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Coca-Cola Company: New Asset-Light Model Leads to Higher Margins

Coca-Cola Company (KO ) is one of the most iconic brands in the entire world and is the current leader in non-alcoholic beverages. Coca-Cola was originally created in 1888 by Atlanta pharmacist, Dr. John S. Pemberton, whose goal it was to create a distinctive tasting soft drink that could be sold at soda fountains. Today, Coca-Cola Company has $21 billion brands and currently maintains over 50% market share of sparkling soft drinks.

On a year-to-date basis, Coca-Cola has not had the start it hoped for in 2018 and is down 4.12%. The same goes for the company on a longer-term basis, with a rolling one-year return of negative 1.72% and five-year return of only 8.64%. As a comparison, PepsiCo Inc. (PEP ) has always been Coke’s clear competitor. On a year-to-date basis, PEP is down much more at 9.27%. It also has performed much worse than KO over the longer term, with negative returns of 5.75% for the trailing one-year. However, for the five-year return, Pepsi has done much better with a return of 34.77%.

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Coca-Cola Company Stock Chart


From a revenue perspective, Coca-Cola has really struggled, which was one of the reasons why there was a change made at the CEO level last year. Over the last five years, Coca-Cola has seen a negative 5.9% revenue growth rate. In fact, there has not been positive growth in its revenue since 2013. Last year in 2017, Coca-Cola had one of its worst years ever, with $35.4 billion in revenues equalling a decline of 15.4% from the year prior. However, both 2017 and the last few years of revenue declines are attributed to Coca-Cola’s ongoing refranchising of bottling territories. In the first quarter of 2018, Coke came in higher than expected at $7.62 billion versus the estimate of $7.34 billion but was 16% lower than the first quarter of 2017. However, management stated that sales surpassed expectations because the decline was anticipated as the company worked on refranchising its bottling operations. For the remainder of 2018, analysts expect revenues will continue to drop off as Coke sells off its bottling franchises, equalling a total of $31.82 billion. However, 2018 looks to be the year when Coke’s revenues bottom out as analysts expect revenues of $32.95 billion in 2019.

On an earnings-per-share basis, Coca-Cola looks worse with a negative five-year growth rate of 32.8%. However, most of this is attributed to the negative fourth-quarter earnings of $0.65 per share, causing 2017 to total $0.29 per share, a drop-off of over 80%. However, this was purely caused by the Tax Reform Act that resulted in a one-time repatriation charge of $3.6 billion. However, the estimated tax rate for 2018 dropped from 26% to 21%. This was substantiated by Coke’s 2018 first-quarter earnings that beat estimates at $0.32 per share. For 2018 in total, analysts see Coke’s plans to maximize its margins with an estimate of $1.91 per share, equal to a 147% increase and its highest measure since 2013. The same goes with 2019, where analysts predict Coke to break the $2.00 mark with an earnings-per-share estimate of $2.02 per share.


In May 2017, Coca-Cola hired its new CEO James Quincey who had one focus: to lead Coke’s robust history into the future. As such, Coke has seen some major fundamental changes in its operations and has shifted focus to an asset-light model.

Previously, Coca-Cola owned its bottling distributing plants but has recently shifted to a franchise-owned model instead. Since than, Coke has completed the transitions in North America, Europe and China and is expected to complete Africa during 2018. This shift has helped Coke to focus on its core business, which now contributes more than 90% of the company’s net revenues. Previously in 2015, Coke made 52% of its total revenues from its bottling segment but as of 2017, it only represents 9%. Coke’s total employees also dropped significantly in its bottling segment, dropping from over 103,000 in 2015 to around 19,000 today. With this change, Coke has only seen a modest drop-off in revenues, which was expected. But with the drop-off, operating margin has increased from 3.75% in 2015 to 26.9% in 2017.

Coca-Cola Investor Overview

Although Coca-Cola has been around for 130 years, the company knows that it needs to adapt to the times to survive the future. The first step is that Coke shifted its portfolio to a category cluster model, versus the old ‘Sparkling and Stills’ model. Coke broke down its divisions into five separate categories: Sparkling; Energy; Juice, Dairy & Plant; Hydration; and Tea & Coffee. Sparkling remains the clear leader with over 50% market share, with the remaining segments ranging from 10% to 15%.

In addition to its segmentation, Coke has taken action to reduce the amount of sugar in its products, which is in support of the World Health Organization’s added sugar guidelines of 10% limit of total caloric intake per day. Coca-Cola Zero Sugar was successfully rolled out in 2017 as a prime example. Another initiative is that Coke is working to reformulate its Fanta and Sprite beverages to have 30% less sugar.

Growth Catalyst

For Coca-Cola, the growth drivers come from its segments outside of Sparkling, wherein it can benefit by increasing its market share. In the battle of Coke versus Pepsi, Coke has always been the clear leader from the market share perspective.

However, the market share for carbonated soda beverages has been steadily dropping, with water now replacing soda as the leading beverage. With its other four segments, Coke has much more upside. The Juice, Dairy & Plant segment is expected to have a global industry retail value growth of $50 billion, of which Coke maintains less than 10% market share right now. Hydration is the next largest potential, worth $36 billion, of which Coca-Cola has nearly 15% share. Finally, Coke also has market share of 15% in both Energy and Tea & Coffee, which are worth $16 and $14 billion, respectively.

Dividend Analysis

Coca-Cola is one of the longest running companies to have consecutively increased its dividend, as shown by its 55-year track record that was started in 1963. The company has a current yield of 3.53%, which is higher than the yield average of the Best Beverages-Soft Drinks Dividend Stocks that is currently at 1.53%. Although the stock price has underperformed, shareholders were at least rewarded with a nice-sized dividend payment. Coke is also on a list of companies that have raised their dividend over 25 years in a row; to see the rest of the list, click here.

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The biggest risk to Coca-Cola is that the company cannot meet the demands of consumers. With health as a growing priority, Coca-Cola needs to find a way to innovate its product line before consumers move on to other brand names that do. Although Coke has a major focus on its segments outside of its Sparkling segment, most of the company’s revenues are still derived from it.

The Bottom Line

It looks like the new CEO has really turned the corner on Coca-Cola and has made the company much more efficient in terms of margins. The low-asset, high-margin model is looking to pay off, as Coke is finally projected to have earnings growth in 2018. With the stock already down, now is the time to buy before the stock starts having record-breaking quarterly earnings and revenue growth.

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