Coca-Cola Set For Growth Going Forward As Investors Continue To Be Rewarded By The Stock

Summary

• Growth investments have started adding toward KO’s top-line and bottom-line numbers.
• Company’s efforts to get leaner cost base will support growth investments and earnings growth.
• KO’s shareholders will continue to enjoy healthy cash returns in the years ahead.

I reaffirm my bullish stance on The Coca-Cola Company (NYSE:KO); the company recently reported strong top-line and bottom-line results for 2Q'15. As a matter of fact, KO's strong global market presence is helping it effectively execute its growth initiatives, under its plan of making 2015 a "Transitional year". Therefore, the company's growth strategies, small bottle sizes but higher prices, attractive partnerships, increased global marketing campaigns and on-track multi-year costs saving plan will positively affect the stock price in future. And owing to its strong growth potentials, I believe the company's cash flows will remain reasonably strong to make healthy cash returns to shareholders through dividends and share repurchases.

Financial Highlights of 2Q'15

The company's strategic growth plans focused on growing its top-line numbers, combined with its attractive multi-year cost saving plans, strongly backed its 2Q'15 results. KO's healthy sales volumes increased its 2Q'15 organic sales by 4%. And despite a double-digit increase in advertisement spending during 2Q'15, the company's increased focus on controlling expense burden improved its operating margin by 50bps and grew its operating income by 6%. Moreover, KO's 2Q'15 net income increased by 20% year-over-year and resulted in an EPS of $0.71, which for the fourth consecutive quarter outpaced analyst estimates, as shown in the chart below.

Source: Nasdaq.com

Growth Drivers remain Intact
With its strong portfolio of globally recognized carbonated and non-carbonated brands, KO has a strong market position in the global beverage industry; the company is presently leading the global beverage industry, with the highest market share, as shown in the chart below.

Source: Staista.com

KO's has been taking aggressive measures to improve its financial performance and its idea of getting most out of transitional year 2015 is working very well. And given the fact that KO is planning to continue the execution of its growth-generating plans, well beyond 2015, I believe the company will remain an impressive growth story in the years ahead.

Packaging Initiatives

One of the most important and intelligent strategic growth initiatives taken by KO, during the first half of 2015, was changing its packaging strategy; under its new packaging strategy, the company increased focus on selling reduced can sizes in the U.S. KO's initiative of selling mini cans came in the wake of increasing healthcare concerns, which shifted people away from carbonated soft drinks to other healthy drinking options. This new packaging strategy seems to have paid off well during 2Q'15; volume of its mini cans witnessed adouble-digit growth during the quarter. Along with the packaging strategy, KO's plan of benefiting from its strong brand positioning by raising prices on its traditional 12-ounce cans added well towards the company's North American region's revenue and profitability base. In fact, KO's North American net revenue and profit figure improved by 3% and 7%, respectively, during 2Q'15. Given this success of disciplined pricing and the reduced packaging strategy, the company is planning to continue with these initiatives in the years ahead, which I believe will keep KO on a growth track.

Partnerships

Along with its attractive pricing policies and intelligent packaging changes, the company has also accelerated its efforts to make intelligent strategic acquisitions. The company's partnerships with Monster Beverages (NASDAQ:MNST) and Keurig (NASDAQ:GMCR) have been positively affecting KO's top-line numbers; KO reported that the distribution of MNST's beverages has added a one-percentage point to its North American sales volume base, year-to-date in 2015.Also, the company is eyeing to acquire Chinese multi-grain drink producer Culiangwang Beverages Holding Limited for $400 million. The company's partnerships and acquisition will allow it to improve its competitive position among other energy drink producers, which will portend well for its long-term growth.

Accelerated Marketing Spending

In its efforts to improve its sales volume, KO has adopted an aggressive marketing strategy. In this regard, the company's globally launched "Share a Coke" campaign has been doing pretty well in gaining volume and revenue growth. In fact, in China, KO's Coca-Cola Break consumer promotion has also seen an impressive customer response. As a matter of fact, both Share a Coke and Coca-Cola Break campaigns have helped the company gain double-digitvolume gains for its flagship Coca-Cola brand in China during 2Q'15. Moving ahead, as KO remains focused on gaining more customers through its successful marketing campaigns, I believe that both the company's global market share and overall revenues will grow at a healthy pace in future.

Slashing Cost

In its efforts improve its cost structure and back its growth investments, KO has designed an attractive costs saving plan. Under this plan, the company is actively saving cost by managing its supply chain network. Thus far, KO has consolidated around three distribution centers and has closed one in North America. Moreover, KO's plan to create an efficient system by refranchising most of its company-owned bottling territories is also on-track. Owing to these on course cost saving plans, I believe the company is rightly headed to attaining its management's anticipated annualized costs savings of around $3 billion, least by 2019, which will positively affect its bottom-line growth.

Investors Remain Rewarded At KO

The company has been regularly returning healthy portions of its cash flows to shareholders in the form of dividends and share repurchases. During the first half of 2015, around $3.8 billion of cash has been returned in the form of dividends and share repurchases. In fact, KO currently offers an attractive dividend yield of 3.23%. Moving ahead, as KO continues with its attractive growth plans, I believe that its cash flow productivity will improve, which will support its cash return policy. The company has announced that around $2 to $2.5 billion worth of common shares will be repurchased during 2015, which will better KO's future EPS and will positively grow its ROE.

Risks

One of the major risks faced by the company is from declining sales of its diet coke brand; during 2Q'15, global diet coke sales volume decreased by 7%. Moreover, a stronger dollar will remain an overhang on sales and earnings growth of the company. Furthermore, KO will continue to face increased competitive headwinds from innovative product launches of its major competitor, PepsiCo (NYSE:PEP). In addition, unforeseen negative economic changes and changing consumer preferences are key risks that might hamper the company's future stock price performance.

Conclusion

KO's regular growth investments to enhance and improve its product portfolio, regular price hikes and increased advertising activity are rightly headed to make 2015 a transitional year for the company. Although these growth investments have started adding toward KO's top-line and bottom-line numbers, I believe the full impact of these efforts will be reflected in 2016 and beyond. In addition, the company's efforts to get a leaner cost base are rightly headed to support its growth investments and will support its earnings growth. Owing to strong growth potentials of KO's strategic growth plans, I believe the company's shareholders will continue to enjoy healthy cash returns in the years ahead. Also, analysts have projected a healthy next five-years growth rate of 6.7% for KO, as shown below. Due to the aforementioned factors, I am bullish on KO.

Source: Nasdaq.com