We maintain a Neutral rating on
T
he Coca-Cola Co.
(
KO
) following the appraisal of fourth quarter and full year 2011
results.
Coca-Cola posted fourth-quarter 2011 operating EPS of 79 cents
per share, (excluding restructuring charges and costs related to
global productivity initiatives as well as the acquisition of the
North American bottling business and net losses related to the
economic hedges), which exceeded the Zacks Consensus Estimate by 2
cents and the prior-year quarter by 7 cents.
The results were also ahead of the long-term targets of
Coca-Cola, driven by strong brands, volume and increased value
share realized in total non alcoholic ready-to-drink beverages and
across both sparkling and still beverages.
Revenues in the quarter rose 5.0% to $11.0 billion, while in
2011 revenues increased 33.0% to $46.5 billion. Robust sales growth
was driven by growth in concentrate sales, positive currency
benefit, positive price/mix and the acquisition of North American
bottling operations in fiscal 2011.
The cola giant also has a formidable portfolio of globally
recognized brands and markets four of the world's top five
nonalcoholic sparkling beverage brands, including Coke, Diet Coke,
Sprite and Fanta. In 2011, Coca-Cola also introduced a wide variety
of brands like Coke-Zero in Uganda and Fanta Powder in India; and
beverage products like Frugos Sabores Caseros in Latin America and
Real Leaf in Vietnam.
The company is also expanding into key developing markets, such
as China, India, and Russia, encouraged by the high-growth nature
of these countries. With investments of over $2 billion in Indian
operations over the last 18 years, Coca-Cola seeks the markets of
Russia and China with billions of investments planned over the long
term.
Coca-Cola's acquisition of North American bottling operations
from
Coca-Cola Enterprises, Inc
. (
CCE
) expects to generate synergies of at least $350 million in the
next 4 years. The acquisition also boosted the top line of the
North America segment, which grew 44% in 2011, up from 27% in
2007.
In addition, Coca-Cola is undertaking various productivity
initiatives to streamline its cost structure and boost
profitability, as the company remains concerned about rising input
costswhich also led to a decline in the gross margins by 3.0% to
60.9% in 2011. With the completion of its four-year productivity
program, the company has earned annualized savings of over $500
million in 2011. Coca-Cola has plans to launch a new global
productivity initiative in 2012 to target $350 to $400 million in
annualized savings by the end of 2015. Nevertheless, we expect
commodity costs to continue to be volatile and increase overall in
2012.
Coca-Cola has also been failing to properly promote its Coke
brands in the North American beverage segment as compared to its
rival
PepsiCo Inc.
(
PEP
) due to lack of advertising. Its advertising spending as a
percentage of sales has decreased since 2006 which has affected the
top line of Coca-Cola.
The Center for Science in the Public Interest (
CSPI
) recently released studies which showed that the caramel coloring
which is used to give the company's colas a distinctive brown color
contains a chemical, 4-ethylimidazole (4-MI) which is associated
with cancer in animals. The CSPI has requested the US Food and Drug
Administration (FDA) to ban the use of caramel coloring. Coca-Cola
thus needs to review its manufacturing process for the caramel
coloring to gain back the confidence of the consumers. We thus
prefer to remain on the sidelines.
COCA-COLA ENTRP (
CCE
): Free Stock Analysis Report
COCA COLA CO (
KO
): Free Stock Analysis Report
PEPSICO INC (
PEP
): Free Stock Analysis Report
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