Can Coca-Cola Dominate the Dow and Outpace PepsiCo in 2014?


Coca-Cola and its stock's 12% rise so far this year have fallen short of expectations for 2013, looking particularly anemic against the 21% rises for both the Dow Jones Industrials and industry rival PepsiCo . For the first time in its long history, the soft-drink giant has had to deal with serious challenges to its namesake beverage, coming not from successful competitors but rather from health advocates and regulators. Moreover, with international growth having slowed, Coca-Cola faces the burden of restoring consumer confidence in its brand.

Investors aren't used to thinking about Coca-Cola as being vulnerable to changing consumer trends. For the most part, Coca-Cola's long-term strategy has used the stability of its world-renowned brand to stretch its boundaries and to add lucrative new products to an already-solid lineup. Now, the company has to deal with a threat to what has defined it as a company throughout its existence, and the fallout has huge implications for Coca-Cola, PepsiCo, and the rest of the soft-drink industry, as well as the Dow. Let's take a closer look at Coca-Cola's prospects for 2014.

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Source: Yahoo Finance.

Are Coca-Cola's growth prospects realistic?
Perhaps the most striking thing about Coca-Cola's stock right now is that despite its relatively poor performance and sluggish growth prospects, it still commands a premium earnings multiple. Perhaps because of their perception that the company has limited earnings-growth potential, analysts' target price for Coca-Cola represents only a 12% gain from current levels. Reaching those targets would only result in the stock price rising about $1 above its 2013 highs from last spring.

Coca-Cola will keep facing multiple issues that could hamper its ability to recover and compete more effectively against PepsiCo and its other beverage rivals. Opinion against sugary drinks has gotten extremely negative lately, with the American Heart Association recently publishing a study showing that sugar-sweetened drinks cause 180,000 deaths around the world annually. In response, more U.S. cities and states are considering special taxes on soft drinks in order to discourage consumption. Even some international governments are looking at similar measures in light of obesity concerns.

Coca-Cola can't rely on its carbonated diet drinks to pick up the slack. Consumers have lost confidence in assurances that artificial sweeteners like aspartame are healthy, reducing their consumption of diet beverages and putting pressure on both Coca-Cola and PepsiCo. Even efforts to use newer alternative sweeteners like stevia might end up failing if Coca-Cola can't convince customers that they're any more reliable from a health standpoint.

Most of these concerns affect PepsiCo as much as Coca-Cola. But Coca-Cola also has some disadvantages that its rival might be able to exploit. PepsiCo used the added leverage provided by its snack-foods division to poach a lucrative Coca-Cola customer, Buffalo Wild Wings, earlier this month. If PepsiCo continues to use the appeal of its popular snack product lines to boost its beverage business, it could spell disaster for the more-concentrated Coca-Cola.

In order to address all these concerns, Coca-Cola announced last week that it would restructure its North American operations. By dividing the region into two parts, Coca-Cola aims to return to its traditional separated structure between production of concentrates and bottling operations. North American bottling operations will report to Coke's Bottling Investments Group while Coca-Cola North America will retain the remainder of the beverage giant's business. As former Americas division President Steve Cahillane left the company as part of the restructuring, analysts now see returning Coca-Cola North America President Sandy Douglas as a potential successor to CEO Muhtar Kent in the future.

Coca-Cola's performance in 2014 both in absolute terms and in relation to the Dow and PepsiCo will depend on its ability to navigate all these issues successfully. By keeping its attention on its long-range vision while adapting its business to meet ongoing concerns, Coca-Cola has the potential to deliver strong results in 2014 and beyond.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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