After a Contentious Proxy Season, Is Coca-Cola a Buy... or a Sell?

Coca-Cola has been in the news quite a bit lately, although it probably wishes that it wasn't. The company's board recommended issuing a large amount of stock to its management and employees, and its stockholders subsequently approved this at Coca-Cola's annual meeting. The action raised the ire of shareholder Wintergreen Advisors and even led to a rare abstaining vote from megashareholder Berkshire Hathaway, although CEO Warren Buffett chose not to publicly castigate the company.

Worse, Coca-Cola's share-issuance move comes on the heels of a tough period for its stock price, which has struggled to produce positive returns over the past twelve months. This situation has not been dissimilar to that of competitor PepsiCo , which has also had an acrimonious relationship with certain shareholders. So with Coca-Cola's management looking to capture a bigger share of the pie for itself, is the soda icon a good bet for investors?

What's the value?
Coca-Cola is one of the kings of the carbonated-beverage trade primarily through its world-recognized Coke brand, which brings in sales of $1 billion in each of 19 different countries. Unfortunately, growth in the carbonated-beverage business isn't what it used to be for Coca-Cola and this has led the company to diversify into the still-beverage segment, where it has leading brands like Minute Maid and Powerade in the fruit juice and sports drink categories, respectively.Coca-Cola's diversification, both in terms of product mix and geographies, has allowed it to maintain overall volume growth despite challenging conditions in certain markets.

In its latest fiscal year, the company reported fairly lackluster results that were highlighted by a 2% overall volume gain, which was hurt by flat-to-negative growth in its large North American and European markets. However, Coca-Cola did enjoy a slightly better average pricing environment during the period that allowed it to generate a healthy overall operating margin above 21%, despite huge marketing spending in preparation for this year's Winter Olympics and World Cup soccer events. The net result for Coca-Cola was continued strong operating cash flow that will help fund growth initiatives like its high-profile, strategic investment in Keurig Green Mountain. This investment will help speed up that company's roll-out of an at-home, cold beverage machine, expected sometime in 2015. 

Of course, PepsiCo hasn't been faring any better lately in the carbonated-beverage business, which is evidenced by negative volume growth in its large Americas and Europe beverage units during its latest fiscal year. The poor results, as well as the presence of activist investors on its shareholder rolls, has pushed the company into a multi-year cost savings program designed to save at least $3 billion over the next few years. Undoubtedly, PepsiCo hopes to emerge on the other side as a more profitable enterprise capable of driving growth through research and development investments, which include a focus on low-calorie and reduced-sugar offerings in the beverage arena.

A better way to go
Given the top-line and profit growth challenges at Coca-Cola, not to mention its seemingly anti-shareholder behavior, investors would probably find better returns with a beverage player that is finding growth in the current operating environment, like SodaStream . The company is the biggest fish in the at-home, carbonated beverage segment. This is a fast-growing area that has anecdotally benefited from rising consumer interest in healthier beverage offerings that avoid questionable ingredients, such as high-fructose corn syrup.

In its latest fiscal year, SodaStream posted another year of strong top-line growth with a 29% rise, thanks to strong sales volume increases for both its machines and related accessories. While the company's gross margin was negatively affected during the period by a strategic motivation to discount machine prices in a bid to further expand its market share, SodaStream remains profitable and net cash-flow positive and thus it has the flexibility to fund its capital expenditures internally without needing to leverage its balance sheet. More importantly, the investments that SodaStream is making today should create operating efficiencies down the road which will make it a more profitable enterprise and enhance its shareholder value.

The bottom line
Times are tough at Coca-Cola and management seems to believe that paying its employees more will help reinvigorate the company's growth, and only the passage of time will validate this position. While the company remains highly profitable, its path to growth will likely be a long and arduous trek, so this is only a good bet for those investors who are willing to hold for the very long run.

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Robert Hanley has no position in any stocks mentioned. The Motley Fool recommends BRK-B, GMCR, KO, PEP, and SODA. The Motley Fool owns shares of BRK-B, PEP, and SODA and has the following options: long January 2016 $37 calls on KO and short January 2016 $37 puts on KO. 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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