Coca-Cola Sweetner Deal to Deliver Small Kick to Shares

The Coca Cola Company (NYSE:KO) is the world’s largest manufacturer, distributor, and marketer of non-alcoholic beverage concentrates and syrups and competes with companies like Pepsi (NYSE: PEP) and Dr. Pepper Snapple Group (NYSE:DPS). 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, which had less than 11% market share.

Coke relies heavily on its trademark Coke soft drink, which we estimate to account for nearly 27% of our $60.54 price estimate for Coke’s stock. On the other hand, Pepsi relies more on its Frito Lays and Gatorade brands, with the trademark Pepsi soft drink accounting for around 7% of our $67.28 price estimate for Pepsi’s stock.

Looking for the Perfect Sweetner

Beverage companies are racing to find new sweetners to drive growth in drinks other than their carbonated soft drinks (CSD) business, largely a consequence of increasing awareness on health issues. For example, in the US, the top soft drink companies have agreed to remove sweetened drinks like Coke, Pepsi and ice teas from schools. ^[1]

In order to make low calorie drinks taste better, soft drink makers led by Coke, Pepsi and Dr Pepper Snapple are experimenting with natural, low calorie sweetners and flavor enhancers. Earlier this year, PepsiCo signed a four-year deal with Senomyx Inc for the development of sweeteners, with Coca-Cola signing similar deal with Chromocell Corp earlier this week. Coke has kept its development plans confidential, but many believe that it is very close to reaching a break through like its competitors Pepsi and Dr Pepper Snapple. ^[2]

We believe that a successful sweetner substitute would lift Coke’s division that we classify to include Coke Zero, Sprite Zero, Barq & Other and accounts for 14% of our $60.54 price estimate for Coke’s stock. We estimate the revenues from this division will increase at an annual rate of 4.4% from around $4 billion in 2009 to $4.8 billion by 2013.

However, we expect that any major breakthroughs in sweeteners and flavor enhancers may lead to new product developments, which would drive revenues for this division. If the revenues from this segment doubled to near 10% growth in the coming years, this would add around 5% upside to our price estimate for Coke’s stock.

1. Bottlers Agree to a School Ban on Sweet Drinks [↩]
2. 3-Drink Makers Ready for Battle with New Sweeteners [↩]