Global beverage titan Coca Cola (NYSE:KO) reported first-quarter earnings on Tuesday that were in line with analyst estimates. However, the company's earnings were nothing special due to overseas businesses struggling on currency fluctuations. The bigger news of the quarter was reported by Coke's archrival Pepsi (NYSE:PEP), which is looking to alter its business model for the better. On initial inspection however, Coke's model still looks superior, and this was demonstrated in the most recent quarter.
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First Quarter Overview
Coke's top line struggled during the quarter, falling 3% to $7.2 billion. The company's overall unit case volume grew 2%, highlighted by a 31% improvement in India and 10% growth in China, areas that Coke considers among its "key emerging markets". The bulk of sales, however, stem from developed markets such as Europe and the U.S., where volumes fell 2%. Management was quick to point out that "North America again outperformed the industry" and gained market share, but a 4% decline in carbonated beverages (despite impressive double-digit growth from Coke Zero) more than offset the 3% growth in the non-carbonated drink category, which includes brands such as Minute Maid and Glaceau.
Falling EPS
Case volume is a great indication of organic growth trends, while operating income trends were reduced by the effects of a strong dollar. Total company operating income fell 1%, but grew 17% when eliminating currency fluctuations. North America led the way with 35% operating income growth while every region except for Europe (up 8%) posted double digit increases. What counts, however, is reported results, and earnings per share (EPS) fell about 9% to 58 cents from Q1 2008, as restructuring charges and a higher tax rate took their toll on the bottom line.
Outlook
Earnings results still matched analyst projections, who collectively expect Coke to report full-year earnings of $3.09 per share. This would represent a solid 24% increase from the $2.49 reported for all of 2008. Consensus sales are only expected to increase marginally, meaning Coke will rely on cost savings and other efficiencies. Management currently expects to post $500 million in "annualized savings from productivity initiatives" by 2011. (Take a look at Earnings Forecasts for more on how consensus estimates are determined.)
Bottom Line
Coke's quarter was nothing to write home about and was actually upstaged by archrival Pepsi. Pepsi actually reported its results ahead of time, along with an announcement to acquire its two primary bottlers Pepsi Bottling Group (NYSE:PBG) and PepsiAmericas (NYSE:PAS). The apparent motivation is to gain more control over the bottling operations and save a couple of hundred million dollars annually. (Read What Makes An M&A Deal Work? for a primer on the benefits and disadvantages of M&A.)
The move could end up working out well for Pepsi, but so far Coke has said it has no intention of following suit in acquiring its own bottlers, such as Coca-Cola Bottling (Nasdaq:COKE). Instead, Coke prefers a franchise model where it sells concentrate, keeps the capital-intensive bottling operations off its books, and maintains a significant amount of influence over its partners. In my opinion, this is a superior business model, as illustrated by the 18.8% net margins reported during the quarter. This also leaves excess capital to buy back stock and increase the dividend, which Coke has now done for 47 straight years.
