Thursday, July 22nd, 2010
By John Jannarone
It’s time for investors to reconsider a liquid diet.
Thanks to its larger emerging-markets exposure and higher-margin products, Coca-Cola historically has enjoyed a healthy premium to stodgier packaged-food makers such as Kelloggand General Mills. A year ago, Coke traded at 14.7 times 12-month forward earnings, compared with 11.6 times for the average packaged-food company, says Bill Pecoriello of Consumer Edge Research.
But Coke has been squeezed by worries over weak beverage sales and its pricey deal to buy the North American bottling business from Coca Cola Enterprises. The company now trades on a forward multiple of about 14 times, just a sliver above the average packaged-food company.
The convergence has gone too far. Coke still has advantages that should help restore its premium. One is a limited threat from private-label brands. For packaged foods like cereal, private label has gained share in recent years. Even though brand-name companies have cut prices in response, increased volumes haven’t been enough to offset the lower selling prices.
Coke, in contrast, has managed modest price increases in the mature North American market without sacrificing market share. The company said Wednesday that its second-quarter volumes in the region rose 2%, the first increase in many quarters.
And in the longer term, food products probably will remain tough to introduce in emerging markets where consumer tastes vary considerably. Coke, on the other hand, has successfully marketed its iconic drinks in more than 200 countries.
While Coke is unlikely to win back the sky-high multiple of the 1990s, its edge over food companies should give its shares some extra pop.
