Markets & Finance

Coca-Cola: A Strong Stock in Shaky Times


Most analysts favor the beverage giant given its expansion overseas and growth in "vitamin water" and other noncarbonated drinks

Not many stocks were left standing when the Dow Jones industrial average crashed by 504 points on Sept. 15—the worst drop since the September 11 terrorist attacks. One stock that did stand firmly was Coca-Cola (KO), the world's largest soft drink company. When the tsunami-like wave of selling was done on that frenzied day, Coca-Cola's stock stood at 54.75, up from the previous session's closing price of 54.50.

True, it was a razor-thin rise, but considering the devastation in the marketplace that day, just staying upright was a mighty accomplishment, as the financial giants lost some 20% to 94% of their value. Nonfinancials also got ravaged, including General Electric (GE), which tumbled 8.04%, ExxonMobil (XOM) 5.48%, Sprint Nextel (S) 5.70%, Intel (INTC) 3.97%, and Merck (MRK) 3.25%.

For a while there, Coke seemed to have lost its fizz. From 2003 through 2006, its shares traversed a narrow range, meandering between 37 to 50. In 2007, the stock came back, trading up to a high of 65 by early January 2008. But then the stock got caught in the market's subprime-mortgage-driven decline in July, which yanked Coke down to a 52-week low of 49.60. Since then, it's eased back to the mid-50s.

Buffett's Beverage

That's because Wall Street appears to have rediscovered Coca-Cola. Of the 17 analysts who follow Coke, not one recommends selling the stock, and all but two tag the stock a buy. Two analysts rate it a hold. (It's also reassuring that Coke's largest stakeholder is Warren Buffett's Berkshire Hathaway (BRKA), which owns an 8.6% stake.)

One Coca-Cola bull is Esther Kwon, an analyst at Standard & Poor's Equity Research who rates Coke a strong buy, with a 12-month price target of 62, based on her analysis of its historical price-earnings ratio. (S&P, like BusinessWeek, is owned by McGraw-Hill (MHP).)

Coke's p-e (based on forward earnings) ranged between 16 and 28 in the past few years. Right now, it's 17, based on Kwon's 2008 earnings estimate of $3.17 a share. "Given a challenging economic environment, we think a multiple in the lower half of the range is appropriate," says Kwon. For 2009, she expects Coke to earn $3.45. In 2007, the beverage company earned $2.57 a share.

Noncarb Play

What has caught the eye of analysts of late is the company's fruit juice and noncarbonated drinks, including energy drinks that come in the form of "vitamin water." Last year, Coke acquired Energy Brands, which makes bottled vitaminwater. Kwon expects the $4.5 billion acquisition to hasten the growth of Coke's noncarb beverage business, which lags behind PepsiCo (PEP) in this area. But Coke now expects to be a big player in the field of noncarb drinks.

Sales this year are expected to jump 15%, helped by increased prices on some of its products. And Kwon forecasts operating profits will rise some 17%, helped by a more favorable product mix and lower operating costs. "We look for volumes in Coca-Cola's noncarb portfolio to continue to accelerate as the company widens distribution of its Energy Brands unit in 2008, and for its premium pricing to hold," says Kwon.

Nira Maharaj, an analyst at investment research firm Value Line, notes that the overseas markets and new products are good growth engines for Coke. And expanding its drink portfolio in China, even as the severe earthquake in that country hurt Coke's second-quarter earnings, is a very positive move, she says. In India, Coke's plan to expand its Minute Maid business is also a plus, she says.

Room to Expand

Coke's "bellwether status" and strong execution should continue to support above-average earnings growth, says Christine Farkas of Merrill Lynch, which has had Coke has a client, in a note to clients on Sept. 11. "Favorable pricing, improving operating leverage, strong emerging-market exposure, and a flexible balance sheet" should support low double-digit earnings per share growth over the next few years, she says. Based on her analysis of the company's discounted net free cash flow, Farkas figures Coke shares will be worth 68 to 70 in the next 12 months,

The bears who worry about Coke's declining business in North America also warn about rising competition from PepsiCo, as well as the recent recovery of the U.S. dollar. A weak dollar, they note, helped boost Coke's earnings. The bulls counter, however, that Coke's products, which have been made in the U.S. since 1886 and are now sold in more than 200 countries, will remain a top brand worldwide. Last year, the U.S. accounted for 26.9% of Coke's revenues, the European Union 14.4%, the Pacific 13%, Latin America 10.6%, Africa 4.45%, and Asia 3.4%.

Clearly, there is still a lot of room for Coke to expand in foreign markets. And new products in either fruit juices or vitamin/energy drinks will help bolster Coke's growth strategy. Some of Coke's brands in these categories include Evian and Dasani bottled water, Rockstar energy drink, glaceau vitaminwater, and Powerade sports drink.

In all, Coke appears to have the formula for stronger growth. And in these scary times in the market, its stock continues to be a stalwart.


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