Coca-Cola's Strategy Could Boost Its Stock Price

The company's growth plans may strengthen its financial prospects

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Coca-Cola Co (KO, Financial) can record further stock price growth, in my view, after its 20% rise in the past year.

The global beverages company is launching innovative new products, strengthening its sustainability credentials and using increasing amounts of data to improve its ability to adapt to changing consumer tastes.

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Investing for growth

The company’s acquisition of global coffee business Costa in 2019 could boost its financial performance. Coca-Cola has launched ready-to-drink Costa products across Europe since the acquisition and has already achieved a 6% market share in the UK.

It has also accelerated the placements of Costa Express, which is a self-serve coffee machine located in retail outlets and gas stations. For example, in the fiscal 2019 fourth quarter it opened 700 Costa Express locations. They could increase its brand awareness among consumers and widen its economic moat.

In addition, Coca-Cola is using an increasing amount of data to make key decisions that could strengthen its competitive position and enable it to become more flexible to changing consumer tastes. This allowed it to add an incremental 100,000 transactions per week for one of its largest customers in Europe in the fiscal 2019 fourth quarter. Its further use of data could lead to it becoming more efficient and productive in upcoming quarters.

Innovation

The company is improving its sustainability credentials through a variety of programs. For example, it has introduced bottles that are 100% recyclable in 12 markets in fiscal 2019, and plans to roll them out in further markets in fiscal 2020. In addition, it used almost 30% recycled plastic across its total portfolio in Western Europe in 2019, and is targeting using 50% recycled plastic in Western Europe by 2023.

It is also seeking to reduce its carbon footprint and use an increasing amount of glass and aluminium in its products, rather than plastic. This could resonate with its customers at a time when 88% of consumers say they have more positive attitudes towards companies which have a positive environmental or social impact.

Coca-Cola launched new products such as Coke with coffee in 2019 to expand its presence into new markets. It also launched Coke Energy in a number of international markets in 2019, as well as sports drink Powerade Ultra

Potential difficulties

The business experienced tough operating conditions in Latin America in the fiscal 2019 fourth quarter. This trend could continue in fiscal 2020, since the economic outlook for major South American economies such as Argentina is uncertain. Additionally, Coca-Cola’s performance in China could suffer from the spread of the Wuhan coronavirus. It has already caused many of the company’s factories in the country to close, which could disrupt its sales performance. China accounts for 10% of Coca-Cola’s global volumes, and a reduction in its sales in the country could hurt its financial performance.

In response, the business has focused on boosting demand for its products in challenging markets. For example, in Latin America it rolled out single-serve packs, which have broadened the appeal of its products to a wider range of consumers. This contributed to its strongest performance in Brazil in 2019 for seven years, which helped to offset its weak performance elsewhere in the region.

Additionally, it launched a new online marketing campaign in China in 2019, which increased the number of consumers who purchased its products by 20 million compared to the previous year.

Future prospects

Market analysts forecast that Coca-Cola will report a 9.2% rise in its earnings per share in fiscal 2020, followed by further growth of 8.4% in fiscal 2021. Its price-earnings ratio of 28.8 is not cheap, but its growth potential suggests that it offers investment appeal.

Disclosure: the author has no position in any stocks mentioned.

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