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Coca-Cola Co. had a pretty good financial crisis and then an excellent post-crisis recovery. The company's stock price peaked at $32 (U.S.) or so in prelapsarian 2006, and while the fall to $20 over the following year-and-a-half hurt, most big U.S. companies fared worse, and Coke's shares now sit at $40. Refreshing.
Thus it was somewhat of a surprise that the fizzy drink maker's latest quarterly numbers, released on Wednesday, were short on bubbles. Volume growth globally slowed to 1 per cent, against 4 per cent in the same quarter last year. Revenues fell slightly. Coke's shares fell a bit on the news and have now lost 5 per cent of their value over the past three months.
But the correct response from investors to this news is to ignore it. Any time Coke reports a weak quarter, some version of the debate about the future of sugar water in a health-conscious world breaks out. This always misses the point. Coke's long-term financial performance proves that it is a company that can manage change, and one that increases profits with grinding consistency. Rapid growth in Latin America and Asia has left North America, amazingly, as Coke's fourth most profitable market. Indeed, is it worrisome that the company's biggest pool of profits is now in Europe? So far, Coke has kept profits in the region steady – right through the recession. Focusing on a single year, let alone a single quarter, at a company like this would be bizarre.
Hence, it makes more sense for investors to ask whether now is the right time in the stock market cycle to own Coke. Those who are worried that the U.S. equity market is stretched and is set to roll over, in the style of 2008, may be reassured by Coke's valuation. The company's price-to-earnings ratio, using 10-year average earnings as the denominator, is lower now (at about 28 times) than it was back then (36 times or so at the peak). At neither point was it cheap. If the world goes to hell in a handbasket, though, would you rather own Coke or Yahoo on the same valuation?