Research Reports – Coke Classic Analysis – Barron’s Letter

AS APPEARED IN BARRON’S ON JANUARY 31, 1994

To the Editor:

In Barron’s annual Roundtable, John Neff called Coca-Cola "the Philip Morris of the year." Neff believes Coke’s earnings growth has come from price increases and that the stock has been over-promoted. He also states that Coke "consumption was not good, particularly in some of the foreign countries, because of price and cultural problems."

Coca-Cola increases prices only with inflation. Its earnings growth outpaces sales because of operating leverage, not price increases. Coke’s operating leverage comes from its bottlers. They bottle and distribute the soft drink, while Coke supplies the concentrate, which has a 75% margin. In the U.S., Coke’s operating income has more than doubled since 1986 without any price increases. Coke hasn’t had "cultural" problems; it generates about 80% of its operating income overseas in markets with diverse cultures.

There are few if any similarities between Coke and Philip Morris. In the U.S., a serving of Coca-Cola costs the same as it did in 1980,while the price of a pack of Marlboros has gone up almost fourfold in the same span. Soft-drink consumption is rising, cigarette consumption is declining. The market share of private-label soft drinks is 9% and has fallen from 13%, while private-label cigarettes hold 30% of their market and are growing rapidly.

Coke is no Philip Morris.

Manuel P. Asensio
Chairman
Asensio & Co.
New York City

Analysis

Coca-Cola Report