by millionairemind » Mon Sep 15, 2008 8:53 am
Published September 15, 2008
Coca-Cola has lost some fizz
Analysts blame wrong strategy but welcome its recent China takeover
(NEW YORK) This has been the wrong summer to invest in dark liquids. Crude oil has plunged and so have shares of the soft drink maker Coca-Cola.
Coke's decline has captured less attention, but it seems to have much in common - beyond colour coordination - with crude's reversal of fortune.
The weakness in oil has been attributed to reduced expectations for growth in the global economy, especially emerging markets, and to the recovery in the US dollar. Both developments are considered bad for Coke, too, because three-fourths of its revenue originates overseas; lower growth could mean lower foreign sales, and weaker currencies cut the US dollar value of those sales.
The result is a stock that has lost about 15 per cent in the last six months, approximately double the loss of the broad market. What shareholders must find especially disheartening is that this is the sort of environment - a recession or something close to it - in which producers of consumer staples like Coke are supposed to display resilience.
Coca-Cola's troubles are not confined to the last few months, and they are not all caused by the unravelling of the global economic boom.
The recent agreement to pay US$2.5 billion for China Huiyuan Juice is a wise move. It chisels away at Coke's dependence on carbonated drinks and expands the company's presence in a huge, fast-growing economy.
Repeated missteps by senior management have made the stock a long-term underperformer. It is down about 20 per cent since the start of 1998, a period in which the Standard & Poor's 500-stock index has risen about 35 per cent.
Some investment advisers think shareholders have got what they deserved. Jim Huguet, a portfolio manager at Huguet Associates, has been a longstanding critic of Coke's management.
Rivals like PepsiCo were quick to catch the trend toward bottled water and sports drinks and positioned their companies to benefit, he said. Over the last decade, he said, Coke continued to rely heavily on carbonated drinks and paid a price in stagnant sales.
'They could have bought Gatorade, which was up for sale and which Pepsi bought,' Mr Huguet said. He called Pepsi 'a much more innovative company than Coca-Cola' and added: 'When you talk about innovative leaders, Coke doesn't pop to the top of the list.'
But even he concedes that the company has taken steps to move farther from the bottom. The recent agreement to pay US$2.5 billion for China Huiyuan Juice is a wise move, in his view, because it chisels away at Coke's dependence on carbonated drinks and expands the company's presence in a huge, fast-growing economy.
That opinion is widespread. John Faucher, who follows Coca-Cola for JPMorgan, called the deal 'a long-term strategic positive' in a note to the bank's clients and lauded the 'long-term growth opportunities and the potential for some manufacturing synergies'.
He cautioned, however, that some investors might worry that Coke would buy back fewer of its own shares in order to have cash for the acquisition.
Ken Gau, an analyst at Waddell & Reed, is another fan of the acquisition. He described the announcement as 'one of the first things we've seen out of them in a while that's encouraging for longer-term growth'.
Mr Gau joined Mr Huguet in criticising the decisions made by Coke's bosses during the last decade and the sense of aimlessness that it produced. But he tends to see the bottle as half full rather than nearly empty.
He commended the firm's chairman E Neville Isdell for overhauling top management - including himself, when he stepped down as chief executive in July, placing Muhtar Kent in the post - and for setting the company in a direction likely to improve growth well into the future. -- NYT
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch
Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.