As we look forward to the new year, The Coca-Cola Company (NYSE: KO) finds itself in the midst of a number of important transformations. Its drive to refranchise nearly all of its North American bottling operations by the end of 2017 appears to be on track. This initiative will leave Coca-Cola as an asset-light business focused on concentrates and the marketing of its 500-plus global brands. And in May of next year, Chief Operating Officer James Quincey will succeed Muhtar Kent as CEO, with Kent continuing as Chairman of the company's board of directors.
Typically, it's a good idea to for an acquirer to buy a target company with a lower EV-to-EBITDA multiple, where possible. Purchasing the rest of Monster, while probably achievable if Coke really decides to stretch its resources, won't be a cheap exercise.
An alternate path for Coca-Cola
If snapping up the remaining publicly traded shares of Monster Beverage Corporation isn't the most advisable use of Coca-Cola's resources in 2017, what should the company do to heighten its value? In addition to completing its bottling divestments on time this coming year, Coca-Cola should focus on ramping up internal innovation.
An example that you or I might not immediately identify as innovation, but counts for the same in the beverage industry, is Coca-Cola's race to reduce sugar in its carbonated beverages. On October 17th of this year, rival PepsiCo (NYSE: PEP) announced that, by 2025, two-thirds of its global beverage volume will contain less than 100 calories or fewer from added sugar, as measured by a 12-oz. serving. Days later, COO Quincey noted to analysts on Coca-Cola's Q3 2017 earnings call that the company itself has over 200 sugar reformulation initiatives underway.
The reformulations point to Coca-Cola's deep ability to evolve its product portfolio. Other examples include new-use cases for brand Coke, including test introductions of "Coca-Cola Lime" in Romania and "Coca-Cola Ginger" in Australia.
Coca-Cola's numerous acquisitions of small brands, which it intends to scale through its massive distribution system to offset soda volume declines, have grabbed more attention from the press and investors as of late. The purchase this summer of Unilever 's(NYSE: UL) soy-based beverage business, known as AdeS , with the help of partner Coca-Cola FEMSA (NYSE: KOF) , illustrates the type of portfolio diversification most shareholders are familiar with.
Yet ultimately, if Coca-Cola is lowering its own capital requirements by divesting manufacturing operations, it follows that the highest return on future investable cash flows may come from the organization's annual research-and-development spend. In addition to buying up other brands, Coca-Cola should seek to develop its own new formulations to expand through its distribution system. That's the type of economic muscle that, if exercised vigorously, negates the need to take "big-bet" risks on peers like Monster Beverage Corporation.
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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage and PepsiCo. The Motley Fool recommends Coca-Cola and Unilever. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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