Coca-Cola (KO, Financial) disappointed the street with its third quarter numbers as profit declined considerably from last year while revenue was flat. Apart from the sales declines the company has various headwinds reeling around it, which could be a matter of concern for investors. Although the management is taking various steps to turnaround its present situation it will be a matter of time to see how Coca-Cola reacts to these changes.
A look at the challenges
The company continues to bear the heat of a challenging macroeconomic environment, which is coupled with soft consumer spending in the U.S, Japan and Europe. Not only this, these days young consumers are getting more health conscience about the calorie content in soft drinks. Although these challenges will affect the soft drink industry as a whole but statistics reveal that Coca-Cola’s sales growth has declined compared to its peers such as Pepsi for nine consecutive quarters. This indicates that Coke is facing more company specific issues apart from the one’s existing in the industry.
But Coca-Cola has ample opportunities ahead and made solid progress in executing its strategies in North America. To start with, it adopted a disciplined pricing approach, which would be backed by high quality marketing programs. Further it intends to streamline its operating model to speed decision making process and enhance its local markets focus to drive growth. In this direction, it is restructuring its global supply chain and investing in new technology that will facilitate to streamline its operations.
Focus on profitable categories
Even as it talks about investment, it would be focused on selected profitable categories such as value-added dairy, which would yield good return in future. Also in the wake of its sales decline it will focus more on cost savings, which would be spread over a wider time horizon. Coca-Cola CEO Muhtar Kent said that, the company intends to cut its expenses by $3 billion a year by 2019. Investors however were not thrilled with this decision and want the cut to be even deeper. The company has already started implementing these strategies and slashed 1800 jobs to curtail its costs.
Apart from cost reductions, the company is also looking for opportunities to grow both organically as well as inorganically. There are speculations that Coca-Cola could acquire White Wave Foods, which has 14% share in the $9billion global non-dairy beverage category. With the growing health issues reeling around soft drinks, Coca-Cola and its peers could opt for such plant based beverages, which provides a unique growth opportunity in the days ahead.
Going forward, these initiatives could save significant amount of money and boost its growth, which will ultimately contribute to share holder’s wealth.
Conclusion
The company currently has a trailing P/E of 23.61, which is nearly in line with the industry P/E. Also its forward P/E looks attractive at 20.9, which reflects the growth in its earnings. Although the company didn’t have a good start through the year but its initiatives sound promising. Especially the cost cutting strategies adopted by the company will save significant amount of money in the future. Therefore from a long term perspective we could see more upside to Coca-Cola.
