The Dow’s Record Brings Coke Along for the Ride

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With the Dow Jones Industrials setting a record earlier in the week, I want to dip back in time a bit and look at one of its true bellwether stocks, Coca-Cola (NYSE:KO) who posted a 13% increase in profits this past quarter beating estimates by $0.01 but disappointed slightly on sales with its revenues increasing by just 3.8% to $11.46 billion.  Investors should be concerned with Coke’s gross profit margin falling below the 60% threshold after staying above for more than two years.  This may be a harbinger of a short lived rally for the Dow. 

The rise in the Coke’s sales was led by 9% growth worldwide in still-beverage volume — juices, mineral water, etc. — and 16% growth in ready-to-drink tea — Gold Peak, Honest Tea, for example.  On the other hand, North America and Europe disappointed in terms of volume growth; where the former posted just 1% increase, the latter fell by 5%. At this point the U.S. expansion is likely a domestic event that will have little effect beyond its borders – exports are booming – therefore soft consumer discretionary spending is worrying.

The Pacific group’s volume increased by 2% while Latin America (+5%) and Eurasia & Africa regions (+10%) were the real growth driver for volume. In essence, Coke is going strong in the emerging markets, its newer products having significant success, but the developed world is at best a challenging environment.

More recently, Coca-Cola announced that it was going to increase its quarterly dividends by 10% from $0.255 per share to $0.280 per share which will be paid on 1st April to all the shareholders who are on its books by 15th March.

Meanwhile, Coca-Cola’s biggest rival PepsiCo (NYSE:PEP) also posted quarterly results in which it topped analysts’ earnings estimate more comfortably but its net revenues declined. The company’s income increased by 16.9% to $1.66 billion ($1.06 per share) from the year-ago quarter.  Net revenues fell by 1% to $19.95 billion. The primary reason behind the fall in revenues was refranchising operations in China and Mexico.

PepsiCo Americas Food increased its net revenues by 3.5% but PepsiCo Americas Beverages reported a 4% drop in the same during the quarter. Net Revenues from Europe increased by 1% but fell by 13% in AMEA (Asia, Middle East and Africa) mainly due to structural changes largely coming from China.

Both companies are suffering from margin erosion as developed world tastes and habits are changing as both recession and lower discretionary income take its toll as well as lower overall ASP’s in emerging and frontier markets take on a greater share of total revenue.

Pepsi is in the midst of its turnaround plan that involves massive restructuring and an increase in advertising, so driving increased profits is a mark of efficient management. The company also raised its annual dividend to $2.27 per share and will spend $10 billion on stock repurchases over the next three years. This year, Pepsi will buyback $3 billion in shares and give $3.4 billion in dividends, a typical strategy for U.S. firms that need to reward both shareholders and fund managers by both producing yield and supporting the price via float shrinkage and strategic buying.

Coke is a major component of the Dow and with the index making all-time highs I like buying Coke for a medium term swing trade on a weekly close above $39.10.  Momentum alone will carry it back to the 2012 high at $40.67.  But if Coke cannot get through the $39.00 level the probability of a reversal looms large.  Coke has a high probability setup forming on the monthly chart which as of today’s close yields it an 88% chance of breaking through last month’s high at $39.06, establishing March as an outside bar and creating an opportunity for that trending move towards the August peak to occur.  Coke’s fundamentals are not great, but they are stronger than the Dow’s so with momentum on its side there’s a good opportunity for a solid low-risk return over the next few months provided it clears the current hurdle.

 

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