NEW YORK (TheStreet) -- Warren Buffett once said, "Your premium brand had better be delivering something special, or it's not going to get the business."
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That, however, has not stopped health-conscious consumers from bypassing Coke in favor of healthier drinks. The company has taken notice. And Coke's recent 17% stake taken in Monster Beverage (MNST) - Get Monster Beverage Corporation (MNST) Report is one more example of the company's new venture-capital persona, adopted to quench Wall Street's thirst for growth. But will it work?
Coke stock closed Thursday at $40.18. Shares are down 1.2% on the year to date. Over the trailing 12 months, investors have thirsted for some good news. Since shares hit 2013 high of $42.97, Coke's performance have been flat -- to put it mildly.
The problem hasn't been Coke as much as it has been an industry in transition. Consumers are moving away from sodas in favor of healthier alternatives like tea and sports drinks, causing Coke to experience weak volumes and compressed margins.
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Coke's response; if you can't beat them, buy them -- and in some cases, buy a portion of them.
Coke's 17% position in Monster comes with a price tag of $2.15 billion while preserving Coke's right to increase that position by another 8%. This comes on the heels of the company having scooped up a 16% stake in Keurig Green Mountain (GMCR) back in May.
Coke representatives were not available to comment.
Coke's pattern of capital deployment into smaller beverage companies is noticeable. The question, however, is to what extent these deals, which (in some cases) include swapping assets, can increase investor's wealth.
While this deal does increase Coke's footprint in new growth categories, I also see it as an admission by management that Coke has lost its innovative edge. New products such as Coca-Cola Life, which uses a blend of sugar and plant-based Stevia as a natural sweetener, have failed to take off like the company expected. Coca-Cola Life was the company's answer against the "liquid candy" that sodas had become known for.
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What's more, Coke's capital position is no longer as pristine as it used to be. While the company has roughly $22 billion is cash, its $41.2 billion debt load yields a net debt position of $18 billion. How much of that debt will Monster's projected growth help reduce?
Investors should question how much they should believe management's plan for 2020. Recall two years ago when the company targeted annual volume growth rates of 3% to 4%. Management also projected operating income to climb 6% to 8% on an annual basis. These targets were laid out prior to the steep decline in soda consumption.
In the most recent quarter, however, the company saw just 1% growth in global volumes versus expectations of 2% to 3%. This means management's vision for the next six years needs a different perspective. Plus, it's not a good sign that Warren Buffett, the company's largest shareholder, describes management's compensation plan as "excessive."
That, combined with slowing growth and its new venture-capital strategy brings uncertainty to a business once known for its safety. The good news is, Coke isn't going anywhere -- not for a long time. So it really comes down to how much patience investors have in management to return Coke back to long-term growth. Until then PepsiCo (PEP) - Get PepsiCo, Inc. Report is the better buy -- until Coke's premium product can stand on its own.
At the time of publication, the author held no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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TheStreet Ratings team rates COCA-COLA CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate COCA-COLA CO (KO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its expanding profit margins, reasonable valuation levels and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The gross profit margin for COCA-COLA CO is rather high; currently it is at 65.60%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.63% is above that of the industry average.
- COCA-COLA CO' earnings per share from the most recent quarter came in slightly below the year earlier quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, COCA-COLA CO reported lower earnings of $1.90 versus $1.96 in the prior year. This year, the market expects an improvement in earnings ($2.08 versus $1.90).
- KO, with its decline in revenue, slightly underperformed the industry average of 4.5%. Since the same quarter one year prior, revenues slightly dropped by 1.4%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- The change in net income from the same quarter one year ago has significantly exceeded that of the Beverages industry average, but is less than that of the S&P 500. The net income has decreased by 3.0% when compared to the same quarter one year ago, dropping from $2,676.00 million to $2,595.00 million.
- You can view the full analysis from the report here: KO Ratings Report