Coca-Cola (KO) Chief Executive Officer Muhtar Kent will tell you he doesn't pay any attention to the company's share price. "We do the right thing, and our share price manages itself," he says. His predecessor, E. Neville Isdell, often said the same thing. Today, Isdell, who stepped aside as CEO in 2008, admits that he obsessively checks the stock on his BlackBerry.
The stock's $87.94 high-water mark on July 14, 1998, still haunts company headquarters in Atlanta. The five-year decline that brought shares to $37 in March 2003 reflected the turmoil within, as the company struggled with bloated costs, management upheaval, and a loss of focus on its core product, soda pop. Coca-Cola has been addressing those problems, and after a setback during the recent global recession, its shares on May 19 hit $68.46, the highest level in more than a decade. Yet even as it improves operations, the company is unlikely to generate the exuberant support from investors that propelled the stock in the 1990s, and some money managers who own the shares say it will be two years or more before they surpass the high established 13 years ago.
Coke began the slow climb out of its hole in 2004, when the directors lured Isdell, who had held high-ranking positions at the company, out of retirement to be CEO. In a strategy that came to be known as "Red, Black, Silver," Isdell refocused the company—which had been giving priority to noncarbonated drinks—on its core products, Coke (Red), Diet Coke (Silver), and, starting in 2005, Coke Zero (Black). Executives pushed supermarkets to give them prominent display and more shelf space. Isdell also put in place a succession plan that led to Kent taking over as CEO in July 2008.
Kent, 58, got to work on Coca-Cola's U.S. operations. He introduced 7.5-ounce minicans that sell for about $3.50 for an 8-pack, aimed at people who want to control their soda portions, and 16-ounce bottles priced at 99¢. Both sizes fetch higher per-ounce prices than the standard 20-ounce bottles in convenience stores and 2-liter bottles in supermarkets, where competition keeps prices low. Last year, Kent purchased the company's largest franchised bottler, giving the company control of 90 percent of its U.S. and Canadian distribution.
Kent also reconfigured serving sizes globally to meet shifting consumer demands and boost profit margins. Since March 2009, he's promised to spend at least $27 billion through 2020 for new plants and distribution facilities in emerging markets, including Mexico and China. Coca-Cola gets nearly 80 percent of its sales outside the U.S.
The moves are having an impact. The company has posted four consecutive quarters of sales growth by volume in North America. Last year, Diet Coke surpassed Pepsi-Cola as the second-best-selling soft drink in the U.S., according to data from trade newsletter Beverage Digest. Coca-Cola remained No. 1. The company's profit margin grew to 22 percent in 2009, up from 18 percent in 2008. By comparison, PepsiCo's (PEP) profit margin was about 14 percent in 2009, up from 12 percent the previous year.
Coca-Cola's stock rose 30 percent in the year ended May 31, outpacing PepsiCo's 13 percent and the Standard & Poor's 500 Consumer Staples Index's 23 percent. Coca-Cola's price-earnings ratio stands at about 19, modest by historical standards. At the 1998 high, Coca-Cola's shares were trading at almost 48 times the company's annual earnings, reflecting investors' willingness to pay a premium to own what they saw as a reliable growth stock. "It had a p-e that turned out to be unjustified," says Douglas Lane, president of New York-based Douglas C. Lane & Associates, whose clients hold more than 600,000 Coke shares.
So when will Coca-Cola get back to $88, a 31 percent climb from $67, its May 31 closing price? In the short term, Coca-Cola faces volatile commodity costs that could force it to raise prices at a time when consumers may balk, says Lauren Torres, an analyst for HSBC Securities. She estimates Coca-Cola will trade at $71 a year from now.
Lane says a new high will come in two to three years. He expects Coca-Cola's profit to rise 10 percent to 12 percent annually during that time—respectable, but below the rates the company enjoyed in the mid-1990s. Assuming Coca-Cola's p-e ratio stays at 19, the earnings gains would imply a stock price of $90 in 2013. "It's still a relatively inexpensive stock," Lane says. "It has broad positions globally, it's broadened its product line, and it's got a really top-notch fellow running the company now."
Donald Yacktman, whose Yacktman Asset Management holds 11.9 million Coca-Cola shares, estimates it will take five years for the stock to reach a new high. "It's just a matter of grinding it out," he says. Carlos Laboy, an analyst for Credit Suisse (CS), is far more optimistic. In a note to clients in May, he estimated Coca-Cola's shares will hit $95 in a year. "We believe KO's U.S. business is reaching an inflection point," he wrote, referring to the company by its stock symbol.
Isdell, retired again and traveling the globe speaking about corporate sustainability, smiled recently when asked for his best estimate of when the stock would surpass its 1998 high. "Eighty-eight is a funny number," he said. "What you have to do is look at the fundamentals, and I think eventually you're going to get there."
The bottom line: While Coca-Cola stock has rallied 30 percent over the past year, some analysts and investors predict a slow climb to its 1998 record.