The Coca-Cola Co (NYSE:KO) is an iconic American brand that reaches across the globe. But Coca-Cola has suffered in recent years, as Americans have become more health-conscious, having concerns about excessive sugar and additives in their drinks. KO stock has largely remained in a trading range of $35.00–$45.00 for the last few years, as growth has slowed and investors don’t know what to make of the stock.
To battle those headwinds, Coca-Cola has diversified its portfolio beyond soft drinks, purchasing or creating new product lines such as energy drinks, water, fruit juices, and iced tea.
But there are other reasons to be bullish on KO stock. Let me explain why investors may want to take a closer look at Coca Cola.
Wide Economic Moat
When a company has an “economic moat,” they have a competitive advantage that is difficult to copy, creating a barrier to competition from other firms. Coca-Cola has this in spades.
Coca-Cola’s formula for its drink is patented, meaning there is no way another company will ever be able to replicate it. They can come close, but Coca-Cola will never have to worry about another company selling an identical product and stealing market share.
Even when Coca-Cola tried to tinker with its own formula, replacing its iconic drink with “New Coke,” loyal customers turned their back on the company and petitioned Coca-Cola to go back to the original formula—and it worked.
Also, the company’s brand name and image is so iconic that consumers are willing to pay a premium, even if there are cheaper, generic brands on the market, for the real thing. Coca-Cola has had 130 years of brand-building that is nearly impossible to match. The company’s drink has become synonymous with “coke.”
Coca-Cola’s economic moat alone also makes it an excellent defensive stock in volatile markets such as the one now.
New Product Lines and Smaller Sizes
Sales of Coca-Cola’s diet products have slumped in recent years. In Coca-Cola’s third quarter of 2015, the company reported that sales of “Diet Coke” dipped eight percent globally, while its namesake product grew one percent year-over-year. (Source: “3 reasons why Diet Coke sales will keep plunging,” Fortune, October 23, 2015.) That can be blamed on a consumer base that is starting to steer clear of drinks that have artificial sweeteners and preservatives.
To counter the trend, Coca-Cola recently introduced its “Coca-Cola Life” brand and is continuing to support smaller package sizes.
Coca-Cola Life only has 60 calories and is made with cane sugar and stevia leaf extract rather than the chemical sweeteners used in the diet products. Coca-Cola life was introduced in late 2014 and its part of a growing portfolio of beverages the company now offers sweetened with stevia.
The smaller package sizes Coca-Cola has been selling of late is also helping drive North American sales. In the company’s most recent earnings call, CFO Kathy Waller noted the following:
“North America delivered its strongest performance in three years, driving 4% top line growth for the full year. This shows that our strategic focus on driving consumption in smaller package sizes is continuing to pay off. In fact, for the full-year, purchase transactions grew 3%, outpacing 1% unit case volume growth, which means more people are reaching for a mini-can or an 8 oz. glass bottle than ever before.” (Source: “Edited Transcript of KO earnings conference call or presentation 9-Feb-16 2:00pm GMT,” Yahoo! Finance, February 9, 2016.)
Coca-Cola is accelerating its pace to re-franchise its bottling operations. In the company’s latest earnings call, Waller said that the company will be moving from a system where about 18% of the company’s volume was produced by company-owned bottlers in 2015 to about three percent.
Waller also said that the strategic initiative is important “as we align our system for future growth and get back to the historical model of The Coca-Cola Company as a brand-building company.” (Source: Ibid.)
The move helps Coca-Cola shift risk and expenses away from the company and allows it to focus on product development and marketing, rather than capital-intensive operations, such as logistics. Coca-Cola should also be able to improve its margins with this move.
The Bottom Line on KO Stock
With its wide economic moat, new product lines and smaller packages, and re-franchising efforts underway, KO stock should be able to break out of its narrow trading range it’s been stuck in for the last few years. Investors might want to take a closer look at Coca-Cola stock.