Why Coke's a Buy

International Juice

At the end of the day, all the successful grapefruit infusions in the world won't help a company like Coca-Cola much if the rest of the company is in the tank. They're a drop of sucralose in a giant bucket of syrup. Fortunately, revenue and earnings are improving elsewhere, particularly in international divisions.

On Tuesday, we learned that sales volumes in Japan were up 5% in January, vs. a gain of 1% in January last year. That's important because while Japan amounts to only about 5% of Coca-Cola's total sales volume, pricing there is so outrageous that the country totals a whopping 20% of the company's total annual profit, according to a Merrill Lynch estimate.

Down in Mexico, Coca-Cola announced in December that it would join its largest bottler in that country to buy the second-largest Mexican juice company, Jugos Del Valle. That's another big attempt to bring noncarbonated sodas more powerfully into the mix. The company made similar deals last year in the Philippines and India, two more key regions.

When you put it all together, you can see that Coca-Cola's earnings are being helped by the plain fact that its product balance is improving, with noncarbonated beverages such as Fuze and Odwalla now amounting to 20% of its total sales, and regular old Coke and Diet Coke fading a bit into the back of the corporate fridge. It takes a while for investors to recognize this, but rising revenue serves to punctuate the new message.

I estimate that Coca-Cola will earn $2.60 a share this year and $2.87 next year. When you put a price-earnings multiple of 21 on the 2008 figure, you get a price target of $60. That's 25% higher than the current quote, which makes the stock a good buy right now. If it doesn't work out, you can always mellow out with a chilled ginseng-and-guarana Fuze tea.