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Why Coca-Cola Is an 'Unbeatable Business'

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The soft-drink giant is well-positioned for continued growth despite weaker-than-expected third-quarter sales numbers.

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Few companies dominate their market in quite the same way that Coca-Cola (KO) (NYSE:KO) rules the soft-drink business.

According to Beverage Digest, Coke's brands collectively controlled 41.9% of the US carbonated soft drink market in 2010, well ahead of PepsiCo (NYSE:PEP), with 29.9%. Even in a head-to-head competition between the flagship brands-Pepsi versus Coke-Coke emerges the winner, with 17% of the market compared to Pepsi's 9.9%.

The company also has a huge asset in the Coca-Cola banner, which was just named the world's top brand for the 13th time on brand-consulting firm Interbrand's annual list.

In addition to Coke, the company's brands include over 3,500 beverages, which it sells around the world, including diet and sparkling colas, fruit juices, water, sports drinks tea and coffee.

Coca-Cola shares, too, are renowned for long-term, consistent growth. The stock has risen over 31% in the past five years, compared to a 6.8% decline for the S&P 500 Index (INDEXSP:.INX). And it has made the climb with remarkable consistency. The stock carries a beta rating of just 0.51, which means it's almost exactly half as volatile as the overall market. Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is the company's largest shareholder, with an 8.9% stake, and Coca-Cola is Berkshire's largest holding.

"Every investor's goal should be to find companies with sustainable competitive advantages like Coke," writes Jim Fink in The Life and Leadership of Coca-Cola's Roberto Goizueta. "Coke's cola has always tasted the best and cannot be cloned despite endless efforts by competitors to do so. Coke's worldwide exclusive distribution network is virtually impossible to replicate. When you combine the best product with the best distribution network, you have an unbeatable business."

Global Slowdown Is Just Another Bump in the Road for Coca-Cola

Coca-Cola reported third-quarter profits that were in line with the consensus forecast last week, though sales were lower than expected.

During the quarter, the company's revenue gained 1% from a year earlier, to $12.34 billion. That missed the consensus estimate of $12.41 billion. On a constant-currency basis, revenue rose 6%.

Revenue rose 4% in the Eurasia and Africa region (which supplies 6% of Coke's total revenue), while North American revenue (46% of the total) gained 5%. These gains offset an 8% decline in Europe (10% of revenue) and a 4% drop in the Pacific region (13%), partly because the company sold more lower-priced drinks due to slower economic growth in those two areas. Latin American sales (10%) were flat.

Earnings rose 4%, to $2.33 billion, or $0.50 a share, from $2.25 billion, or $0.48. Excluding one-time items, the company earned $0.51 a share, down from $0.52. That matched the consensus estimate. Coke also said that unfavorable exchange rates held back its operating income by 7% in the quarter. The company's gross margin rose to 60.7% from 60.2% a year ago.

Coca-Cola Products Are Market Leaders

Despite the sales miss, the company saw higher sales volumes across all its divisions, led by Eurasia and Africa, where volumes rose 11%.
India continues to be a growth area for Coca-Cola. The company saw overall volumes rise 15% in the country in the latest quarter, with its main Coca-Cola brand posting a 34% increase. Sprite gained 15%. The company said its Indian growth is balanced across all of its package sizes. It also sold more juices and juice drinks, such as Minute Maid Pulpy and Maaza.

The company's Indian unit now controls 25% of the country's soft drink market, ahead of PepsiCo's 20% share. Domestic soft-drink maker Parle Bisleri also has a 25% stake.

Coke now plans to invest $5 billion in the country by 2020. The company will to use this cash to expand its distribution networks, introduce new products and increase its manufacturing capacity. That will help it better attract consumers as India's middle class keeps growing.

Coca-Cola Is Sharing Its Success With Shareholders

Not to be overlooked is the company's long history of returning capital to shareholders, both through reliable dividends and share repurchases. Coca-Cola is also one of America's most reliable dividend-paying stocks. The company has paid dividends for 82 consecutive years-since 1920-and has raised its payout every year for the past 50 years. The current annual rate of $1.02 a share yields 2.69% on a yearly basis.

The company's ongoing share repurchase plan is another often-overlooked benefit. Coke has spent $2.5 billion on buybacks through the first three quarters of the year.

This article by Chad Fraser was originally published on Investing Daily.

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Twitter: @investingdaily
No positions in stocks mentioned.
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