Coca Cola (NYSE:KO) is a world leading international beverage company. KO controls almost 50% of worldwide beverage market by sales, equating to 1.9B servings of their product being sold each day. KO is currently in the middle of a huge transformation from selling mostly carbonated beverages, to selling still beverages and waters. Since 2006, KO has added 11 billion dollar brands to their portfolio, all of which were still beverages, and there are currently 15 additional brands in the pipeline generating retail sales between $500M to $1B. I will talk about how the future of KO will mainly be determine by the successful expansion of its still brands, and what this means for earnings going forward.
Many articles tend to focus on the historical success of big blue chips such as KO, but I intend to analyze the future growth drivers of KO. Up until now, carbonated beverages propelled KO to the top dog of the beverage industry, but undoubtedly, consumer tastes are changing. With each passing KO earnings report, the story seems to be the same: Carbonated beverages are experiencing anemic growth while still beverages are still growing at low-mid single digits. In fact, 14 out of 21 of KO's billion dollar brands are now owned by held by still beverages such as teas and waters.
So why does KO need to change their tune? Recently, there has been a lot of negative publicity surrounding carbonated beverages in the form of soda taxes. Just Google "soda tax" and you'll see that Philadelphia implemented one last year, and many other U.S. cities in California all the way to Massachusetts are considering taxing soda. What's a company like KO to do? Well, in addition to expanding still beverage options, they could also market smaller sized packaging for their carbonated beverages. Smaller sized beverages contain less calories and a higher profit margin for the company, a win-win.
Recently appointed CEO, James Quincy, has also stated that KO will move to offer a wider range of low to no calorie options for their customers' favorite brands. He also emphasized Coca Cola's "one brand" initiative. This initiative will work to re-shape how consumers view Coca Cola, whereby Coca Cola Classic, Coca Cola zero, sprite, etc will all have the same iconic brand image. This initiative may sound useless, but many consumers are now concerned not only with the caloric content of their beverages, but also the artificiality. Diet Coke and Coca Cola Zero have often been viewed as not consuming "the real thing", and consumers are reluctant to put full trust in those brands as they do with the Coca Cola Classic brand. The one brand initiative is working to change this stigma, and to be sure, the one brand initiative was tested in several pilot markets and led to higher sales of Coca Cola Zero, Diet Coke, and Coca Cola Life.
But How Much is Coca Cola worth Today?
To asses KO's fair value, I will use the discounted earnings per share valuation method and tweak my assumptions until I solve for KO's current price. KO is forecasted to earn $1.9 per share this year and if we assume these earnings will grow by 5.75% per year for the next 8 years, and then achieve terminal growth of 2.0%, we arrive at a fair value estimate of $43.69, right around the current stock price.
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