Coca-Cola's Global Volumes Grow Despite Europe

Despite softness in Europe and a sizable foreign-exchange headwind,  Coca-Cola (KO) posted solid second-quarter results. Global volumes grew 4%, with sparkling beverage volumes increasing 2% and still beverages climbing 9%. During the quarter, reported revenues climbed 3%, but this was offset by 4 percentage points of negative foreign currency impact. On a currency-neutral basis, operating income increased 7%, and comparable earnings per share climbed 4% to $1.22. Although we are slightly lowering our 2012 estimates for Coke's revenues and earnings per share (due to foreign-exchange headwinds), we are raising our fair value estimate by a dollar to $74 per share, as the company's global volume growth continues to perform well. (Our fair value estimate does not adjust for the company's 2-for-1 stock split, which is expected to occur on or about August 10, 2012).

Coca-Cola's European segment posted lackluster results in the quarter with volumes falling 4%, roughly in line with the market, as lousy weather and continued economic uncertainty reduced consumers' propensity to purchase packaged beverages. Additionally, a strengthening dollar resulted in a 7% unfavorable currency impact for Coke's European operations, more than offsetting a 2% benefit from price/mix. Once again, Coca-Cola is sponsoring the Olympic Games, and we expect that the company will work diligently to spur sales in London during the third quarter, along with its partner Coca-Cola Enterprises (CCE), as the city hosts the summer games.

The Eurasia and Africa segment performed admirably in the quarter, with volumes growing 12% in the quarter (including 7 points of benefit from its Aujan acquisition), compared with 7% growth in the year-ago period. Growth was strongest in India, with volumes up 20%. In light of this strong growth and to better serve the Indian people, Coca-Cola and its local bottling partners announced a plan in June to invest an additional $3 billion in this high-growth market through 2020, bringing the total planned investment to $5 billion. From our perspective, additional gains in India will be an important driver if Coke is to achieve its 2020 vision to double systemwide sales. Volumes were also strong, increasing in the Middle East and North Africa (20%), South Africa (10%), and Russia (9%). Although concentrate sales climbed 9% and price/mix was a positive 7%, the segment experienced an 11% negative currency impact in the quarter, resulting in just 4% revenue growth and 6% operating income growth.

In North America, consumers' desire for sparkling beverages continued to fall and volumes in Coca-Cola's carbonated portfolio dropped by 2%. However, 5% pricing growth more than made up for this falling demand. Additionally, Coke's still beverage portfolio grew volumes 8%, thanks to strong demand for Powerade (+13%), Gold Peak tea (up double digits), and smartwater (up double digits). Longer term, we expect that the still category in North America will continue to grow at the expense of carbonated beverages. We believe that the tea category and energy drink category will likely post some of the strongest growth rates in America in the coming decade. While we continue to believe that Monster (MNST) could make a good strategic acquisition for Coca-Cola, we think that it may be some time before Coke contemplates such a deal. On April 30, Monster shares soared on rumors of a deal, only to come back down to earth after Coke denied that it was currently in talks with the energy-drink company.

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