The good times, like the charismatic Roberto Goizueta, are gone. In our 1998 Coke Duel, where we first began to cope with Goizueta's passing, I was bearishly skeptical of successor Doug Ivester ("What's the difference between Ivester and an Investor? An N and an O! NO!"). I was right. It didn't work out and now the company has gone from one Doug to another. In April, Doug Daft takes over and the wordplay is just too obvious this time around.
But seriously, the problem is that running Coke is a lot like the beverage business itself. Sure, operations matter, but in an industry where only discernible pallets can tell one cola from another, image is everything. Absent that, all you're left with is caffeinated, carbonated corn syrup. Goizueta, Ivester, and Daft all came from strong operating backgrounds. However, Goizueta had what Ivester and Daft seem to lack -- a charmed relationship with investors and the analyst community.
Last year, when tainted Coke sickened hundreds of Belgians, Ivester proved rudderless. Daft, still three months away from the throne, has already upset Wall Street by projecting unrealistic expectations of 15-20% earnings per share growth.
As Goldman Sachs analyst Marc Cohen told The Wall Street Journal, Daft "is in danger of boxing himself into a corner; companies can't put out goals and routinely miss them and not lose credibility.''
It's not even April and the eventual CEO is already providing ammo for the pundits. Now, Goizueta wasn't exactly innocent of analyst alienation during his tenure. He often berated bearish prognosticators. He would single them out and either deny them access to certain functions or privately iron out the perceived differences. In the end, a Coke analyst during Goizueta's term feared losing out on optimism. Now, it's the other way around.
Why are Daft's projections so out of sync with reality? By recently raising the cost of Coke concentrate to bottlers, by 5-7%, one would expect margins to improve. However, Daft is basing his 15-20% bottom-line climb on an 8% surge in volume.
Shame. Europe is still shell-shocked over last year's contamination. West Coast juicer Odwalla <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ODWA)") else Response.Write("(Nasdaq: ODWA)") end if %> has yet to get over a 1996 E.coli bacteria outbreak in its apple juice. Most of Belgium's 200 victims were children. A tainted image goes beyond a recall.
Stateside, is there anybody out there who has made a New Year's resolution to down 8% more Coke this year? Another factor to consider is that these bottlers, who will have to pass on Coke's syrup price hike to the end user, will find it an even more competitive landscape.
If we put the bleak 1999 behind us (which is easier said than done) we still find an investment that has gone flat. With estimates pegged at $1.52 this year, is Coke really worth 44 times Y2K earnings? Two years ago the company earned $1.40 a share. Annualized, that is less than 5% bottom-line growth over the two-year period. A Coke where Goizueta was able to manipulate earnings through crafty trading in and out of bottlers consistently grew in the double-digits. Not anymore. "Always" is just not forever.
I imagine that Paul has pointed out what a great investment Coke has been through the years. If you were like Warren Buffett and picked up shares of Coke in 1988 at two times sales, bully for you. Unfortunately, we are nowhere near those levels now. If you want Coke at two times revenues then wait until Coke hits $15. It probably won't. That is why avoiding the stock altogether is your best alternative. We have uncertainty, both globally and at the helm itself. This is not the time to own Coke. Not at these dizzying multiples. Not with these clouded fundamentals.
Have you seen the new televised Coke ad? The one with the hideously uncatchy "Enjoy" jingle? When the company's ad chief bolted for the entertainment industry two years ago, he took a lot of the marketing magic with him it seems. Anyway, one of the ads finds extreme sport enthusiasts diving off a waterfall cliff and plucking out submerged Coke bottles. Cascading. Submerged. Is this the future of Coke? Like I said, I see symbolism in ad campaigns.
This Week's Duel
Related Links