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Coke could add life to your portfolio
Lots of stocks are vulnerable to the rising price of energy. But people will always need a drink -- which is one reason that Coca-Cola looks like a buy.
By Robert Walberg
Has your portfolio gone flat in the past few weeks amid fears of rising oil prices? If so, here's one way to add some fizz: Buy Coca-Cola (KO, news, msgs).
After several years of going nowhere, Coca-Cola shares are back on the rise. After last week's upgrade from UBS, the stock could continue to outperform the overall market for the rest of the year.
Coca-Cola stock is approaching its 52-week high of $45.88. A break above this ceiling would position shares for a run at the $53-to-$55 area, or 20% to 24% above current prices.
So what makes Coke the real thing now? For starters, the company should be relatively isolated from the negative economic effects of higher oil prices. Whereas consumers might cut back on autos, home improvement projects and even clothes, they are unlikely to reduce the amount of soda, water or fruit juice they drink. As oil prices continue to climb, look for more and more money to flow out of economically sensitive areas of the market and into the large consumer staples like Coca-Cola.
Teaching analysts to sing
Coca-Cola is also benefiting from improved execution, market share gains, management changes and a more favorable bottling environment. In fact, the company's better-than-expected operating margins and modest share gains in its water, sports drinks and juice markets enabled Coke to beat Street estimates in the second quarter.
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The company has now beaten analysts' projections in each of the last five quarters. Nothing makes Wall Street happier than a company that consistently hits or beats estimates. By improving its execution and by hitting or exceeding its targets, the company will continue to win converts from the analytical community. Note that shares jumped on news of the UBS upgrade. Considering that 10 of the 18 analysts following the stock rate it a hold or neutral, there could be a steady stream of upgrades in the offing.
But there's more to the Coca-Cola story than merely winning back fans on the Street. Coke is determined to win back consumers through new product launches and more effective marketing. The company took a big step in that direction several months ago when it named the seasoned Mary Minnick as president of marketing, strategy and innovation. Minnick played a pivotal role in growing Coca-Cola's business through new product launches in key markets such as Japan and China.
More than Zero
New products such as Coke Zero will also receive a boost from the company's more aggressive marketing campaign. Coca-Cola plans to spend up to 27% more in the second half of this year than it did last year promoting its image and its products. Combined with a competitive pricing structure, the marketing blitz should help the company revitalize the brand and gain share.
Finally, Coke is seeing strong growth in developing markets such as Africa and renewed growth in mature markets such as Germany, Japan and the U.S. Last year's tepid results won't be tough to beat, and there's no reason to think that the company won't continue to show growth for the foreseeable future.
Like any company, Coca-Cola has its concerns. Chief among them is the company's heavy reliance on carbonated beverages. Growth in the carbonated soft-drink market has slowed in recent years as consumers drink more juice, bottled water and sport drinks. However, Coke is finally adapting to the new climate, and future product launches and acquisitions should reflect management's more aggressive tone.
Another concern for shareholders has to be Coke's exposure to a rebounding dollar, as the company derives nearly 75% of its profits from overseas. On the plus side, as long as the Bush administration continues to pursue policies that result in rising budget and current account deficits, the dollar is more apt to decline than rise. And much of the dollar risk to Coke's shares is already reflected in the price.
Overall, the concerns are relatively small compared to the positive changes taking place at Coca-Cola. With the stock already trading at a discount to the market (based on forward-looking earnings estimates for fiscal years 2005 and 2006) and to its historic norm, there should plenty of upside room in the stock. Toss in a nice dividend yield of 2.5%, strong cash flow and a return on equity of 29%, and this consumer giant could provide a giant safety net to investors in what could be a hazardous market.
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