Thursday, October 23, 2014

Coca Cola (KO): Earnings Commentary

Hey all!

Hope everyone's week is going great so far. We are having some rain here in New York City but I love rainy days so, works for me.

As time permits, I try to make it the norm here on the blog to share a quick summary of the earnings results for stocks in my portfolio as well as my opinion or "two cents" on said results. The first company in my portfolio to report earnings was Coca Cola (KO) a couple of days ago on 10/21/14 {third quarter 2014}. Without further 'ado, lets get right to business.

Quick Background/Original Investment Thesis:

I bought shares of Coca Cola for the first time back in 2010. I cant believe its already been four years. My original thesis for buying coke was that I wanted to have a reliable, consistent company in my portfolio with a history of solid earnings and a company I didn't see going out of business ever, or at least not in my lifetime. I also loved the fact that coke pays dividends and it doesn't hurt that Warren Buffet loves the company, believes in it, and has an outstanding 9% stake in the company (is actually Buffet's largest holding right next to Wells Fargo). I've always seen coke as more than an  "American trademark", this is a brand that is recognized pretty much in the entire world. So, for said reasons, and a few others, I wanted the company to be part of my portfolio. With a solid ROI since time of purchase, the stock has not disappointed me but I am now facing a dilemma. And that brings me to the next headline below.

Highlight of Results:
  • Cash from operations year-to-date is at $8 Billion
  • Net Revenue declined 2% year to date
  • International volume grew 1% for the quarter but decreased 1% in North America
  • Reported operating income increased 10% for the quarter, 2% year to date
  • Third quarter earnings per share came in at $0.48 which represented a 13% decline from the second quarter 2013. Comparable EPS reported at $0.53, same as last year same quarter.
Where do I even begin with this? I suppose the bottom line is that Coke is not doing very well when it comes to growth and sales increases, specially in North America. CEO Muhtar Kent attributed the slowing in growth {in part} to a "challenging macroeconomic environment". I suppose that part of those 'macro reasons' include the fact that a lot of people are moving away from items labeled as unhealthy such as soft drinks and going more towards "healthier" alternatives. It doesn't help that sodas {including diet alternatives} have been getting a bad reputation in the media for a long time coming now. It is true that for many years now coca cola executives have understood the fact that they need to diversify in terms of product offerings and offer more "health conscious" alternatives. Because of this, they have invested in teas (i.e.: honest tea), as well as offer smaller sizes in their cans and bottles (less calories, etc.). However, the strategies do not appear to be doing enough and more needs to be done.

One thing I like to see companies do when "issues" arise is that they immediately identify said issues, communicate with shareholders, and apply a course of action with goals and objectives. This is exactly what Coke has been doing. During their recent earnings call announced they will be carrying out a series of strategies in order to "reinvigorate long term sustainable growth" and strengthen long term financial performance. Part of this plan involves increasing productivity target to $3 billion in annualized earnings by 2019. They will also focus on streamlining/simplifying the organization by refranchising company-owned bottling territories in North America and pretty much handing over operations to bottlers. This should lessen the burden of expensive/labor intensive bottling processes and can allow coke to focus back on its core product and operations.

My Two Cents

Coca cola remains an internationally recognized and incredibly strong brand. I doubt that will change from one day to the next (or anytime soon). I strongly believe hard core soda lovers have deaf ears to any negative commentaries regarding how "unhealthy" soft drinks are and they will continue drinking soda. However, what I do question is whether the number of "die hard" soft drink lovers and devotees is lessening over time. Also, whether this is a trend that will continue on as the years go on.

As mentioned, I love the fact that coca cola recognizes its weaknesses, acknowledges them, and has set up a plan of action. However, I also feel that it will in fact take time for the company to reposition itself back to growth and I wonder if growth is even possible (unless they start making more strategic acquisitions which something I've seen competitor Pepsi Co. doing aggressively over time).

My dilemma- I could either keep coke in my portfolio and continue collecting the dividends. I can see the stock price appreciating over time but I wonder if I will have to wait a long time for significant stock price appreciation and whether my money is better off invested in a different company with stronger growth prospects. If I do decide to sell my shares of coke, however, I want to know exactly where that money will go. I will leave my position as it is right now until I figure that out. Will keep you guys updated! Any thoughts and/or comments are welcomed.

Tell me, what are YOUR thoughts on coke?

Thank you for reading!

Cheers to profits,

PS: I shared coke as a great "starter stock" on my prior post for individuals just getting started in investing. My position on that has not changed.  However, I will write a follow up post with an "alternative" for individuals whom may be looking for more growth-focused companies. I have edited the prior post to include this comment.