The Coca-Cola Company (KO – Free Coca-Cola Stock Report), the world's leading marketer of soft drinks and a Dow-30 component, has posted modestly higher earnings for the March quarter, which was enough to lift the shares in early morning trading. Reflecting, in part, higher input costs, share net rose just 3.5%, to $0.89, below management's high-single-digit target for sustainable earnings growth. Still, there was plenty to like about the company's performance, including aggregate sales approaching $11.14 billion (up 6%, year over year), unit-volume growth across all six geographic regions, and continued market-share gains.
Worldwide sales volumes increased 5% in the quarter, up from 3% in the final three months of 2011. The acceleration largely reflected strength in the Eurasia and Africa regions, where volume growth jumped from 4% in the December period to 9% in the latest interim. Regional gains were led by India (volumes: +20%), the Middle East/North Africa (+14%), and South Africa (+10%). Elsewhere on the international front, Europe (+1%) continued to show resilience in the face of government-led austerity and economic uncertainty, while China, arguably Coke's most important overseas market, posted volume growth of 9%, reflecting, in part, the company's recent right-sizing efforts (with respect to occasion-driven product packaging) and strong Fanta brand sales (+15%).
Volumes in Coke's mature North American (United States and Canada) market increased 2% in the March quarter, up from the previous 1% trend line. The company's still (non-bubbly) portfolio was once again the key driver (first-quarter volumes: +6%), led by the Powerade sports drink brand (+13%), which benefited from a new ad campaign (“Power Through”) and marketing around the college basketball championship tournament.
In terms of overall profitability, the adjusted gross margin narrowed by approximately 150 basis points (to 61.0%) in the March period, largely due to higher ingredient and packaging costs. Still, a tight rein over “controllable” costs and ongoing productivity initiatives continued to provide a decent offset.
Strong global demand augurs well for Coca-Cola over the next several years. Indeed, unit-volume sales should increase at a mid-single-digit clip, thanks to higher soft-drink consumption in countries like China and India. On the domestic front, meantime, greater control of the “route to market” should enable Coke to both better serve major customer accounts and more quickly react to shifting consumer tastes. For 2012, specifically, we now look for share net to come in at $4.10, up 7% from the adjusted $3.84 earned by Coke in 2011.
As an investment, Coke shares have underperformed the broad market year to date (+4% versus +9% for the S&P 500, through mid-April). Still, we think that they will deliver competitive long-term returns, thanks, in part, to a well-covered and growing dividend.
About the Company: The Coca-Cola Company is the world's leading marketer of ready-to-serve, nonalcoholic beverages. On any given day, 1.7 billion individual servings of the company's brands are consumed by people around the globe. The Atlanta-based company currently has more than 500 wholly owned and licensed brands, including 15 that generate $1 billion or more in annual sales.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.