Sales Growth Is Bullish for KO Stock
The verdict is in: while it may be true that The Coca-Cola Co. (NYSE:KO) hasn’t been the best-performing company this year, much of this can be attributed to wider global economic volatility and a surging U.S. dollar. But not all is lost, because there are quite a few positive indicators that may combine to give strong uplift to the KO stock price next year.
The rate at which Coca-Cola’s earnings have grown this year has admittedly not been great, so it’s quite understandable that investors aren’t making KO stock part of their investment portfolio. However, you might be surprised to know that there has never been a more opportune time to take another look at Coca-Cola stock. You see, when the going gets tough, you can rest assured that it will be the strong companies with solid growth plans, such as Coca-Cola, that will manage to turn the situation around to their benefit. Don’t believe me? Let me explain.
Here’s Coca-Cola’s One Big Advantage
There are quite a few other companies without the perseverance or financial resources to get through the rough times. But it’s the legacy stocks like Coca-Cola that have the knowledge and experience to capitalize on sector-wide declines that, time and again, come out with a larger market share than they began with.
Some of the ongoing downturn for the company is simply outside of Coca-Cola’s hands. You see, the world’s soft drink industry has hit a bit of slump these last few years and stemming from their market shares, big players like Coca-Cola are quite predictably feeling the largest loss in their bottom lines as a direct result.
Despite a fall in overall revenue streams, Coca-Cola has demonstrated no sign that the company is feeling any sort of financial pressure. Far from being in dire straights, Coke has indeed allocated the same amount of money to its international marketing and investment efforts over the last six financial quarters. Now that’s what I call consistency.
It drives the point home that Coca-Cola is in the driver’s seat when it comes to what direction the company is going. And the company is also proving capable of taking advantage of broader economic trends.
The company’s management team has decided that the current rise in the value of the U.S. dollar, with the indirect negative effects it has had on the company’s bottom line, is simply a temporary issue. Coca-Cola has instead focused on more long-term, growth-oriented projects and developments.
Now, when the greenback does finally drop in value relative to international currencies, it’s the companies with huge international operation chains like Coca-Cola that will be reaping massive gains as a result of these currency shifts alone. Now, as I discussed above, wider industry slumps and global economic instability are both disasters and opportunities for the biggest global companies. They tend to grow over the long-term and when they play their cards right, quite frequently, they come out stronger after an industry downturn.
OK, so it’s a given that soft drinks have been slowly but surely losing ground in the U.S. and Canada over the last 10 years or so. This is mostly due to consumers being more health-conscious and the trend towards avoiding high-sugar beverages in favor of less calorie-rich drinks. (Source: “The Decline of ‘Big Soda’,” The New York Times, October 2, 2015.)
But this downturn is more pronounced than most people realize. You might be surprised to find out that between 2013 and 2014, carbonated beverages declined by one percent. And the trend away from the carbonated stuff and toward still beverages has been even more accelerated in Europe, where still beverages saw a solid 12% growth rate in the last quarter. (Source: “Soft drink sales hit a decade of decline,” CNBC, March 26, 2015.)
Translation? Citizens in the Western world are shunning sugary soft drinks in ever-growing numbers, but this is not a trend that is easy or even likely reversible. Accepting that fact and moving on with a better growth strategy is where Coca-Cola excels, however.
How can a huge multinational company such as Coca-Cola, whose flagship product is a sugary carbonated beverage, keep up with this trend, though? The answer is simple, really: Coca-Cola is following a plan to expand into the still drinks market niche, with ongoing strategies to sell more health-conscious choices.
In fact, the company owns extensive holdings in juice, coffee, tea, and energy drinks already, so this really isn’t much of a stretch. Of course, carbonated soft drinks comprise approximately 70% of overall revenue for the company, but it comes as no surprise that its leadership has made the strategic decision to hedge against the rise of non-carbonated still drinks. (Source: “Coca-Cola Boosted by Sales of Tea, Bottled Water,” The Wall Street Journal, July 22, 2015.)
But the company is not staying idle in hopes of a reversal in market fortunes. Coca-Cola is maintaining robust investment and marketing efforts by offsetting the financial losses incurred in total global sales by implementing expense-cutting policies. Coca-Cola forecasts it will be able to trim more than $3.0 billion in expenses, which will effectively result in growing productivity savings by the year 2019. (Source: “Why $3 Billion Is The Most Important Number Underlying Coke’s Q2 Earnings Report,” Forbes, July 22, 2015.)
The company aims to do this by utilizing a combination of system standardization and cost allocation, in addition to various supply chain optimization methods. The biggest potential savings for Coca-Cola, though, might stem from another direction: the refranchising of its bottling operations.
What most people don’t seem to know is that Coca-Cola’s bottling activities are a significantly capital-intensive portion of the company’s overall business and they have constantly put negative pressure on the company’s overall profit margins. This latest move to refranchise its bottling segment could go a long way toward offsetting those costs.
Coca-Cola and Expansion in Emerging Economies in 2016
A smart investor will take care to never forget Coca-Cola is, by far, the largest player in a soaring global sector. Carbonated soft drinks, the largest beverage segment in the world, is estimated to experience huge growth over the next 20 years. This will primarily stem from rising per-capita and family income in many new emerging economies. (Source: “Opinion: Building and Securing Trust in Asia,” Coca-Cola Journey web site, April 21, 2015.)
China and India are expected to supply the bulk of this growth, with the two countries’ growing populations and, in turn, their purchasing power set to drive up demand for Coca-Cola’s products. With China and India’s huge populations, which account for roughly a third of the Earth’s people, it’s important to note that even slight growth could result in huge gains in the KO stock price.
The Bottom Line on KO Stock
When it comes to the Coca-Cola stock price forecast, all signs point to the KO stock price soaring in 2016 and beyond. In spite of some significant headwinds the company is facing in the near-term, such as growing health-consciousness and rising production expenses resulting from a rising U.S. dollar, Coca-Cola’s sales volumes will rise at a steady pace.
The ongoing societal transition towards healthier drinks, which will likely require acquiring smaller manufacturers, does potentially signal a slowdown in Coca-Cola’s revenue growth. However, this headwind will be offset by rising sales of healthy beverages, such as the ones outlined above.
The most important point to take away from this article is Coca-Cola’s growth potential in its Asian markets, where even slight growth in its market share could generate a massive increase in sales. That’s why I’m bullish on the Coca-Cola stock price forecast into 2016 and well beyond.