The Coca-Cola Company (KO) appears set to plod along during its 2015 campaign. In that vein, a stronger U.S. dollar has hindered overall profitability. This year, the company’s pre-tax profits are likely to decline in the high-single-digit neighborhood, meaning share net may fail to reach last year’s mark of $2.04. Further, recent volumes indicate the top line will probably remain largely muted, especially in developed markets, as health-conscious consumers continue to shy away from beverages containing elevated levels of sugar or artificial sweeteners. Thus, Coca-Cola has taken steps to address these concerns. In an effort to right the ship, the beverage maker has ramped up its marketing, advertising and promotional activities. Although these actions ought to positively influence results, it may take some time for recent measures to take root.
Investors evaluating a position in Coca-Cola will notice that the equity has mostly been stuck in neutral over the last couple of years, displaying support around the $37.00 mark and hitting resistance around $44.00. Despite lacking explosive growth potential for the foreseeable future, this issue maintains many solid qualities. These shares offer accounts worthwhile risk-adjusted return. Indeed, the stock boasts a dividend yield above the present Value Line median. In addition, conservative investors should note KO garners our Highest rank (1) for Safety, which is primarily owed to the company’s strong Financial Strength rating (A++).
Therefore, these factors leave us asking a couple of questions. First, will the company be able to overcome current top- and bottom-line obstacles? And is this issue a good pick for the long term? We will address these issues by performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities and Threats.
The business
The Coca-Cola Company, founded in Georgia in 1892 and incorporated in 1919, is the world's largest beverage company. It owns/licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees and energy and sports drinks. In addition, the business owns and markets four of the world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite. Finished beverage products bearing the company’s trademarks, sold in the United States since 1886, are now sold in more than 200 countries.
Coca-Cola makes its branded beverage products available to consumers throughout the world via a network of company-owned or -controlled bottling and distribution operations as well as independent bottling partners, distributors, wholesalers and retailers — the world's largest beverage distribution system. Beverages bearing trademarks owned by or licensed to KO account for 1.9 billion of the approximately 57 billion servings of all beverages consumed worldwide every day.
Strengths
Brand Awareness: The Coca-Cola Company is one of the most widely recognized brands across the globe. Its signature logo, classic red and white colors and world-famous jingle resonate with consumers of all ages. There are two key players in this sector of the beverage business, one being Coca-Cola, while the other remains PepsiCo, Inc. (PEP). That said, Coca-Cola maintains its position in the top post as the clear-cut winner. Although both businesses constantly jockey for increased market share, Coca-Cola has the edge here. The beverage producer also garners a core following customers, as many consumers that deem themselves fans of its products tend not to shift toward other brands. Going forward, the company’s vast financial resources ought to fuel its sizable marketing efforts and increased product innovation, which should propel market-share gains over the long haul.
Robust Distribution Network: Coca-Cola makes its products available to individuals in more than 200 countries through the world’s largest distribution network. Its ability to utilize company-owned/-controlled distributors, as well as independent bottlers, wholesalers and retailers, has no parallel. This system enables KO to closely manage costs, rapidly introduce new items into the marketplace and saturate various geographic locations. Moreover, its meaningful network allows for an enhanced level of quality control and safety for its goods. The stable distribution platform has been a boon for expansion in recent years as the company has sought to reach new customers in remote locations. These diverse operations have aided market presence, volumes, deliveries, and product introductions during a crucial span.
Weaknesses
Water Management: Water is a main ingredient in substantially all of the company’s products. It is vital to the production of the agricultural ingredients on which the business relies and is needed in KO’s core manufacturing processes. Also, this resource is critical to the prosperity of the communities Coca-Cola serves. Water is a limited resource in many parts of the world, facing unprecedented challenges from overexploitation, as well as rising demand for food and other consumer and industrial products whose manufacturing processes require water. These events increase the risk of pollution, poor management and effects stemming from climate change. As the demand for water continues to climb around the world, and water becomes scarcer, the overall quality of available water sources may very well deteriorate markedly, leaving the Coca-Cola system to incur higher costs or face capacity constraints that could adversely affect its profitability or net operating revenues in the long run.
Foreign Currency Fluctuation: The company earns revenues, pays expenses, owns assets and incurs liabilities in countries using currencies other than the U.S. dollar, including the euro, the Japanese yen, the Brazilian real and the Mexican peso. In 2014, it used 70 functional currencies in addition to the U.S. dollar and derived $26.2 billion of net operating revenues from operations outside the United States. Because its consolidated financial statements are presented in U.S. dollars, Coca-Cola must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major currencies affect its net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies. In addition, unexpected and dramatic devaluations of currencies in developing or emerging markets could negatively affect the value of the beverage provider’s earnings from, and of the assets located in, those markets. Weaknesses in some currencies might be offset by strengths in others over time due to the geographic diversity of the company’s operations. Moreover, KO also employs derivative financial instruments to further reduce its net exposure to foreign currency exchange rate fluctuations. However, it cannot fully hedge the impact from fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies or the currencies of large developing countries.
Opportunities
Diversification: The company has been hard at work utilizing its ample war chest to build a presence in rapidly-growing beverage categories. Currently, it owns 16% of Keurig Green Mountain and is developing a fresh Keurig Kold device that is set to debut this fall. Keurig, famous for pod-based, hot drinks intends to feature Coke-branded products for its upcoming platform. In addition, Coca-Cola recently finalized its purchase of a 17% stake in Monster Beverage. The deal provides the company with access to a popular energy drink growth segment. All told, we anticipate these transactions will bolster the top and bottom lines immediately. These joint ventures also deliver Coca-Cola with established inroads to a younger customer base. Looking ahead, KO will probably aim to forge increased relationships with coffee, energy and health drink businesses.
Extended Reach: The population continues to increase at a steady clip. In order to capitalize on this fact and consumers’ shift toward healthier living, Coca-Cola has focused on bolstering a variety of its business lines. Areas such as India and China have ramped up demand for the company’s latest juice and coffee offerings. Too, developing countries face hefty clean water shortages, which ought to result in surging demand for the company’s bottled water goods. These business segments have increased at double-digit rates in the past year, highlighting an elevated need for beverages other than Coca-Cola’s traditional drinks. We believe Coca-Cola remains dedicated to differentiating its portfolio and delivering emerging markets with various beverage staples over the long term.
Threats
Nutritious Selections: It’s been no secret that soft drink providers have suffered some of late. A cultural shift toward natural and organic products has led many to opt for nutritional waters, smoothies, and various healthy beverage options. Thus, core soda offerings that include high amounts of sugar, or diet items with artificial sweeteners, have fallen out of favor with buyers. What’s more, this trend does not seem likely to abate, as consumers continue to boost their knowledge of proper dietary requirements and exercise programs. Further, many health professionals have called for the elimination of foods and beverages containing lofty amounts of sugar, since these products place individuals at an elevated risk of becoming obese, developing diabetes and suffering from heart disease. Also, a negative perception of these beverages has surged due to federal regulators’ desire to place excess taxes on sodas and sugary soft drinks.
Indirect Competition: Although companies such as Starbucks (SBUX) and Dunkin’ Brands Group (DNKN) do not compete directly with Coca-Cola, these businesses do place a dent in the company’s market share. The chains offer customers healthier alternatives, unique choices and customer loyalty rewards that are not easily matched by Coca-Cola. In addition, smaller franchises and retail chains provide patrons with private-label substitutes for traditional Coke products, which allows these businesses to deliver beverages at a lower price. Industry data suggest potential customers will continue to be pulled away from basic drink selections in favor of customizable options that carry a greater nutritional benefit.
Conclusion
While the number of challenges facing Coca-Cola are abundant, this company does possess a good deal of promise for the future. Its overall size, leverage and financial resources have it well positioned to take advantage of worthwhile acquisition targets. Too, the company’s brand appeal and cultlike following insure that it will probably remain a top-tier beverage provider going forward. Coca-Cola’s vast distribution network should enable better volumes ahead and success in burgeoning markets. All told, conservative investors wanting a reliable source of income and a bit of capital gains exposure might want to give The Coca-Cola Company a glance.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
