Upside to Coca Cola’s Profitability from Bottler Acquisition
The Coca Cola Company (NYSE:KO) is the world’s largest manufacturer, distributor, and marketer of non-alcoholic beverage concentrates and syrups. The company sells these syrups and concentrates to bottlers who, in turn, sell the finished product.The Coke brand had market share of about 17% in the US in 2009, much higher than its primary competitor Pepsi (NYSE: PEP), which had less than 11% market share.
We estimate that the Coca Cola division contributes 27% to our $60.54 price estimate for Coca Cola company’s stock value. Our price estimate stands roughly 7% below market value.
Profit Margin Upside from Bottler Acquisition
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Coca Cola recently finalized the acquisition of the North American unit of its largest bottler (Coca Cola Enterprises). [1] The company believes that this acquisition will allow its North American business to operate as one strong, aligned business system with increased operating efficiency.
Coca Cola’s gross profit margins for its namesake brand soft drink have been relatively constant at around 63-66% for the past few years. This is due to stable nature of the business, as raw material costs have been relatively stable; Coca Cola has long term purchasing agreements with farmers and growers worldwide. If a long-term shift in raw material prices does occur, Coca Cola is able to pass the impact along to the consumers. Consequently, we do not expect much change in the gross profit margins for the company’s Coca Cola brand over our forecast period.
However, the operational synergies from the Coca Cola Enterprises acquisition could create upside to our estimates in the long run. Coca Cola estimates $140-150 million in cost synergies during fiscal 2011 from the acquisition and annual synergies of $350 million by 2014. [2]
Modify the trend-line in the chart above to see how various gross margin trends for the company’s Coca Cola brand soft drink operations could impact the company’s overall stock value.
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