The Coca-Cola Company (NYSE:KO) has posted net earnings of $1.89 billion, a growth rate of nearly 13% over the same quarter in 2011. The performance was driven by a strong increase in sales volumes in emerging markets and a significant improvement in the company’s operating margin. The latest numbers should come as a relief to investors, dispelling any major concerns surrounding the declining consumption of carbonated beverages in developed markets.
Coca-Cola’s revenues over Q4 2012 stood at $11.5 billion, about 4% more than Q4 2011. For the full year, the company’s revenues stood at around $48 billion, an increase of around 3%.
Emerging Markets Lead Growth
Most of the company’s top line growth during 2012 has been fueled by Africa, Asia and Eastern Europe, where rapidly rising levels of disposable income are helping the company draw in more customers. Together, these regions delivered 10% increase in volumes for Coca-Cola in the final quarter. The company’s net sales from these regions, however, was dragged down by mix of currency headwinds due to a strong dollar and weaker pricing. Overall, the company’s net revenues from these regions increased by around 5% over both the final quarter as well as the full year.
The company’s performance in Latin America also continued on a strong note with volumes rising by 5% over the quarter. A relatively stronger pricing in this region meant that net revenues rose by 8% over the final quarter. The company’s 12-month sales growth figure, however, is markedly lower at 3%. This is primarily because of significant currency headwinds which Coca-Cola faced in previous quarters.
Coca-Cola’s strongest growth driver in emerging markets continues to be the traditional line of fizzy drinks, spearheaded by the company’s flagship drink Coke. The company’s sales of non-carbonated beverage also saw good volume growth in emerging economies with categories such as juices (such as Minute Maid) and sports drinks (Powerade) doing particularly well.
Decline In Soda Sales Fail To Dampen North American Earnings
Coca-Cola’s North American performance, in particular, should bring a lot of cheer for investors. In our pre-earnings write up, we had mentioned how the decline in soda consumption in the US could have an adverse impact on Coca-Cola’s North American volumes. It turns out that the company’s volumes actually increased, albeit marginally by 1%. A strong 8% volume growth in non-carbonated categories led by energy drinks, juices and ready-to-drink teas help offset a 2% volume decline in carbonated beverages. Moreover, the company maintained its strong pricing in the region, especially in the carbonated segment, helping net revenues increase by 6% over the quarter and 5% over the full year.
Europe Remains A Worry
Europe, on the other hand, has proved to be a major drag on the company’s top line in 2012. Volume sales from the region declined by 5% in the final quarter, with net revenues down by 6% for both Q4 and the full year. Sales of carbonated beverages in particular have taken a real beating in the region over 2012, with a double whammy of increased health awareness combining with weak consumer outlook due to uncertain economic conditions.
Stronger Operating Margin Boosts Earnings
The company’s bottom line, meanwhile, improved markedly – operating margin in Q4 2013 stood at over 19% in the final quarter compared to below 18% a year ago. Moreover, this was achieved despite a general increase in commodity prices – gross margins for the quarter were actually lower by around one percentage point. The credit goes to lower selling, general & administration (SG&A) expense, which declined from 39.9% of total revenues in Q4 2011 to 38.6% in Q4 2012.
The Future Looks Promising
Coca-Cola’s latest results indicate that the company’s portfolio of beverages is wide enough to accommodate the changing tastes of consumers, especially in North America. Going forward, we expect Coca-Cola to continue in its dominant position in the North American beverage market, making up for losses in carbonated drinks through continued portfolio expansion in other categories. Meanwhile, Europe remains a worry, but we expect the company’s continued investments in emerging economies to dispel any major concerns surrounding a net sales slowdown in the next 2-3 years.
We estimate a $39 price for Coca-Cola, which we will soon revise based on the latest results.