By Jennifer Yousfi
Managing Editor
Money Morning

The Coca-Cola Co. (KO) yesterday  (Wednesday) reported a double-digit increase in third-quarter earnings – a showing that topped analyst estimates and muscled aside a global slowdown that tripped up its archrival.

Just one day after beverage nemesis PepsiCo. Inc. (PEP) posted a 9.6% decline in third-quarter earnings, announced 3,300 layoffs and said it’s closing six plants, Coca-Cola posted a 14% increase in profit for the three months ended Sept. 26 – with strong international sales offsetting a weak domestic economy.

The upbeat results sent Coke shares up, even on a markedly down day for stocks. Coca-Cola stock hit a daily high of $47.33 yesterday, before closing at $44.21 – up 48 cents each and still good enough for a 1.1% gain on a day the Standard & Poor’s 500 Index plunged 9.03%.

“We once again demonstrated our ability to perform consistently, delivering our eighth-consecutive quarter of double-digit comparable earnings growth, despite an incredibly challenging economic environment,” said Muhtar Kent, president and chief executive officer, in a company statement.

Coca-Cola, the largest global soft drink maker, reported net income of $1.89 billion, or 81 cents per share, up from $1.65 billion, or 71 cents a share, for the same period the year before. The consensus analyst estimate was for Coke to earn 77 cents.

“The ongoing global slowdown is not yet evidenced in Coke’s business,” Deutsche Bank AG (DB) analyst Marc Greenberg wrote in a research note. However, Greenberg quipped, the report left him wondering “whether it was the last great quarter or if Coke runs the last great consumer staples business.”

It could well be the latter. While it’s true that beverage sales are declining in the United States – one of the problems that caused Pepsi to stumble, Coca-Cola’s strong international presence more than makes up for it. On a volume basis, Coca-Cola sales increased 7% internationally, which more than offset a 2% domestic decline.

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Coca-Cola’s strong marketing campaign, centered on the Beijing Summer Olympic Games, helped to boost sales. The Atlanta-based soft-drink maker rang up double-digit sales increases in such emerging markets as China, Turkey, India and Nigeria for the quarter, Reuters reported. The company also got a currency boost from a relatively weak U.S. greenback, which increases the value of non-dollar denominated sales.

Coca-Cola also has been more adept than its rivals at targeting key shifts in consumer taste. While its core soda brands – Coke, Diet Coke, Sprite and Fanta – saw a 3% global increase for the quarter, such other products as Minute Maid-brand juices and Glaceau vitaminwater experienced a 10% increase.

“We anticipate that the operating environment, especially in North America, will continue to be challenging as we finish 2008 and move into 2009,” Kent, the CEO, said in the statement. “However, we have been diligent in taking the evolving landscape into account as we are planning for 2009, and believe that the solid fundamentals of our business, our strong balance sheet and cash generating capability, the experience of our management team and the strength of our brands will drive the business through these difficult economic times.”

The 2008 third quarter was Coke’s first with Kent at the helm. He took over on July 1 as president and CEO.

Kent worked his way up from his position as president of Coca-Cola International, and before that he was president of the company’s North Asia, Eurasia and Middle East Group. So he may well be the perfect candidate to steer Coca-Cola through the current economic landscape in which emerging markets offer the best growth potential.

Coke shares have certainly taken some lumps this year, along with the rest of the market, as the blue-chip Dow Jones Industrial Average component is down 28% year-to-date. But the Dow itself is down more than 35% so far this year. And with Coke’s strong results appearing to maintain the safety of its 38-cent quarterly dividend, some analysts believe it’s time to take advantage of this international beverage powerhouse.

“There may be economic disruption in the near-term, but Coca-Cola always tends to come up on the other side of it in fairly decent shape,” Greggory Warren, an analyst with Morningstar Inc. who recommends buying Coca-Cola shares under $50, said in an interview with Bloomberg News prior to the earnings release.

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The Coca-Cola Co. (KO) announced yesterday (Wednesday) that it will buy China Huiyuan Juice Group Ltd. for $2.3 billion (HK$17.9 billion) in an effort to diversify its presence in one of the world’s fastest-growing beverage markets. But the deal still requires government approval, which is anything but guaranteed.

Coca-Cola’s offer of $1.56 per share (HK$12.20) is more than triple China Huiyuan’s recent closing price of HK$4.14 a share. It is the company’s largest overseas acquisition to date, and the biggest foreign takeover of a Chinese company ever. The deal values Huiyuan at 46.6 times this year’s estimated earnings, according to Bloomberg data.

"It’s a sizeable offer, but certainly a very smart one," said Lou Basenese, editor of the Oxford Club’s Takeover Trader. "It’s better than building everything from ground zero. It’s a shortcut into a promising market."

By 2025, China’s middle-class is projected to exceed 600 million. That’s twice the size of the entire population of the United States. And a great many of those people will be drinking Huiyuan products.

Sales of fruit and vegetable juices in China will grow 16% to $12.3 billion this year alone, according to Euromonitor International, whereas carbonated beverage sales are only forecast to rise 7% to $7.94 billion.

That gives Huiyuan a decided advantage. And not just because it’s a hometown player. With 220 beverage products and a 10.3% market share, Huiyuan is actually China’s biggest producer of fruit and vegetable juices. And when it comes 100% pure juice products, the Beijing-based beverage giant accounted for 43% of all sales last year.

 "There’s no question Huiyuan is the market leader in China. It just isn’t a huge market right now," said Basenese. "But that’s true of all emerging markets. It’s the massive growth potential that makes this deal, and emerging markets in general, attractive."

Coca-Cola says that it expects more than 80% of its future growth to come from markets outside of the United States. The company’s sales in China jumped 18% last year.

There is also growing speculation that Coca-Cola will take Huiyuan’s products abroad.

"It’s very possible Coca-Cola will leverage the Huiyuan brand, acquire other Chinese juice makers, then boost their output for export," Lawrence Chor, analyst at Tai Fook Securities, told Reuters.

However, the acquisition is still up for regulatory approval and there’s no guarantee the deal will pass.

Takeover Opportunities Abound in Emerging Markets

Inbound mergers and acquisitions are notoriously difficult in China, where state interference and red tape ensnare corporations and nationalistic pride triggers protests against foreign companies seeking influence over popular domestic brands.

"There are two main difficulties," Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation, told Xinhua. "One is the large size of the two companies, which will raise concerns about monopolies. The second is that the brand of Huiyuan is considered to be protected as a famous domestic brand."

In July, U.S. private-equity firm The Carlyle Group ended its Herculean effort to buy a stake in Xugong Group, one of China’s biggest manufacturers of construction machinery, after three years of attempting to plow through regulatory resistance.

There’s also the matter of the U.S. government preventing Chinese companies from acquiring U.S. assets.

In September 2007, Huawei Technologies Co. and Bain Capital Partners LLC launched a $2.2 billion takeover bid for Internet-equipment-maker 3Com Corp. (COMS). That deal was blocked when it was revealed that exposure to 3Com’s technology might allow China to eavesdrop on U.S. domestic conversations, or make Chinese networks harder to tap. Three years ago, CNOOC Ltd. (ADR: CEO), a unit of China’s top offshore oil and gas producer, was forced to abandon its $18.5 billion bid for Unocal, after a political uproar in the United States.

"If you think back to Unocal or 3Com, there is already [a] precedent for the Chinese government to return the favor and block any U.S. company from making too big a splash in its domestic market," said the Oxford Club’s Basenese.

Whether Coke’s deal for Huiyuan goes through or not, another potential takeover target is Wimm-Bill-Dann Foods OJSC (ADR: WBD), says Basenese. WBD is Russia’s largest dairy company and a global manufacturer of dairy and juice products.

The company fell short of analysts’ expectations in the second quarter, as high raw milk costs and slowing demand pinched margins and led to just an 8.8% rise in net profit. However, sales jumped 26% to $760.1 million, and earnings before interest, taxes, depreciation and amortization (EBITDA) were up 21% from a year ago, reaching $93.1 million.

WBD could easily find itself in the crosshairs of Coca-Cola, Groupe Danone SA (OTC: GDNNY), or Coke rival PepsiCo, Inc. (PEP).

In March, PepsiCo spent $1.4 billion to acquire Lebedyansky JSC, a Russian producer of juice, juice drinks, nectars, ice tea, mineral water, baby juices and baby food. And it won’t stand pat if Coke succeeds in its bid for Huiyuan. And Danone, which owns one-fifth of Huiyuan, is a minority shareholder in WBD, as well.

Danone has already agreed to sell its stake in Huiyuan to Coca-Cola, and with such a generous offer on the table, is in the perfect position to reap a war-chest-filling windfall for its Huiyuan shares. With that cash on hand, many analysts believe that Danone may seek a larger stake in WBD, if not an outright takeover.
 

Danone appointed its senior executive to WBD’s board in 2007.
 

[Editor's Note: Takeover Trader Editor Lou Basenese cut his teeth as a senior research analyst for Wall Street's biggest investment bank. Taking what he learned on "The Street,"Basenese has time and again displayed an ability to predict global deals before they happen, and to offer analysis of the business sectors he believes will soon be "in play." For additional insight on the global takeover game, click here to check out this latest research report issued by The Takeover Trader.]

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International sales drove fourth-quarter earnings for Coca-Cola Co. (KO), the world’s biggest soft-drink producer, which posted a 79% rise in net income to $1.21 billion, or 52 cents a share, and a 26% increase in net operating revenues for the quarter.

For the year, worldwide unit case volume was up 6%, or 1.2 billion additional cases. Full year earnings per share increased 19% to $2.57. And net operating revenues increased 20% on the year, 4% of which came from currency benefits.

"Importantly, this growth was balanced across our geographies and portfolio of brands," Neville Isdell, Coca-Cola’s chairman and chief executive officer, said in a statement.  

Indeed, the company posted net revenue growth in every geographic market:

• Africa: 25% in the quarter, 16% for the year.
• Eurasia: 34% in the quarter, 24% for the year.
• European Union: 15% in the quarter, 14% for the year.
• Latin America: 24% in the quarter, 24% for the year.
• North America: 13% in the quarter, 11% for the year.
• Pacific: 7% in the quarter, 7% for the year.

The company also announced that it plans to repurchase $1.5 billion to $2 billion of its stock in 2008. Last year, it bought $1.75 billion of its stock and paid $3.1 billion in dividends to shareholders.

And that’s not the only reason shareholders were happy in 2007. For as tumultuous as last year was for most investors, Coca-Cola shareholders were treated to a 26.3% gain, or $12.79 rise, in the company’s stock, far-and-away better than the 3.5% total annual gain of the S&P 500 Index.

Cola-Cola is one of the so-called "Global Titans," companies that combine the safety of the U.S. financial system [with its transparency, regulatory oversight and detailed financial reporting], with the long-term growth promise of emerging Asia and Europe. For that reason, Coca Cola and firms such as MGM Mirage (MGM), Yum! Brands, Inc. (YUM), General Electric Co. (GE), The Boeing Co. (BA) and rival beverage maker PepsiCo Inc. (PEP) are "best-of-both-worlds" investment.

With sales in North America markets slowing, Coca-Cola and PepsiCo have taken their rivalry to emerging markets, where the wallets and taste buds of new and growing middle classes are directly targeted. 

Specifically, the craze over the 2008 summer Olympics in Beijing has taken the rivalry to a new level.

For example, as part of its big Olympics marketing push, PepsiCo adopted the country’s national color in creating a red-themed can for sale exclusively in China.

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