Coca-Cola’s 2014 Results & Future Growth Plan

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  • Executive summary of Coca-Cola’s latest earnings release
  • Coca-Cola’s 5 step growth plan analyzed in detail
  • See why Coca-Cola is a favorite of The 8 Rules of Dividend Investing

Coca-Cola’s (KO) stock price was up around 3% yesterday. The company released its full year and fourth quarter earnings. This article gives an executive summary of the company’s 4th quarter results and discusses the company’s growth plan. The market has clearly responded favorably to Coca-Cola’s results and growth plan as evidenced by the surge in the company’s stock price this morning.

Coca-Cola has long been a favorite of The 8 Rules of Dividend Investing thanks to its near 3% dividend yield, extremely low stock price standard deviation, and 8.8% a year revenue per share growth over the last decade. The company’s full year 2014 results are examined below.

2014 Results – Executive Summary

Coca-Cola added 3 new brands to its stable of brands with $1 billion or more per year in sales. The new additions were Gold Peak TeaFUZE Tea, and Japan-centric I LOHAS Mineral Water. Coca-Cola has been focusing on building its non-soda brands. The addition of 3 new billion-dollar non-soda brands shows this strategy is working.

Global sparkling (carbonated – sodas) volume grew 1% in the quarter, and 1% for the full year. Global still (tea, water, juice, etc.) volume grew 2% in the quarter and 4% on the full year. Still beverage growth is outpacing sparkling beverage growth for Coca-Cola.

The company saw constant currency operating income grow 7% in the 4thquarter of 2014 versus the 4th quarter of 2013. The company’s constant-currency operating income growth was driven by volume increase from a double-digit increase in advertising spending. Slightly lower operating expenses also increased operating income for the company.

Coca-Cola reported adjusted EPS of $0.44 per share in the 4th quarter of 2014 versus $0.46 per share in the fourth quarter of 2013. The company has been negatively impacted by a strong U.S. dollar, which is hurting (on paper) the company’s results. The aforementioned 7% constant-currency operating income growth paints a better picture of true underlying growth for the company (before share repurchases).

Coca-Cola is a global business. The bullet points below show the company’s constant-currency operating income growth in each of its geographic segments for the full year 2014:

  • Eurasia & Africa: 14% Constant-currency operating income growth
  • Europe: 0% Constant-currency operating income growth
  • Latin America: 2% Constant-currency operating income growth
  • North America: 1% Constant-currency operating income growth
  • Asia Pacific: 4% Constant-currency operating income growth

Coca-Cola is stagnant in the developed nations of North America and Europe. The company is seeing its fastest growth in developing markets, especially in Africa and Eurasia.

Future Growth Plans

Coca-Cola’s stated growth goal is to generate high single-digit currency-neutral earnings-per-share growth. The company plans to accomplish this goal through 5 key initiatives. Each of the 5 key initiatives to drive high-single digit currency neutral earnings-per-share growth are discussed in the sections below. The 5 initiatives are:

  1. Simplify Operating Model
  2. Expand Productivity Program
  3. Focus on Great Brands & Strong Bottling Partners
  4. Target Investments that Leverage Global Strengths
  5. Provide Local Operations with Clear Goals

Simplify Operating Model

Coca-Cola will simplify its operating model by providing clear targets and goals to its employees. The goal is to empower individual employees at the local level. Coca-Cola is attempting to simplify its operations by refranchising the majority of its North American Bottlers by 2020.

Expand Productivity Program

Coca-Cola’s productivity program is targeting $3 billion in savings per year by 2019. The program is focusing on:

  • Restructuring the company’s global supply chain
  • Implementing zero based budgeting
  • Increasing discipline and efficiency in marketing

Coca-Cola’s marketing budget is expanding. The cost savings from the plan will come predominantly from operating improvements. We have already seen operating income rise in the fourth quarter of 2014 as a result of efficiency gains from the productivity program.

Focus on Great Brands & Strong Bottling Partners

As mentioned before, Coca-Cola plans to refranchise its North American bottling operations. The company is putting its trust in its bottling partners to decentralize operations.

Coca-Cola now has 20 brands that generate over $1 billion a year in revenue. This year, Gold Peak Tea, FUZE Tea, and I LOHAS joined the company’s other 17 billion dollar brands. Coca-Cola’s increased marketing spending this year shows that the company will continue to invest heavily to support its industry leading brand portfolio.

Target Investments that Leverage Global Strengths

Coca-Cola’s recent acquisition of several brands from Monster Beverage (including Peace Tea and Hubert’s Lemonade) show how Coca-Cola plans to make investments that leverage its global strengths. The company can acquire strong brands that are sold predominantly in one market and use its best-in-class supply chain to spread products around the globe.  In this way, it can rapidly increase sales of brands that perform well domestically and test them on a global scale.

Provide Local Operations with Clear Goals

In addition to zero cost budgeting, Coca-Cola is also restructuring its incentive program to drive growth. The company is including revenue growth as an incentive goal for its various divisions. This move should incentivize growth and give employees a clear goal as to what is expected of them and what they should focus on.

Final Thoughts

Coca-Cola is a high quality business with a long history of success. Coca-Cola is a Dividend Aristocrat thanks to its amazing 52 years of consecutive dividend increases.The company is undergoing a restructuring plan to maximize long-term growth.

As a result of this restructuring plan, constant-currency earnings-per-share growth is expected to be in the mid-single digits in 2015. Still, total shareholder return should reach the high single digits thanks to the company’s near 3% dividend yield. Patient investors will likely be rewarded as Coca-Cola’s growth picks up after 2015 thanks to its restructuring plans and continued growth in its expanding still beverage portfolio.

Disclosure: None.

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Joe Economy 9 years ago Member's comment

And if all this didn't convince you that KO is a good stock to buy, maybe our friend Mr. Buffet can? Quoting Warren Buffet in 1996: Companies such as Coca-Cola and Gillette might well be labeled "The Inevitables." Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years.... Indeed, their dominance will probably strengthen. Both companies have significantly expanded their already huge shares of market during the past ten years, and all signs point to their repeating that performance in the next decade.

Quoting Fool.com: Coca-Cola is a global powerhouse, employing about 700,000 people. It has 17 billion-dollar brands, such as Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, and Simply. In its own words, "Globally, we are the No. 1 provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks. Through the world's largest beverage distribution system, consumers in more than 200 countries enjoy our beverages at a rate of 1.9 billion servings a day." It certainly seems like a winner worth investing in.