Shares of beverage giant Coca-Cola (NYSE: KO) popped nearly 1% in early market trading on Wednesday, yet the stock soon fell into negative territory after second-quarter Coca-Cola earnings results were released. The company beat analyst expectations on both revenue and profit, which was sorely needed since this year has not been kind to the king of Coke.coca-cola-earnings

Coca-Cola’s stock price has gone flat. Shares are down 2% year-to-date and are down 1% over the past year. The company continues to reward investors with a solid dividend, but without much growth, and due to its high valuation, investors will need better growth for their thirst to be satisfied.

Pricing Power Saves the Day

Generally speaking, a company grows revenue in one of two ways. Either consumers buy more of its products, or the company raises prices on its products (or sometimes both). In Coca-Cola’s case, last quarter’s results were fueled much more by the latter.

Coca-Cola raised prices by 4% in North America last quarter, which was important because the North America business represents nearly half of its total sales. The company employed “stealth” price increases by resorting to smaller packaging.

Coca-Cola enjoys tremendous pricing power, which is a testament to its business. Only the biggest, strongest players in a given industry have the size and scale to exercise price increases whenever they choose. Coca-Cola is one of those companies.

Its quarterly revenue declined by 3%, although most of this was due to unfavorable currency fluctuations. The rising U.S. dollar has been a big pain for large multinational corporations such as Coca-Cola, because the strengthening dollar makes international revenue worth less when it is converted back into the domestic currency.

Adjusted earnings per share came in at $0.63 per share, which represents 8% growth year over year. This beat analyst expectations, which called for $0.60 per share of profit.

Shifting Consumer Tastes

Fundamentally, there is a structural change in consumer eating and drinking habits that Coca-Cola has been disturbingly late to acknowledge. Shoppers, particularly in more developed nations like the United States, are gradually turning away from sugary beverages like soda and instead are drinking more water and teas.

This has caught Coca-Cola flat-footed. The company does hold a number of non-soda-related brands, including Dasani and Honest Tea. Success in these brands helped Coca-Cola increase sales of still beverages by 5%.

But global volumes grew just 2%, which kept overall growth constrained.

To be sure, Coca-Cola has a vast product portfolio. The company holds more than 20 brands that each bring in at least $1 billion in annual revenue. But the company still derives most of its revenue from sparkling beverages, specifically Coke and Diet Coke, which are the No. 1 and No. 3 best-selling soda products.

At its recent stock price, Coca-Cola trades for 25 times trailing EPS. At such an aggressive multiple, it needs to produce higher growth in order for its stock to do well.

Income investors are likely pleased with the company’s 3% dividend yield and its habit of increasing dividends each year. That should continue for the foreseeable future, but growth investors may not see a lot to like about Coca-Cola.

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Published by Wyatt Investment Research at