Global market leader in beverages, The Coca-Cola Company (NYSE:KO), is scheduled to announce its Q4 and full-year earnings on February 18. Marred by declining soda sales in developed markets, especially in the U.S., the company could derive meaningful growth from the fast growing sports drinks and bottled water segments of the U.S. liquid refreshment beverage (LRB) market. Geographically, Coca-Cola’s business could gain from increasing disposable incomes in emerging economies such as China and India, partially offset by unfavorable currency translations. Going forward, in addition to benefiting from budding beverage segments and growing economies, the company might also be able to revive sales of fizzy drinks after teaming up with Keurig Cold systems, owned by Green Mountain Coffee Roasters (NASDAQ:GMCR).
We estimate a $42 price for Coca-Cola, which is around 8% above the current market price.
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Diet Cola Slump Could Impede Growth Yet Again
According to our estimates, the flagship cola brands Coca-Cola and Diet Coke together form over 46% of the company’s valuation. Contracting carbonated soft drink (CSD) sales, especially in the core cola segment, could have a significant impact on Coca-Cola’s financials. The domestic CSD market declined for the ninth consecutive year in 2013, with unit sales in convenience stores (C-stores) declining by 1.42%.  What adds to Coca-Cola’s woes, apart from the constricting market size for fizzy drinks, is the declining demand for Diet Coke. Sales of Diet Coke in the U.S. reduced by ~1% year-on-year in 2012 by our estimates, and are expected to remain flat to negative in 2013 as well. Due to problems of bitter aftertastes and safety concerns regarding the artificial sweetener aspartame, diet sodas remained the most under-performing segment of the U.S. beverage industry in 2013. Sales of Diet Coke recovered by a mere 0.5% over 2012 in the U.S. C-stores last year.
However, Coca-Cola remains committed to its CSD business and hopes to revive its sales in the coming years. The company has already launched a low calorie drink “Coke Life” in Argentina, which uses a derivative of the artificial sweetener stevia (Reb M). Since stevia is considered safe, this drink has been a success in Argentina, resulting in a 5% growth in unit case volumes in the country through September 2013. The company has also hinted at the introduction of Coke Life in the U.S. this year, and looks to leverage the positive perception of stevia to spur sales of diet sugary drinks. Apart from using stevia-infused drinks, Coca-Cola aims to bring consumers back to CSDs by developing attractive packaging and increasing sampling programs of its cola drinks to drive trials and sales. In fact, as part of this development, the company plans to introduce a chill-activated can that will change color with varying temperatures. 
Growth In Sports Drinks Could Mean Bode For Coca-Cola
As consumers slowly shift from sugary drinks to healthier alternatives such as sports drinks, traditional cola-making companies have struggled to maintain their market share in the overall U.S. beverage industry. Unlike CSDs, where Coca-Cola has a formidable share of 42%, the company has a smaller 24% share in the sports drinks segment with its brand Powerade. Sports drinks is led by PepsiCo (NYSE:PEP)’s brand Gatorade, with an impressive market share of 74%. However, Powerade has munched into Gatorade’s market share in the last few years, fueled by the success of its diet variants. While G2 (low calorie Gatorade) has just 30 calories per 12 oz. serving, Powerade Zero and Zero Ion4 are calorie-free. Powerade’s diet offerings outperformed G2 in terms of revenue growth last year.
As consumers now demand sports drinks with high amounts of electrolytes but less carbohydrates and calories, most of the growth in this segment is expected to come from diet sports drinks. Although sports drinks constitute a small 5% of the U.S. beverage industry at present, we expect this segment to grow at a CAGR of 6.5% through 2018 to over 2 billion gallons. Sales of Powerade might also significantly increase as it is the official sports drink for the 2014 FIFA World Cup to be held in Brazil this year. Powerade’s market share rose from 17% in 2009 to 24% in 2012 (0.33 billion gallons), and if the brand is able to grab one-third of the sports drinks market by 2018, Coca-Cola could double its domestic sports drink volumes by our estimates.
Carbonated Water Bolsters Growth In Bottled Water
Coca-Cola’s brand Dasani has an 18% market share in the U.S. bottled water market, which comprises still water, sparkling water and jug/bulk water. Bottled water is expected to become the largest segment of the domestic LRB market by the end of this decade, toppling sales of CSDs. The company’s stronghold in this segment could somewhat offset the decline in its CSD volumes. We expect Coca-Cola to cap off a strong quarter in bottled water, gaining from the shift in market trends and rapid growth in this category. Dollar sales for the overall bottled water market increased by 3.4% year-on-year in the U.S. C-stores in the fiscal year ended November last year.
However, the company has a small 3% share in the fast growing sparkling water segment, with its brand Glaceau Fruitwater. Carbonated water is one of the main segments that are taking away market share from CSDs. As consumers look to keep the fizz but lose the sugar or aspartame, flavored sparkling water has seen a surge in sales. While retail sales in the still bottled water category remained flat in the fiscal year ended August 2013, retail sales of sparkling water rose by a whopping 33%, although accounting for only 10% of the bottled water market.  Going forward, Coca-Cola will look to strengthen its carbonated water portfolio to derive growth from this market.
Key International Markets Which Could Drive Growth
Unit case volumes grew by 16% in the Middle East and North Africa through September last year, owing to additional volumes brought in by Aujan Industries. Coca-Cola has a 50% stake in Aujan, which is one of the largest independent beverage companies in the Middle East and sells the popular juice brand Rani. Coca-Cola is expected to benefit from growth of Rani, which generated revenues of over $600 million in 2012. Elsewhere, Coca-Cola could also draw top line growth from its third largest market, China. Volumes in the country increased by 4% through September, mainly aided by strong sales of the juice brand Minute Maid and the bottled water brand Ice Dew. China’s juice market is expected to grow at a higher rate than the country’s GDP in the period of 2013-17, with a projected CAGR of 12.6%.  Minute Maid is the first billion dollar Coca-Cola brand to emerge out of China and is expected to drive growth for the company in the country.
Coca-Cola’s Keurig Deal Could Revolutionize Beverage Consumption
Green Mountain Coffee Roasters owns Keurig, which has already revolutionized the coffee business by introducing single-serve K-cups integrated with its brewers. Partnering with Coca-Cola, both companies will now develop Keurig Cold systems to produce cold beverages through at-home preparation. Coca-Cola’s entire beverage portfolio will be compatible with these Keurig systems and could possibly increase demand for cold drinks. The company hopes to increase the consumption rate of its avid customers because of the convenience of carrying sachets as opposed to bottles.Notes: