This article is a continuation of our previous posting: Is Coca-Cola a Buy or should Investors Sell the Stock?
The biggest favorable catalysts that the Coca-Cola company has going in its favor are its solid portfolio of brands and the vast world-wide network of distributors that has allowed it to dominate the non-alcoholic beverage market in over 200 countries. Despite these, a growing consciousness in the developed world (especially in the U.S. and parts of Europe) over the unfavorable health effects of over-consuming carbonated drinks could cause a dampening impact on profits from these markets. These headwinds are more than compensated, however, by longer-term prospects of increased consumption in many of its other international markets.
A burgeoning middle class economy in countries like Brazil, Russia, India and China, is likely to prove extremely favorable for the Coca-Cola Company’s longer-term growth prospects. For instance, based on 2011 per-capita consumption statistics available for various Coca-Cola markets, average Coca-Cola product consumption in China is about 38 servings annually (up from around 8 in 1998), compared to 403 in the USA. This gives an indication of how much room there is for the Coca-Cola Company to grow in some of its emerging markets.
While the $12.3 billion deal to acquire the North American operations of bottler Coca-Cola Enterprises Inc in 2010 was a great strategic move, it increased KO's integration risk and exposed the company to pricing and supply risks associated with bottling commodities such as plastic resins and aluminum.
Coca-Cola depends on nearly 60% of its revenue to come from outside of the U.S. While diversity of operations is a positive thing, it could also harm near-term growth in areas such as Europe, where the current economic environment is not conducive to consumer discretionary spending. This factor could also be a catalyst for introducing geopolitical and currency-related risks into the Coca-Cola company earnings profile.