Coca-Cola (KO, Financial) is a household name across the globe. With a history of more than 120 years, worldwide brand recognition and a strong track record of delivering positive returns for investors, it is no surprise that Warren Buffett (Trades, Portfolio) has Coca-Cola as one of his core holdings.But, following the latest quarterly earnings report, shares of the company are down more than 10%, a significant downturn for what is typically a solid defensive stock. Should investors be worried about the future of this heavyweight? To answer this question, we will have to look at some recent financials as well as fundamental changes in the underlying market.
Solid financials
For the fourth quarter of fiscal year 2018, Coca-Cola posted revenue of $7.1 billion, representing a 6% decline year-on-year. Total revenue for the year came to $31.9 billion, a 10% decline year-on-year. While this sounds alarming, it is actually just the result of the company refranchising some of its bottling operations, so the previous years’ results, which include the bottler's revenues, are not accurate benchmarks for the quarter just ended. A more accurate picture is provided by looking at some of the organic figures. CEO James Quincey summed these up well on the earnings call:
“Our business performed well across all key dimensions in 2018 as we leveraged our transformation as a total beverage company. Most notably, we gained global value share, and those share gains were broad-based. We held or grew value share across each of our geographic segments. Organic revenue grew 5% versus our goal of 4%, driven by strengths across all operating segments.
Underlying operating income grew 11% versus our goal of 8% to 9% as we built momentum through the year while accelerating the capture of productivity savings. This resulted in an approximate 170 basis point expansion in the underlying operating margin. And comparable EPS grew 9%, in line with our guidance of 8% to 10%, despite absorbing $600 million in stronger currency and structural headwinds than we anticipated at the beginning of the year. Our results reflect actions taken over the past several years to transform our business for long-term success.”
An uncertain future
If the quarterly and yearly results were fine, what is the problem? There are a number of longer-term concerns that some investors and analysts have with the company. First, soda consumption in the developed world is falling off as consumers become more health-conscious. Coca-Cola has attempted to hedge itself against this industry-wide risk by investing in sports drinks, teas and juices, but soda is obviously going to continue to be the company’s main product.
Second, the guidance issued by management on the earnings call was certainly very cautious. Full-year revenue growth was forecasted to come in at 4%, down from 5% in 2018. Earnings per share were forecast to be essentially flat. This was understandably disappointing for a company that is currently priced at 21 times earnings.
Summary
Is the recent price decline a harbinger of things to come? It seems unlikely that one of the most powerful brands in the world will lose significant amount of market share just because of more health-conscious consumers in the Western world. Ultimately, people are still going to want to drink sugary water, and the sugary water that they are most likely to drink is Coke.
Furthermore, consumers in the developing world represent a huge opportunity for Coca-Cola, with markets like India in particular presenting lucrative growth opportunities. Overall, this seems like more of a temporary setback than a systemic problem for the company.
Disclosure: The author owns no stocks mentioned.
