One of Warren Buffet’s pet investments Coca-Cola (KO, Financial) has been deteriorating in value over the past few quarters, and in spite of employing efforts to revamp its product portfolio and enhance marketing, the company has failed to meet shareholder expectations. Coca-Cola recently fell victim to negative publicity as its “milk product” campaign under the brand Fairlife, was received by audiences as sexist. Though the ad campaign has now been dropped, it has sure made a dent on Coca-Cola’s brand.
Highlights of the past
After reporting a lackluster quarterly result in October, the company has faced considerable criticism in analyst circles. Soft spending in the US and also in Japan and Europe led to results that were below management’s expectations. As CEO Muhtar Kent pointed out in the earnings call:
“These factors have driven a deceleration in personal consumption expenditures and as a result the non-alcoholic beverage industry is growing one to two points slower than our initial forecast at the beginning of the year.”Â
As such, there is hardly any doubt that Coca-Cola is slipping in its dominant markets and the slow revenue growth, which is a result of decrease in demand, will continue to persist.
In fact, the persistence of headwinds in major regions like North America and Europe has to be tackled by the company management through incremental media spending or efficient product innovation. Given that these two markets account for nearly 35% of Coca-Cola's net volumes indicates that the company is showing little growth in volumes. Though the decline in these regions was offset by volume increases in the Asia Pacific and Latin American regions, investors should be cautious and watch for data from the North American and European regions because of its heavy impact on company’s top line.
Where’s the growth?
It is important to understand that there are two primary growth points. Since the company does not operate in a complex industry and manufactures products the utility of which is easy to understand, Coca-Cola has a couple of ways to achieve and maintain this growth. One of them is product portfolio and the other is media spending. While Coca-Cola is known for its aggressive and innovative media spending across various regions, the company is now beefing up its overall product portfolio via several acquisitions.
Recently, the company purchased a 16.7% stake in Monster Beverage Corp. (MNST, Financial). The partnership is a step in the direction of accelerating the company's growth of its energy drink category of business. Earlier during the year, Coca-Cola also completed the acquisition of a 16% stake in Keurig Green Mountain Inc. (GMCR, Financial) and has made plans to offer some of its products to Keurig's hot brewing system in the US and Canada. As Coca-Cola moves towards making its products available in K-Cup packs to be used with the brewing system, the 10-year agreement is one that tries to strengthen products.
In addition to these deals, Coca-Cola also entered into an agreement with SABMiller (SAB) to form a new business that will dominate the African markets. The world's second biggest brewer behind brands such as Peroni and Grolsch has confirmed a long-rumoured deal with bottling firm, Coca-Cola Sabco, to form a new company that will cover 40pc of all Coca-Cola sold in Africa by volume. The new business, called Coca-Cola Beverages Africa, will be the biggest bottler of the soft drink in Africa and the 10th largest in the world, with annual revenue of $2.9 billion.
Now that I have given you details of Coca-Cola’s recent acquisitions, the main point of discussion is whether these acquisitions will help Coca-Cola to regain its previous growth rates. The result of these acquisitions is uncertain for now because these are lateral product additions. The implication is that these business areas are somewhat new to Coca-Cola’s traditional product line-up and therefore, the integration of such products with Coca-Cola’s primary line in terms of distribution, will be challenging.
Takeaway
Currently, Coca-Cola is trading in the range of $43-44, which is an attractive entry point. However, I would advise against it because of Coca-Cola’s expectation that it would miss the 6-8% EPS growth in the coming quarters. The sustainability of EPS growth is the hallmark of Coca-Cola’s valuation, and now that the company is not confident of hitting that target, it makes investing in the stock risky, even at the current price level.
