Beverage behemoth Coca Cola (NYSE:KO) reported third-quarter results on Tuesday; they were nothing spectacular. However, Coke continues to steadily build global market share in the face of stagnating trends, and this rather unexciting state of its business could make certain investors very happy, especially those interested in preserving their principal or picking up additional yield in their portfolios.
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Recent Results
Third-quarter total sales fell 4% to $8 billion as every major geographic segment posted a decline in net operating revenues. Coke's bottling investments consist of the consolidated results from approximately 118 bottling and canning plants throughout the world and accounted for 27.5% of sales. This includes Coca-Cola FEMSA (NYSE:KYF) in Mexico and Coca-Cola Bottling (Nasdaq:COKE), which is headquartered in North Carolina.
North America continues to account for the bulk of concentrate and beverage sales (26% of total sales) and posted a 2% sales decline on a 4% drop in case volume. Bottler Coca-Cola Enterprises (NYSE:CCE) is a primary customer and accounted for 42% of Coke's concentrate sales last year. Tepid domestic trends continued on weak sales to restaurants throughout Q3; this was partially attributed to a Fourth of July holiday weekend that was shifted to the second quarter this year.
Europe represents the second-largest market and saw a 10% fall in sales. Latin America and the Pacific region, which were hit by foreign currency fluctuations, reported low single-digit sales declines. The trends in emerging markets remain much stronger than in Coke's mature markets, with volume and market share gains highlighted by 27% volume growth in India and 8% in Mexico. Overall, the company stated that currency neutral revenues continue to grow.
Expense controls, including a 7% fall in SG&A as well as a lower tax rate, served to offset anemic top-line trends. Overall, third-quarter earnings came in flat from the year-ago period at $1.9 billion, or 81 cents per diluted share. Cash flow generation ended up improving, with fiscal year-to-date operating cash flow growing 10.6% to $6.3 billion. Capex levels remained about flat for the same nine-month period.
Bottom Line
Analysts currently project full-year sales to fall a couple of percent to just under $31 billion and are calling for earnings of $3.07 per share. This places Coke's stock at a forward P/E of nearly 18, which has risen in sympathy with a share price that is right at its highs over the past year. The P/E multiple still happens to be at the low end of the five-year range (16.4 to 27.4), but is now discounting a number of years of steady free cash flow growth.
Coke has grown sales and earnings in the high single digits on average over the past five years, which means that while investors won't get burned by buying the stock, they won't get rich any time soon, although a 3% dividend yield may appeal to income-oriented investors. It has also chosen to keep its bottling investments more at arm's length, as opposed to Pepsi's (NYSE:PEP) recent decision to acquire a number of major bottlers outright. This helps keep Coke's returns on invested capital higher, which should also appeal to investors. (For additional reading on the beverage industry, see Parched For Profits? Try Beverage Stocks.)
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