Shares of Coca-Cola (NYSE: KO) rose more than 1% Wednesday after the company announced first-quarter earnings before the opening bell.
This was an important quarter for the soda giant. Coca-Cola earnings had not impressed investors for the past several quarters, as the company suffered a gradual and sustained decline in global case volumes.
In the past year, Coca-Cola faced two significant headwinds in each of its major geographic markets, which weighed on sales and profits over the past year.
First, in North America, consumers have shown a desire for healthier eating and drinking options. Sales of the company’s flagship products, including its namesake Coca-Cola and Diet Coke brands, are slowing down because consumers are shying away from sugary, high-calorie sodas in favor of water, teas and juices.
To be sure, Coca-Cola does have a significant portfolio of brands outside its traditional sparkling beverages. These include Dasani, Minute Maid and Honest Tea. In all, the company holds more than 20 brands that each collect at least $1 billion in annual revenue.
The problem is that sparkling beverages still represent the vast majority of its business. Its other brands are too small, at least for now, to be able to offset the broader declines in soda sales. That means, for better or worse, Coca-Cola is still highly dependent on soda.
The second major headwind is foreign exchange. In the international markets, Coca-Cola is being hit with a significant headwind in the form of currency. The strengthening U.S. dollar makes sales conducted overseas less valuable, as those sales are converted into fewer U.S. dollars when the dollar rises against other currencies.
These challenges explain why Coca-Cola stock is flat over the past year. Fortunately for investors, the company had better things to say about last quarter. Net revenue increased just 1% year-over-year, but rose 8% after excluding currency effects. Pretax profit increased 13% last quarter, adjusted for currency.
Coca-Cola’s core brands did most of the heavy lifting. Global volumes of the Coke brand grew 1%, which was important progress from last quarter’s flat volumes. Furthermore, volumes of Coke Zero and Sprite rose 5% and 4%, respectively. This helped offset a disappointing 6% decline in volumes of Diet Coke.
Among its vast portfolio, Diet Coke looks to be in the most trouble. Volumes for Diet Coke declined more than any of its other brands, most of which posted growth last quarter. Moreover, Diet Coke was recently surpassed by PepsiCo’s (NYSE: PEP) flagship Pepsi brand as the second-most popular soda in the United States.
Of course, even in this tough environment, Coca-Cola still generates a lot of cash. The company intends to use $2 billion-$3 billion on share repurchases in 2015. Plus, it pays a hefty 3% dividend. These generous cash returns compensated investors well during the rough patch, and are likely why the stock did not fall further over the past year.
Another good sign from the Coca-Cola earnings report was that the company did not reduce its full-year forecast. Many companies in the S&P 500 Index have reduced expectations for the rest of the year. Coca-Cola expects mid-single digit earnings per share growth after excluding currencies in 2015.
Coca-Cola’s forecast for growth makes its valuation a little harder to swallow. The stock trades for 25 times earnings, which is a premium multiple to the broader market, as the S&P 500 holds a 20 earnings multiple. In addition, the stock’s valuation is very close to a five-year high.
When it comes to Coca-Cola stock, investors may need to temper their expectations. Earnings are expected to grow only modestly, and with an above-average valuation already, there doesn’t seem to be much room to run.
However, the company still rewards patient investors. It pays a high dividend, and it has raised its dividend for an amazing 50 years in a row. At this point, Coca-Cola looks much more like a dividend stock than a growth stock.
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