The Coca-Cola Company (KO): Don’t Miss Out on This Beverage Stock

After doing a great job in its first quarter, the beverage giant, The Coca-Cola Company (NYSE:KO), didn’t meet its revenue expectations in the second quarter. As soon as the company’s earnings were released, its share price fell by more than 1% in just a few hours. Before falling to $40.23 on July 16, Coke’s shares had appreciated more than 13% this year. Now, the big question is: Does this low price make Coke a buy?

Coca-Cola earnings

In the second quarter, Coke’s sales volume grew by 1%, which was lower than its expectations. The company posted earnings of $2.68 billion, or $0.59 per share, versus $2.79 billion, or $0.61 per share, last year. Excluding extraordinary items, The Coca-Cola Company (NYSE:KO) earned $0.63 per share.

Revenue slipped by 3% to $12.75 billion, missing expectations by $0.21 billion. Sales declined by 4% in Europe and 1% in North America, but were up 2% in South America, 2% in the Pacific, and 9% in Eurasia and Africa.

According to the company, Europe’s sluggish economic growth, Mexico’s inflation and a credit crunch in Brazil were the core reasons behind a lackluster quarter. Moreover, wet and cold weather in the U.S, flooding in central Europe, and an early monsoon in India didn’t help the cause either.

Going forward

According to Coke’s CEO, Muthar Kent, dull performance in the second quarter was a result of “confluence of events” that won’t happen again. Company’s CFO, Gary Fayard also said that they are expecting to see significant growth in the latter half of 2013. He further said that the company would meet its long term targets this year.

In the third quarter, analysts expect The Coca-Cola Company (NYSE:KO) to earn $0.55 per share on total revenue of $12.41 billion. For the full year, analysts’ expectations stand at $2.12 per share on $48.07 billion revenue.

Valuation

The Coca-Cola Company (NYSE:KO) is trading at a forward P/E (1yr) of 17.49 and yields a dividend of 2.70%. I’ll value Coke using an industry forward P/E (1yr) of 17.55. But, since I expect The Coca-Cola Company (NYSE:KO) to outperform its rivals in the future, I will value it using a premium of 15%. Hence, a forward P/E (1yr) of 20.1 would be used for its valuation.

Using 2014’s earnings estimates, I value The Coca-Cola Company (NYSE:KO) at $46. This shows that it’s an undervalued stock and has an upside potential of 14%.

Beverage industry’s major players

Coke’s biggest competitor, PepsiCo, Inc. (NYSE:PEP), has announced that it will be expanding itself in one of the fastest growing food segments – the U.S. yogurt market. This plan comes as part of company’s latest goal to triple its sales outside its mainstream drinks and chips.

In order to implement the plan successfully, PepsiCo, Inc. (NYSE:PEP) has gone into a strategic partnership with Theo Muller Group of Germany. In June, the Muller Quaker joint venture opened a yogurt manufacturing plant in New York. Pepsi’s strong marketing and distribution channel, combined with Muller’s expertise, is all set to grab a substantial market share in the U.S. PepsiCo, Inc. (NYSE:PEP) is trading at a forward P/E (1yr) of 17.61 and has a dividend yield of 2.70%. A mean recommendation of 2.2 on the sell side shows that it is one of the best buys in the beverage industry.