Coca-Cola Is Still Sweet Ahead of Earnings

NEW YORK ( TheStreet) -- It's been a while since I've been able to say that shares of Coca-Cola ( KO) "look cheap." Today's not that day.

And I expect that I'll continue to wait a little while longer before the word "cheap" to describe Coca-Cola can be repeated.

The fact is, very rarely do companies like Coca-Cola and rival Pepsico ( PEP) trade at less than fair market value. That's not to say that Coca-Cola is not a great buy today. But with second-quarter earnings on tap for Tuesday, July 16, value-oriented investors have to understand what they are paying for.

In the April quarter, for example, although Coca-Cola overcame some challenges, there were also plenty of noticeable room for improvement. Although the company did an excellent job growing volumes worldwide by 4%, which beat expectations, revenue still fell 1% year over year to $11.04 billion. There were noticeable pressures in the company's prices and product mix.

For that matter, much of the company's growth came from Coca-Cola's portfolio of sparkling (carbonated) beverages, which grew 3% year over year. The growth was led by 6% increase in Fanta, while both Sprite and Coke added 5% and 3%, respectively. I won't says that these were good results. But they also produced roughly two-thirds of the company's worldwide volume growth.

By contrast, the volume in the still beverage category (noncarbonated drinks) increased by 6%. And management made every single drop count as margins arrived much better than expected. On an adjusted basis, there was roughly an 80 basis-point improvement in gross margin, which was enough to beat Street estimates by almost 60 basis points.

What's more, despite a slight uptick in operating expenses, Coca-Cola was able to post net income of $1.75 billion. After adjusting for one-time items, earnings per share was 46 cents, enough to beat estimates by 1 cent. Remarkably, however, the company was able to meet its operational expectations even as areas like Europe and North America continue to underperform.

It certainly helps that the company has been able to offset its North American struggles with better volume growth in emerging markets like Africa and Latin America. But the fact that the company still beat expectations serves as a reminder of the value of Coca-Cola's dominant brand. Accordingly, the word "underperform" in reference to this company should always be kept in the proper context.

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