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How Coca-Cola Stock Will Satisfy Investors' Thirst for Profit

Stocks in this article: KO PEP DPS GMCR

NEW YORK (TheStreet) – Global beverage giant Coca-Cola (KO) will report financial results for its second quarter on Tuesday. The company's investors are thirsty for better results.

The stock closed Friday at $42.43, up almost 1%. Although shares are up 4% year to date, they trail the S&P 500's 7% gain. And in the last three years and five years, Coca-Cola stock has gained only 10% and 13%, respectively. This is while, during the same span, the S&P has gained 53% and 110%.

PepsiCo (PEP), whose shares have gained just 12% in both the past three and five years, hasn't fared any better. Both soft-drink giants are struggling with slumping sales in their carbonated beverage business.

[Read: Here’s How to Invest in Your Ice Cream and Eat It Too]

The problem hasn't been Coca-Cola as much as it has been an industry that is in transition. Consumers are moving away from sodas in favor of healthier alternatives like tea and sports drinks. This has contributed to a prolonged environment of weak volumes and compressed margins.

Coca-Cola has an answer, however. The company has begun to show that it is more than just a North American soft drink company. This is even though it has increased its global market share in nonalcoholic/ready-to-drink beverages for 26 consecutive quarters.

With the stock trading at around $42 with a P/E of 22, which is 3 points lower than the industry average, Coca-Cola is a solid buy. On the basis of long-term margin expansion and 3% to 4% volume growth, these shares should trade at $46 by the end of the year.

The company is becoming more diversified.

Consider, as the April quarter, close to 80% of Coca-Cola's operating profit came from international markets. Of that total, roughly 55% of its total operating income is generated from emerging markets. These include areas like India and Africa that are still posting high single-digit volume growth, up 8% and 6%, respectively.

Growth in these areas will continue to offset any prolong weakness in North American volume growth. Volume in North America declined 1% in the April quarter. As a result, Coca-Cola saw just 1% growth in global volumes versus expectations of 2% to 3%. This is due (in part) to social and political fight against sodas, which are now being referred to as "liquid candy."

Management is answering the call with strategic product mixes and promotional shifts.

[Read: How Will McDonald’s Stock Respond to Puerto Rican Franchisees’ Complaint?]

New products like Coca-Cola Life, which uses a blend of sugar and plant-based stevia as a natural sweetener, is the company's answer to consumers' demand for healthier beverages. Coca-Cola Life is scoring big wins among more health-conscious consumers, especially in areas like Argentina and Chile.

Because of this success, the company is planning to launch the product in more established countries. It's also time for pundits to put to rest opinions that Coca-Cola has lost it innovative and marketing edge.

What's more, unlike Pepsi or Dr. Pepper Snapple (DPS), amid the slump in global volumes, Coca-Cola still managed to grow its global market share in soft drinks. In the process, management is delivering gross profit margins of 61.40%, up 30 basis points year over year. And this is while the company's net profit margin of 18.32% continues to beat the industry average.

To the extent that Coca-Cola Life, combined with the company's recent joint-venture with Keurig Green Mountain (GMCR) can boost revenue and volume growth, Coca-Cola stock will be just fine. And now is as good of a time as any to place your bet.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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