Hot Stocks: Coca-Cola's Strong International Sales Serve Up Sparkling Third-Quarter Results

["Hot Stocks" is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the fourth installment of this ongoing investment series.]

By Jennifer Yousfi
Managing Editor
Money Morning

The Coca-Cola Co. (KO) yesterday  (Wednesday) reported a double-digit increase in third-quarter earnings – a showing that topped analyst estimates and muscled aside a global slowdown that tripped up its archrival.

Just one day after beverage nemesis PepsiCo. Inc. (PEP) posted a 9.6% decline in third-quarter earnings, announced 3,300 layoffs and said it's closing six plants, Coca-Cola posted a 14% increase in profit for the three months ended Sept. 26 – with strong international sales offsetting a weak domestic economy.

The upbeat results sent Coke shares up, even on a markedly down day for stocks. Coca-Cola stock hit a daily high of $47.33 yesterday, before closing at $44.21 – up 48 cents each and still good enough for a 1.1% gain on a day the Standard & Poor's 500 Index plunged 9.03%.

"We once again demonstrated our ability to perform consistently, delivering our eighth-consecutive quarter of double-digit comparable earnings growth, despite an incredibly challenging economic environment," said Muhtar Kent, president and chief executive officer, in a company statement.

Coca-Cola, the largest global soft drink maker, reported net income of $1.89 billion, or 81 cents per share, up from $1.65 billion, or 71 cents a share, for the same period the year before. The consensus analyst estimate was for Coke to earn 77 cents.

"The ongoing global slowdown is not yet evidenced in Coke's business," Deutsche Bank AG (DB) analyst Marc Greenberg wrote in a research note. However, Greenberg quipped, the report left him wondering "whether it was the last great quarter or if Coke runs the last great consumer staples business."

It could well be the latter. While it's true that beverage sales are declining in the United States – one of the problems that caused Pepsi to stumble, Coca-Cola's strong international presence more than makes up for it. On a volume basis, Coca-Cola sales increased 7% internationally, which more than offset a 2% domestic decline.

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Coca-Cola's strong marketing campaign, centered on the Beijing Summer Olympic Games, helped to boost sales. The Atlanta-based soft-drink maker rang up double-digit sales increases in such emerging markets as China, Turkey, India and Nigeria for the quarter, Reuters reported. The company also got a currency boost from a relatively weak U.S. greenback, which increases the value of non-dollar denominated sales.

Coca-Cola also has been more adept than its rivals at targeting key shifts in consumer taste. While its core soda brands – Coke, Diet Coke, Sprite and Fanta – saw a 3% global increase for the quarter, such other products as Minute Maid-brand juices and Glaceau vitaminwater experienced a 10% increase.

"We anticipate that the operating environment, especially in North America, will continue to be challenging as we finish 2008 and move into 2009," Kent, the CEO, said in the statement. "However, we have been diligent in taking the evolving landscape into account as we are planning for 2009, and believe that the solid fundamentals of our business, our strong balance sheet and cash generating capability, the experience of our management team and the strength of our brands will drive the business through these difficult economic times."

The 2008 third quarter was Coke's first with Kent at the helm. He took over on July 1 as president and CEO.

Kent worked his way up from his position as president of Coca-Cola International, and before that he was president of the company's North Asia, Eurasia and Middle East Group. So he may well be the perfect candidate to steer Coca-Cola through the current economic landscape in which emerging markets offer the best growth potential.

Coke shares have certainly taken some lumps this year, along with the rest of the market, as the blue-chip Dow Jones Industrial Average component is down 28% year-to-date. But the Dow itself is down more than 35% so far this year. And with Coke's strong results appearing to maintain the safety of its 38-cent quarterly dividend, some analysts believe it's time to take advantage of this international beverage powerhouse.

"There may be economic disruption in the near-term, but Coca-Cola always tends to come up on the other side of it in fairly decent shape," Greggory Warren, an analyst with Morningstar Inc. who recommends buying Coca-Cola shares under $50, said in an interview with Bloomberg News prior to the earnings release.

News and Related Story Links:

• Bloomberg News:
  Coca-Cola Profit Rises on Higher International Sales

• MarketWatch:
  International strength boosts Coca-Cola's profit

• Reuters:
  Coca-Cola profit tops view; shares rally

• Barron's:
  Futures Fade; JPM Still Excels, Pays Price; Coke & A Smile

• The Wall Street Journal:
  International Sales Boost Coca-Cola's Results

• Company Press Release:
  The Coca-Cola Company Reports Third Quarter And Year-To-Date 2008 Results

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