STOCK WATCH


Coke Is It -- Once Again

Bob Frick

A renewed marketing push is lifting sales in key countries. And after years of languishing, the beverage giant's stock is waking up.



Wall Street's reaction was predictably flat when Coca-Cola released its second-quarter results July 17. Though sales rose 19% from a year earlier, shares of the world's largest beverage seller dropped to $53.17 a share, down 68 cents. The Street's questionable short-term thinking is even more glaring when you consider how far Coke (symbol KO) has come in the past year and how bright its prospects are.

To be fair, profits only inched up, to $1.85 billion, or 80 cents a share, versus $1.84 billion, or 78 cents a share, a year earlier. The 2007 second-quarter earnings per share reflect a five-cent charge for restructuring costs.

But look at the progress Coke has made. In late 2004, the stock languished in the high $30s and only recently did it finally surpass the $53 level it reached five years ago. Much credit for the revitalization goes to Neville Isdell, who had retired from Coke after working 40 years all over the world and was offered the top job in 2004 when the company's board of directors, frustrated by other CEOs' failures, came knocking on his door in Barbados. Isdell, an Irishman who originally joined Coke in Africa, found a spiritual malaise at the company refocused the business on what it does best: selling carbonated sugar (and sugar-free) water worldwide.

While growth is expected mainly from the company's non-carbonated beverages, such as fruit juices and sports drinks, 80% of sales is still Coke, Diet Coke, Sprite and the like. Fizzy beverages need extra marketing these days, given the obesity epidemic in the U.S. But if there's one thing Coke knows how to do, it's peddle liquids. Consider that in just eight short years it made Dasani water and flavored water ubiquitous in vending machines. This is true although Dasani is simply municipal water run through a filter and enhanced with trace amounts of minerals that cost less to add than the label on the bottle.

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Coke's renewed marketing push has it beating sales estimates in important countries, including Japan and India. And its North American sales should get a boost soon from non-carbonated beverages. Coke recently bought Vitaminwater maker Glaceau, and its strong sales could improve the bottom line later this year.

The long-term looks healthy. Goldman Sachs analyst Judy Hong predicts Coke could beat analysts' earnings estimates over the next several years -- estimates that aren't that shabby. The consensus for 2007 is $2.59 per share, and $2.88 for 2008. That puts Coke sales at a price-to-earnings ratio of 18 for 2008 earnings, far less than its ratio during the glory days of the 1980s and 1990s. It's a cheap price for a sleeping giant that has the best-known brand in the world and sales momentum that may just be taking off.

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