound annual growth rate and1% terminal growth past 2018.

Coca-Cola Hellenic (CCH - commentary - Cramer's Take) preannounced third-quarter volume weakness consisting of a 4.5% increase, down from 7%, coming partly from a 4.5% decline in Russian volume. Pepsi Bottling Group (PBG - commentary - Cramer's Take) said that Russian volume fell 5% and that there would be declines in Spain and Turkey. Does this justify the stock's present price even though there is likely to be a decline in U.S. volume next year?

Coke's management has pointed to a long-term volume gain of 3% to 4%, which will likely be 1.5% in 2009 by Street consensus expectations, with the biggest weakness in the U.S. and Mexico but with increased worldwide economic weakness. The company will likely have a 5% concentrate price hike in the U.S., however, which is about 20% of earnings, and concentrate price hikes along with other bottlers' price hikes in many geographical regions to catch up with commodity costs. With private label not gaining share and having margin problems, too, I would expect these price increases to stick with volume declines being the only downside. That could allow a high-single-digit EPS increase in 2009.

The worst U.S. longer-term expectation is that profits are flattish as the combination of pricing and volume declines lead to flat revenue growth. While I could see this happening, the impetus for a real upgrade of Coca-Cola Enterprises' (CCE - commentary - Cramer's Take) operations -- a new plan is to be announced around mid-November -- in concert with increased standardization of operations and centralized buying by bottlers is likely to result in substantially lower operating costs over the next five years. This should allow for a combination of higher concentrate prices to bottlers and/or volume gains from lower-priced beverages worldwide.

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At the time of publication, Thomas had no positions in the stocks mentioned.