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Coca-Cola just keeps on reaching new heights

INTERNATIONAL – The Coca-Cola Company is the leading global manufacturer, retailer and marketer of non-alcoholic beverages.

It is ranked by Forbes as the sixth most valuable brand in the world with a brand value of approximately $60 billion (R876 billion).

It commands around half of the global carbonated soft drink market and over 10 000 Coca-Cola beverages are consumed per second.

The company primarily produces syrup concentrate, which is sold to various bottlers throughout the world who hold the rights to exclusive territories.

Sparkling beverages constitute the majority of its total volumes. Its key brands include Coca-Cola, Fanta, Sprite, Minute Maid, Powerade, Aquarius and Dasani.

Its flagship product, Coca-Cola, was invented in 1886 by American pharmacist John Stith Pemberton.

The drink was initially intended to be a medicinal tonic and during its early days the original recipe was derived from coca leaves that contained small amounts of cocaine.

The drug was removed from the beverage altogether in 1903.

Although Coca-Cola’s products are not consumer necessities, its popularity and low prices keep soft drinks on grocery lists even during recessions.

The defensive nature of its business means that Coca-Cola shares benefit from nervous investors.

With the US yield curve inverting and trade war tensions picking up, investors are fearful of a possible growth slowdown or recession.

Treasury bonds yield practically nothing after inflation, so low-volatility stocks with solid dividends like Coca-Cola become an attractive target for investors to allocate funds.

Coca-Cola offers investors a dividend yield of 2.9 percent and has raised its dividend for more than 50 consecutive years.

During its second quarter the company recorded organic sales growth of 6 percent and adjusted operating income growth of 14 percent.

While higher pricing and improved product mix did help organic sales growth, two-thirds of the increase was the result of stronger consumer demand for its products.

Momentum was particularly strong in emerging markets such as India and China where per capita consumption of soft drinks is still low.

Coca-Cola benefits from a strong global brand, solid financial position and industry-leading distribution network through its bottlers.

Although sugar tax, plastic pollution and growing health awareness present challenges, they also present opportunity.

Coca-Cola is transforming its business into a total beverage company by proactively investing in growing assets such as health, tea and premium hydration drinks. It also has the aspiration to expand in the growing coffee category.

The shares have gained nearly 15 percent this year, but are unfortunately trading at a ten percent premium to their own history at a price-to-earnings multiple of 33.

The premium is more likely a result of a currently overbought broader consumer defensive segment rather than significantly improved company-specific earnings growth expectations.

A price of around $47 (R701.24) per share more accurately reflects Coca-Cola’s growth prospects.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

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Alphabet, a US multinational with a market value of R12.45 trillion

ALPHABET is an American multinational technology conglomerate with a market value of $856 billion (R12.45 trillion).

It was created through the restructuring of Google in 2015. Google is a market leader in the search and online advertising markets, and is considered one of the big four technology companies alongside Amazon, Apple and Facebook.

The company acquired its name from the word “googol”, a mathematical term representing one followed by one hundred zeros.

It signifies the search engine’s capacity to offer access to the vast amount of information on the internet. Its web-based search engine averages 65 000 searches every second.

In one of corporate history’s greatest blunders, Yahoo refused to buy Google’s search engine technology for $1m in 1999. Three years later Yahoo offered to buy Google for $3 billion, but was unwilling to pay the $5bn Google wanted. Today Google is worth more than 160 times that amount.

Alphabet’s revenues are primarily generated from business advertising on Google’s own websites and from advertising space on third-party websites. Its business segments are Google and Other Bets.

The Google segment includes its internet products such as Search, Ads, Commerce, Maps, YouTube, Google Cloud, Android, Chrome and Google Play.

The Other Bets are early-stage, experimental businesses with enormous long-term potential. This includes autonomous driving and virtual reality.

Although this segment remains unprofitable, management has reiterated that Alphabet continues to invest meaningfully for the long-term opportunities they see.

Alphabet has acquired over 220 companies since 2001, which is roughly one acquisition per month.

The company’s most recent quarterly results beat expectations on virtually all metrics. Google’s advertising revenue increased 16 percent.

Given the company’s high dependence on advertising revenues, it is encouraging that its non-advertising revenue soared by 40 percent.

This was largely due to the strength of Google Cloud products and Google Play. Alphabet also announced a massive $25bn share repurchase plan.

Although this is only 3 percent of its own market capitalisation, it is equivalent to the market value of Capitec, Nedbank and Absa combined.

Potential channel conflicts between search results and the company’s own services could diminish Alphabet’s dominance in the internet space.

Although the new antitrust probe opened by the US department of Justice raises some concern, it isn’t new to Alphabet.

They operate under strict regulation, be it on privacy, competition, copyright or intellectual property and they have encountered many similar cases before.

Data leakage or political force to supply user data could possibly also result in diminishing user trust and search traffic erosion.

However, Alphabet’s undisputed leadership in the search engine space, high innovation rate, diversification into non-advertising business models and strong financial position bode well for its long-term growth.

Its strong brand name and superior search algorithms enable Alphabet to attract high user traffic and generate switching costs due to users’ familiarity with the engine.

They are poised to benefit from growth in wearable information technology and Internet of Things by leveraging their huge user base.

At an undemanding forward priceto-earnings multiple of 18 Alphabet is a sensible addition to investment portfolios. Frants Preis, CFA, is a portfolio manager at Vega Asset Management based in Pretoria. Alphabet shares are owned on behalf of clients.

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Activewear market is expected to grow by 8%

ADIDAS IS the largest sportswear group in Europe and second-largest in the world, after Nike. Its core brands include Adidas, Reebok and TaylorMade.

It manufactures footwear and apparel in sport segments such as football, tennis, golf and running. Adidas is the market leader in football apparel and official sponsor of top football leagues such as Manchester United and Real Madrid.

Adidas sprang to life in 1948 after the two Dassler brothers were unable to agree on the future of their family company, Gebrüder Dassler Schuhfabrik, which was founded in Germany in 1924.

Adolf “Adi” and Rudolf split up all the assets, each going on to create a new separate brand. Rudolf established business rival Puma in 1949.

The global activewear market is expected to grow at a rate of 8 percent per year over the next five years to reach $550 billion (R8.33 trillion) by 2024.

This is despite the headwinds the entire sporting goods sector faces due to higher tariffs in the US.

While global brands such as Nike, Adidas and Puma have already actively diversified their production across several Asian countries such as Vietnam and Indonesia, China still accounts for a quarter of total production capacity for these names.

North America accounts for approximately 20 percent of Adidas’ sales and for almost 15 percent of its operating profit.

It represents a key source of potential margin improvement for the group, being the only region where the company is still meaningfully under-performing its major global competitor Nike.

Adidas recently celebrated another successful quarter. Sales and earnings in their strategic growth areas of Greater China and e-commerce continued to increase at double-digit rates.

Growth has accelerated in the past three years, mainly through its lifestyle brand Originals, which was initially growing at more than 30 percent per annum.

To set itself apart from competitors, Adidas has been using its celebrity partnerships to make inroads with a broader demographic.

Adidas is doubling down on its partnerships with non-athletes such as Beyoncé, Kanye West and Pharrell Williams.

The group continues to show positive progression in terms of brand perception and preference in 2019, supported by its strong social media strategy.

Adidas has spent the last four years curbing ocean pollution by recycling plastic waste into shoes.

The company produced more than five million pairs of recycled plastic waste shoes in 2018 and they plan to incorporate the waste into at least 11 million this year.

With the stock up 45 percent yearto-date due to a re-rating, Adidas is on the expensive side with a forward price-to-earnings multiple of 27.

The market has been more than reflecting its positive long-term growth prospects.

The stock is trading at a significant premium to its own history, but its valuation is in line with peers. Share price weakness in future may present a buying opportunity.