Coca-Cola Earnings: Individual Brands, Emerging Markets Lead Growth

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The Coca-Cola Co ( KO ) will announce it's Q4 earnings on 7th February. We expect the company to continue on its growth trajectory buoyed by specific brands showing impressive growth in markets like Turkey, India, Brazil, China, Argentina, among others and price increases in the second half of 2011 which will help maintain profitability. It currently competes with companies like PepsiCo ( PEP ) and Dr Pepper Snapple Group ( DPS ) and other domestic players.

We estimate a $75 price for Coca-Cola , which is about 10% higher than the market price.

See our full analysis for The Coca-Cola Company

Global Investments to Lead Growth

Specific brands in certain countries show strong growth potential. Turkey, for example, has witnessed double digit growth in the first nine months of 2011 led by the namesake brand Coca Cola. India is another country which saw double digit growth primarily due to a 16% increase in Sprite. Similarly, Mexico and Argentina saw growth of 8% and 9% respectively in the Coca Cola brand. As per our estimates, the trademark brand Coca-Cola alone had a market share of 21.7% in 2011. We expect its market share to increase to 22.4% in the international Carbonated Soft Drink ( CSD ) market.

The Non-CSD segment also shows a strong promise with India seeing a 10% growth in Non-CSD volume. China saw a staggering 19% growth in Non-CSD beverages, led by Minute Maid. The Coca-Cola Co also launched Minute Maid in Tanzania, Uganda and Kenya last year. We expect Minute Maid to command a market share of 14% by the end of this year.

Going forward, Coca-Cola will also have enhanced presence in the Middle East, a region in which has struggled historically, with the recent acquisition of a 49% stake in Saudi Arabia's Aujan Industries . The move will help the company push deeper into North African markets as well.

Gross Profits Under Pressure

The gross profit margins for the year 2011 are lower primarily because of acquisition of Coca Cola Enterprises Inc ( CCE ) and higher commodity costs. For the full year, Coca Cola expects the unfavorable impact of commodity costs to be approximately $ 800 million. We expect the gross profit margin to decrease to 59.4% from 63.9% in the previous year.

However, the company should be able to maintain the margins going forward since the effect of acquisition of CCE will be incorporated and price increases of 4% which began from August 2011 will help sustain the margins. The company plans to raise the prices further this year, although the price increases will be more moderate.

Although the global investments are driving the growth, Coca-Cola still derives 40% of its revenues from the North American region. PepsiCo, which has been criticized for neglecting its core soft drink business, plans to boost the marketing budget for cola and other drinks by 50%, to $1.7 billion. If Pepsi's tactics work, we could see an erosion of Coca-Cola's value.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CCE , CSD , DPS , KO , PEP

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