Forget the Bears; KO Stock Is a Winner
It’s no secret that The Coca-Cola Company (NYSE:KO) has not shown exceptional performance this year, with general global economic instability and issues with a surging U.S. dollar being the main culprits. However, there are several positive factors that could very well provide strong uplift to the KO stock price in 2016. Let me explain.
Coca-Cola’s Huge Advantage
While many other companies lack the fortitude or financial resources to weather tough times, it’s the solid legacy stocks, such as Coca-Cola, that know how to capitalize on an industry downturn and come out with increased market share.
You see, the global soft drink and beverage industry has entered into a bit of a slump, with giants like Coca-Cola taking the biggest hit to their bottom lines as a result of their massive market shares. Despite declining revenue levels, Coke, in particular, has shown no indication of financial pressure, allocating the same level of financial resources to global marketing and investments in the last six quarters.
Coca-Cola’s management has correctly ascertained that the current surge in the value of the greenback, with the associated negative effects on the company’s bottom line, are a temporary affair, preferring instead to focus on long-term growth-oriented developments.
If and when the U.S. dollar does fall in value relative to other major global currencies, companies such as Coke, with massive international operations, will see huge gains from this currency movement alone. As I mentioned earlier, industry downturns and global volatility are points of opportunity for the international giants, which over the long-term, tend to come out stronger than before with increased market share.
Coca-Cola Stock: Likely to See Huge Gains in 2016 and Beyond
There’s no sense in denying the inescapable fact that soft drinks are slowly losing their popularity in North America. Over the last decade, health-conscious consumers continue to avoid sugary beverages and prefer less calorie-rich offerings. (Source: “The Decline of ‘Big Soda’,” The New York Times, October 2, 2015.)
But don’t take my word for it, because raw numbers don’t lie. Between 2013 and 2014, carbonated volumes declined by one percent. The trend towards still drinks (non-carbonated) is more pronounced in the European Union, where still drinks saw a robust 12% growth in the last quarter. (Source: “Soft drink sales hit a decade of decline,” CNBC, March 26, 2015.)
Translation: consumers in advanced economies are turning away from sugary drinks in increasing numbers and this is not a trend that is likely to be reversed.
So what’s a large multinational corporation like Coca-Cola, whose primary product is a sugary carbonated beverage, to do here? It’s simple: Coke is expanding into the still beverage market with plans to offer healthier choices. The company already owns extensive plays in juice, coffee, tea, and energy drinks. While carbonated soft drinks still make up roughly 70% of the company’s total revenue, it’s no surprise that its analysts have made the decision to hedge against the rise in popularity of non-carbonated drinks. (Source: “Coca-Cola Boosted by Sales of Tea, Bottled Water,” The Wall Street Journal, July 22, 2015.)
In the meantime, Coca-Cola is able to maintain strong marketing and investment levels by offsetting the loss in total global sales with expense-cutting measures. The company estimates it will be able to successfully save more than $3.0 billion in productivity savings yearly by 2019. (Source: “Why $3 Billion Is The Most Important Number Underlying Coke’s Q2 Earnings Report,” Forbes, July 22, 2015.)
Coke plans to achieve this using a combination of cost allocation and system standardization, as well as supply chain optimization. The highest potential savings, however, may come from an additional area, namely the refranchising of bottling activities. Many people don’t realize that Coke’s bottling is a substantially capital-intensive part of the company’s business model and has always placed downward pressure on profit margins.
Finally, investors shouldn’t forget that Coca-Cola is the biggest player in a surging global industry. The world’s beverage industry is, in fact, forecasted to experience extremely robust growth in the next two decades as a result of rising income levels in emerging economies. (Source: Coca-Cola, last accessed December 3, 2015.)
This is especially the case for China and India, where the soaring middle classes are driving up demand for Coca-Cola products. Given their massive populations, making up essentially a third of the world’s population, even modest growth, tempered by health concerns, will translate to big gains in the Coca-Cola stock price.
The Bottom Line on KO Stock
When all is said and done, there remains little doubt in my mind that Coca-Cola stock will show huge upside growth over the next few years. Despite some significant headwinds in the near-term, such as rising health concerns and surging production costs as a result of a rising greenback, global sales volumes continue to rise. With the shift towards healthier beverages, which will likely involve acquiring smaller manufacturers of juice and other still drinks, potential slowdowns in revenue growth will be offset by increased sales of healthy products.
But the biggest point to take away from this discussion is growth potential in Asia. Even relatively modest market share growth and per-capita consumption of Coke products will translate to huge sales increases. With the company maintaining marketing and investment efforts at full strength, it’s more than likely that the consumption of Coke products will soar in the coming years.
It’s for these reasons, among others, that I remain highly bullish on KO stock into 2016 and beyond.