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Coca-Cola (NYSE: KO) has struggled to grow in recent years as shifting consumer preferences have gone against sugary sodas. The iconic beverage brand has had to transform itself, and recent earnings results have shown promising results. After five years of underperforming the broader market, Coca-Cola's stock price is up 7% year to date, ahead of the S&P 500's 3% return.
Let's weigh the pros and cons of the company's strategy to determine whether the stock is worth buying today.
Fighting headwinds
Coke's biggest problem in recent years has been the public's growing concern about sugar consumption. A few years ago, a survey by Nielsen Holdings found that 22% of Americans are reducing their sugar intake, while 52% said they are actively trying to avoid artificial sweeteners. The politicos are circling the wagons, as well, with the soda tax. These trends make it very difficult for Coke to grow revenue since soft drinks make up 69% of Coke's unit case volume.
Coke has been struggling with slowing revenue growth for a while. Around 2014, growth was slowing to the low single digits, which prompted management to initiate a new plan to get the company growing faster. This involved refranchising its bottling operations to effectively separate these low-margin businesses from Coke's financial statements, a move intended to improve margins and allow both entities to focus on what they do best.
Along the way, Coke made the strategic decision to become the "total beverage company." The company has expanded into juices, teas, energy drinks, and coffee. So far, the results are encouraging: Adjusted revenue growth slightly accelerated to about 5% this year.
Additionally, the refranchising of its bottling operations and other cost-saving efforts have paid off, with operating margin up 6 percentage points in the third quarter. Analysts expect Coke to grow earnings per share 8.9% in 2018 -- not bad at all for a company that has been around since 1886.
The only downside with management's total-beverage strategy is that non-soda products could put pressure on the company's margins over time. While energy drinks and coffee present growth opportunities for Coke, these markets are more competitive. Coke's highest-margin business is making Coca-Cola syrup, which it sells to its bottlers -- a business that makes up 51% of Coke's annual revenue.
The company has generated high returns on invested capital for decades because of the attractive economic characteristics of this core business. It's those high returns that prompted Warren Buffett to initially buy the stock in 1988; Buffett's Berkshire Hathaway is still a major shareholder to this day.