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Coca-Cola’s current growth trajectory has some investors wondering if the company’s pricey stock is too expensive. (KEVIN LAMARQUE/REUTERS)
Coca-Cola’s current growth trajectory has some investors wondering if the company’s pricey stock is too expensive. (KEVIN LAMARQUE/REUTERS)

Beverages

Flat sales add to Coke’s challenges Add to ...

It is one of the world’s most recognized brands, and boasts investment guru Warren Buffett as its largest shareholder, but Coca-Cola Co.’s growth prospects are being questioned amid a slowing global economy and changing beverage tastes.

Shares of Atlanta-based Coca-Cola dropped by nearly 2 per cent on Tuesday after the world’s largest beverage company blamed unusually wet weather in North America in June and sluggish growth in markets such as China and Europe for disappointing results.

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The iconic soft drink maker is facing challenges on several fronts. Especially in the United States, it must deal with growing concern that sugary beverages may be a factor in obesity. Outside of the U.S., where 80 per cent of Coca-Cola’s products are sold, sales are flattening. Investors are asking if the company’s pricey stock is too expensive given the firm’s less than impressive growth trajectory.

On Tuesday, Coca-Cola reported a 4-per-cent drop in second-quarter profit and a 2.6-per-cent slide in revenue. Global sales volume grew at just 1 per cent, less than the 3.3 per cent average of four estimates compiled by Bloomberg.

“Some investors were bracing for a 2-per-cent volume growth, but 1 per cent appears to be worse than even a bear-case scenario,” Goldman Sachs analyst Judy Hong said in a note.

“[The] key question is whether volume softness is all macro and weather driven. … Investors are likely to demand more confidence around competition and obesity issues in [Coca-Cola’s] key markets.”

The company behind the Coca-Cola, Dr. Pepper and Dasani brands has diversified into tea and lower calorie beverages as consumers becoming increasingly health conscious and demand for full-calorie drinks dwindle.

Still, consumption is waning as the volume of sales in China remained little changed in the second quarter, while North American volumes dropped 1 per cent, the first decline in three years.

Coca-Cola chief executive officer Muhtar Kent said during a conference call Tuesday that the company was “not happy” with its performance, but urged investors to see the second quarter as “an anomaly” and not a “trend or a systemic issue.”

“There was a coming together of many events that usually don’t come together all the time,” he said.

Analysts say the company is well diversified worldwide and still boasts powerful brand appeal. Yet its latest performance is troublesome to investors, including Mr. Buffett, who owns a 9-per-cent stake. At Coca-Cola’s annual meeting in the spring, Mr. Buffett said he “wouldn’t think of selling” his shares, but also advised Mr. Kent not to let the company rest on its laurels.

Other investors are more cautious about the stock, especially given how expensive it is compared to some of its peers.

“It’s hard to justify buying a 17-to-18 times earnings vehicle when the market is trading at about 14 to 15 times,” said Paul Gardner, partner and portfolio manager at Avenue Investment Management. He sees the stock as too expensive given the company’s flattening revenue line. “If you are going to have 18 times earnings, you want some growth.”

While long-term holders such as Mr. Buffett may have benefited over the years, “you have to go forward and the world is evolving out of carbonated drinks,” Mr. Gardner said. “What’s the next 20 years going to be like? It’s going to be very challenging.”

Even Coke’s 2.8-per-cent dividend doesn’t seem that attractive. “The yield is good, but not great,” says Mr. Gardner.

Many analysts continue to believe in the stock, despite Coca-Cola’s rough quarter, in which profit fell to $2.68-billion (U.S.), or 59 cents a share, from $2.79-billion, or 61 cents, a year earlier. Excluding some items, profit was 63 cents a share, matching analysts’ estimates compiled by Bloomberg.

“They’ll just have to fight through this,” said Jack Russo, senior consumer analyst at Edward Jones, who has a “buy” rating on the stock. “While it’s a little bit of a miss in terms of what we expect from this company, this brand is very powerful.”

Morningstar Inc. left its $45-per-share “fair value” estimate intact.

“We believe the company’s long-term prospects look bright, and we view the current market price as an attractive entry point,” analyst Thomas Mullarkey said in a note.

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