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Investment Overview for Coca Cola (NYSE:KO)
WHAT HAS CHANGED?
Currency headwinds are wiping out organic growth
In the tug of war between improved productivity and strong volume growth, and unfavorable currency translations, the latter seems to be winning, dragging down Coca-Cola's overall results. In 2015, while organic sales rose 4%, negative currency conversions were a 7% headwind.
Considering that Coca-Cola generates ~54% of its net sales from markets outside the U.S., macroeconomic volatility in overseas markets continues to be a downer for the American multinational. The U.S. dollar has continued to strengthen against foreign currencies, and could continue to get even stronger when the Fed decides to raise interest rates. After considering its current hedge positions, current spot rates, and the cycling of its prior year rates, Coca-Cola expects a 2-3 percentage point currency headwind on net revenue, and an 8-9 percentage point headwind on full-year comparable currency neutral EPS growth, for 2016.
Coca-Cola restructuring its way to more profitability
Coca-Cola is moving away from a capital-intensive organization with its intended refranchising plans for North America, and now, China, and structural changes in Europe and Africa.
Coca-Cola is looking to refranchise two-thirds of its bottling territories in North America by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. All this in hopes to improve operating performance. So far, the company has transferred or signed agreements for territories covering over 40% of U.S. bottle can volume, and announced the creation of the National Product Supply System, to strengthen and streamline U.S. production.
In addition, Coca-Cola aims to close the combination of Coca-Cola Enterprises, Coca-Cola Iberian Partners, and the company’s subsidiary Coca-Cola Erfrischungsgetränke AG into one bottling company called Coca-Cola European Partners, and the combination of SABMiller, Coca-Cola, and Gutsche Family Investments (GFI) bottling operations in Southern and East Africa into Coca-Cola Beverages Africa, by the second quarter. What the consolidated bottling operations will do is trim the extra overhead costs, improve supply-chain efficiency, and leverage the best practices of each of the bottlers to improve service to customers and consumers across Western Europe and Africa — the company hopes.
Below are key drivers of the Coca-Cola Company that present opportunities for upside or downside to the current Trefis price estimate:
Coca-Cola Family Gross Profit Margin
- Coca-Cola Gross Profit Margin : Margins declined substantially in 2011 due to the acquisition of Coca-Cola Enterprises'(CCE) North American bottling operations. Moreover, higher cost of goods in previous years caused the gross profit margin to fall from 64.2% in 2009, to 60.3% in 2012. Lower commodity prices and effective pricing boosted gross margin in 2013 and 2014, with the figure reaching 61.1%. However, hurt by negative currency translations, gross margin was down to 60.5% in 2015. If the commodity prices rise and the margin deteriorates to 55%, we could see the Trefis price estimate revised downwards by 3%. However, if the gross margins improve to 65% on account of increased cash productivity, there could be a 3% upside to our price estimate.
The Coca-Cola Company 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. Some of the most famous and valuable brands include Coke, Diet Coke, Sprite, Fanta, Minute Maid, Powerade, Dasani etc. In 2010, Coca-Cola Co completed the acquisition of North American operations of Coca-Cola Enterprises. Almost three-fourths of the company's volumes were constituted by non-sparkling volumes in 2015, while cola drinks formed 46% of the net volumes.
Coca-Cola holds around ~33% share in the U.S. liquid refreshment beverage market, ahead of PepsiCo's ~25%, Nestle Waters' ~11%, and Dr Pepper Snapple's ~10.5% shares. The U.S. formed 19% of the company's volumes and 46% of the net revenues in 2015.
The company primarily derives its value from the Coca-Cola brand (Coke). This is the flagship brand of Coca-Cola and has established itself as the most famous soft drink worldwide. Revenues from the drink Coca-Cola reached ~$12 billion in 2015, as per our estimates.
The Coca-Cola (Coke) brand has a high market share in global carbonated soft drink market
Coca-Cola has worldwide brand recognition and commands a volume share of about 17.6% in the U.S. and about 23.1% in the international carbonated soft drinks market. The share has remained relatively stable over the past few years, indicating Coca-Cola's ability to withstand competition. The size of the global market (billion cases) has witnessed slow growth in recent years amounting to approximately 39 billion cases in 2015. With a large market size and share, the Coca-Cola brand contributes the most to the value of the company's stock.
Soft drink companies adapting to changing consumer needs
Soft drink consumption is on a decline in developed countries as consumers switch to healthier alternatives such as juices, Ready-to-Drink (RTD) teas, RTD coffee, water mixers, etc. Moreover, soft drinks are prone to higher taxation due to their unhealthy nature. Hence, volume consumption is on a decline in the U.S. and Europe. Developing nations, on the other hand, offer tremendous potential in terms of volume growth. Soft drink consumption (per capita) in countries like China, India, and Brazil is still only a fraction of what it is in the developed world.
Diet soft drinks are suffering declining volumes in developed markets
Consumers have been shifting to natural and healthier beverages with less sugar and calorie content due to the health risks associated with sugary drinks. The diet counterparts have fared even worse, with the artificial sweetener aspartame being criticized for causing sugar cravings, dehydration, weight gain, and even heart diseases. Consumers have also reported bitter aftertastes of diet drinks which use the natural sweetener stevia, initially considered a bankable solution.
The diet category forms roughly one-fifth the net revenues for the overall CSD category in the U.S., according to our estimates. Revenues for this category are expected to trace a bell-shaped curve through 2000-2020, with the peak in 2009, and decline afterward. In 2015, Diet Coke and Diet Pepsi declined 5.6% and 5.8%, respectively.
Bottled water is growing at a fast pace globally
According to the Canadean, consumption of packaged water is estimated to have reached 233 billion liters in 2015, more than the intake of carbonated soft drinks (CSDs), which is estimated to be around 227 billion liters.
While growth in the bottled water category is expected to continue outpacing growth in the CSD category in the next few years, most of this growth will come from emerging markets such as China, Mexico, and India--where clean tap water is not as easily available.
Growing health concerns have prompted customers to reduce their consumption of calorie-filled beverages such as CSDs and juices. This has benefited the bottled water category, as some customers have switched to consuming bottled water instead of other sugary beverages. The U.S. is the fastest growing bottled water market outside of Asia. This trend is expected to continue and, thus, boost the U.S. bottled water market size. In fact, according to Beverage Marketing Corporation, bottled water is poised to overtake CSDs as America’s largest beverage category in volume by 2017, if not by the end of 2016.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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