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Shares of Coca-Cola Co. (NYSE: KO) are down 4% in morning trading after the company reported earnings before the market opened on Tuesday.
Adjusted earnings for the fourth quarter came in at 46 cents per share, in line with analyst estimates. Revenues in the period were $11.04 billion, missing estimates of $11.3 billion.
The results were negatively impacted by currency fluctuations, but volume improvements and margins were less than the previous quarter.
In essence, it was a nondescript earnings report, but with shares trading for a healthy valuation investors chose to sell the stock after the news was released.
I’m not sure any of that really matters.
The real story for Coca-Cola is the recent deal it signed with Green Mountain Coffee Roasters (NASDAQ: GMCR). That deal to bring the hugely popular Coke brand to the home beverage market is a game changer, but the market is not acting as such.
Shares of Coke fizzled after the deal was announced. At the same time, Green Mountain shares exploded higher.
Why was there not a bigger boost for Coca-Cola? Perhaps it goes back to valuation.
Analysts expect Coke to grow profits by an anemic 6% in 2014. At current prices, shares trade for 17 times 2014 estimated earnings.
That sort of profit growth is not what excites investors. It also explains why the company would strike a deal with Green Mountain.
When you are a global brand like Coke, where are you going to grow?
The home market is a natural extension for the brand and opens up the potential to grow sales by a significant amount.
Investors’ immediate reaction to the Green Mountain deal suggests sales growth may be limited by sales losses elsewhere.
I think that reaction is overly pessimistic. A Coke drinker is a Coke drinker. The product is highly addictive. Being able to consume at home may have a negative impact on supermarket sales, but it also might mean that there will be more sales, given the simplicity of the home-delivery device.
If you examine the success of Green Mountain’s single-serve coffee machine, you will see that the market for coffee expanded – it did not contract.
I think the same thing will happen for Coke. The potential to reach new consumers with the home-delivery product is quite large.
Investors should be excited about that potential, but they are not.
Combined with earnings selling on Tuesday, I would look at Coke shares as being attractive at current levels. Add in the dividend and I think there is higher-than-market-return potential here.