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Coca-Cola Profit Tops Target; Sales Rise 19%

Coca-Cola bottles
AP
Coca-Cola bottles

Coca-Cola posted higher-than-expected quarterly profit Tuesday, helped by strength in its developing China and India markets, and moderate gains in mature markets such as Germany and Japan.

The world's largest beverage company, best known for its namesake soft drinks, also saw strong volume growth for noncarbonated products, including Powerade and Dasani bottled water.

But Coke shares, which had rallied to a five-year high in recent days on expectations of positive earnings news, were down slightly at $53.29 in midday New York Stock Exchange trading, as some investors were disappointed the news was not better.

"This shows you that Coke has arrived, to some extent," JP Morgan analyst John Faucher said. "People are beginning to believe in the (turnaround) story so there tends to be more good news priced in by the time they actually report."

Faucher, who rates Coke shares "overweight," also guessed that some hedge funds had invested in Coke in recent days and were selling their shares now that the market did not strongly applaud Coke's results.

Coke shares gained a modest 1 percent earlier in the session.

Second-quarter net income rose less than 1 percent to $1.85 billion, or 80 cents per share, from $1.84 billion, or 78 cents a share, a year earlier.

Excluding charges and a tax benefit, profit was 84 cents a share, 2 cents higher than the analysts' average forecast compiled by Reuters Estimates.

The higher-than-expected earnings were further evidence that Chief Executive E. Neville Isdell, who was brought out of retirement in 2004 to lead the company, was successfully turning it around.

Under Isdell's watch, Coca-Cola introduced Coke Zero, its most notable brand launch in many years, and acquired vitamin-water maker Glaceau. It also has smoothed over relationships with bottlers and launched a new marketing campaign.

Goldman Sachs analyst Judy Hong termed the results largely positive.

"It reaffirms our view that Coke could be in a position to deliver 11 percent to 12 percent earnings-per-share growth results that exceed consensus over the next few years, driven by healthy emerging market gains and improved developed market results," she said.

Coke Chief Operating Officer Muhtar Kent was also optimistic on a conference call with analysts. "We remain relatively positive on the macroeconomic outlook for the remainder of the year, especially in many of our emerging markets," Kent said. He also forecast a sequential improvement later this year in North America, where second-quarter sales volume declined 2 percent.

Strength in Numbers

Quarterly net operating revenue rose 19 percent to $7.73 billion, helped by price increases and acquisitions in addition to higher product sales.

Breaking down the revenue growth, the Atlanta-based company attributed nearly 3 percentage points of it to the weak dollar.

That is equal to nearly 16 percent of the total revenue gain, and more than just a nominal contribution to the quarter.

Worldwide case volume increased 6 percent. Volume was up 12 percent for noncarbonated beverages, due to higher sales of Powerade and Dasani bottled water, and 4 percent for carbonated soft drinks.

In recent years, Coke has lagged rival PepsiCo in offering alternatives to the sugary soft drinks that North Americans have begun to avoid. But some analysts see its recent acquisitions of Glaceau and juice and tea company Fuze as evidence that Coke is focused on closing the gap.

The company saw strong gains in emerging markets, as well as moderate gains in the European Union and Japan.

Before Tuesday, Coke traded at 20.5 times estimated 2007 earnings, making it the fifth-costliest stock in the Dow Jones Industrial Average on a price-to-earnings basis. Rival PepsiCo's multiple is only slightly lower at 20.0.

So far in 2007, Coke has repurchased $1 billion of the $1.75 billion to $2 billion in stock it plans to buy back for the full year.

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