Negative sector outlook an incentive to buy
The main headline in the North American non-alcoholic beverage sector remains increased advocacy for healthy alternatives. This push, despite being significantly beneficial to consumers, has had far-reaching effects on The Coca-Cola Company (NYSE:KO)’s margins. For four of the past five quarters, Coca-Cola’s soda sales have plummeted in North America. Last quarter they fell 4% on a 1% slip in volumes.
Going forward, increased push for healthier alternatives is expected to hurt soda sales further. And as expected, a section of analysts have already started penning apocalyptic write-ups in this regard. This is good for The Coca-Cola Company (NYSE:KO). Increased negative sentiment will maintain the share price at the current relative lows, presenting a good entry point for investors who want to enjoy a little growth and sustained income.
Staying ahead of trends and competition strengthens long term outlook
How will The Coca-Cola Company (NYSE:KO) maintain its edge amid an increased negative sector outlook? It is already doing something. Coke Zero, its rebranded sugar-free alternative, is making notable headway. But that is not the half of it. In light of increased demand for bottled water and fruit drinks, Coca-Cola has stepped up marketing for Minute Maid and Dasani bottled water. Coca-Cola’s strong financial position relative to its competitors allows it to adapt more swiftly and effectively to changing industry trends.
In 2011, the State of California, through its Proposition 65 Law, ruled that levels of 4-MEI (the chemical that gives cola its distinctive brown chromaticity) in Pepsi and Coke warranted a cancer warning label on each soda sold in the state. While both PepsiCo, Inc. (NYSE:PEP) and Coca-Cola promised to follow through on reducing the levels of the carcinogen, only Coke seems to have significantly followed through. A recent study conducted by the Center for Environmental Health affirmed that 10 out of 10 samples of PepsiCo, Inc. (NYSE:PEP) products sold nationwide outside the state of California in June contained 4-MEI levels that were on average four to eight times the recommended safety thresholds in California. In stark contrast, 9 out of 10 Cokes sold in the same timeframe contained little or no traces of the carcinogen. This, coupled with many more examples, signals Coca-Cola’s ability to swiftly react to changing trends.
Peltz’s self-serving PepsiCo report win-win for Coca-Cola
In the near-term, The Coca-Cola Company (NYSE:KO) is set to gain from Nelson Peltz’s recent take on PepsiCo. Peltz, leader at Trian Fund Management, argues that PepsiCo should wind down its beverage business and take a more emphatic stance on the snack business; starting with acquiring Mondelez International Inc (NASDAQ:MDLZ).
Peltz’s intricate argument is spelled out in a 59 page manifesto where the main headline remains ‘pull out of the beverage business, Coca-Cola has won.’ Although Peltz has a lot to gain if PepsiCo, Inc. (NYSE:PEP) buys Mondelez International Inc (NASDAQ:MDLZ) (he owns significant shares in both companies), his argument is in some ways compelling. PepsiCo’s snack business represents close to 2/3 of its entire business. As it is, its beverage business, which has for the most part been all about catching up with Coca-Cola, doesn’t have that much of a solid future. And the fact that PepsiCo is siphoning capital from its beverage business to sustain the snack business only muddies the waters.
Mondelez International Inc (NASDAQ:MDLZ) presents a robust global distribution network and will be instrumental in offsetting any of PepsiCo’s risks or losses in the U.S. In 2012, Mondelez sales were well distributed in key markets across the globe; 39% in Europe, 20% in North America and 15% in the Asia Pacific and Latin America region. This is exactly what PepsiCo needs.
PepsiCo has however ignored the recommendation, maintaining that it’s not interested in Mondelez, which has languished after splitting off from Kraft Foods Group Inc (NASDAQ:KRFT). This move has only opened up speculation that The Coca-Cola Company (NYSE:KO) will move in for Mondelez.
If Coca-Cola moves in for Mondelez, the upside could be breathtaking – at the least. And if PepsiCo goes back on its decision and considers an acquisition, competition for Coca-Cola in the beverage industry will wane. Whichever way you look at it, it’s a win-win.
Conclusion
The Coca-Cola Company (NYSE:KO) remains one of those stocks that you can keep adding to your portfolio year in year out. Not only is its business easy to understand, but its wide moat means low risks and detailed predictability. Its ability to offer a great dividend even in the face of a harsh economic climate (slowing growth in China, Brazil’s credit crunch), is also a great bonus. It is a great long-term investment.
The article Missed the Coca-Cola Dip? There’s Still Time to Buy originally appeared on Fool.com and is written by Lennox Yieke.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Lennox is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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