Coca-Cola Company (KO) displayed very solid performance as they reported second quarter results on Wednesday morning.  Importantly, Coke’s beverage sales volumes in North America rose for the first time since the fourth quarter 2007, as shoppers were lured in by discounts and new packaging.  Coca-Cola branded soft drinks grew by 1% and overall North American sales volume expanded 2%; not a huge number to be sure, but it is encouraging to see the consecutive declines from North America finally stabilizing. The trend to healthier alternatives than carbonated drinks in America has motivated Coke into action, diversifying their product lines and expanding their reach globally.  Indeed, it was the healthier beverages that grew faster with juices and teas rising 7% by volume in North America.

Net income for the second quarter was $2.37 billion, or $1.02 per share, but excluding one-time item it improved to $1.06 per share topping analysts’ estimates by 3 cents. Global profits grew by 16% as sales expanded at a better rate than costs.  Overall revenue grew 5% to $8.67 billion although that was slightly less than Wall Street expected.  They reported market share gains in both carbonated and non-carbonated drinks in the quarter.

Coca-Cola has long been envied for its global diversity, with three-quarters of sales coming abroad, is now looking more positively on its potential for growth in its home market.  In general, CEO Muhtar Kent sounded a cautious tone for the rest of the year but the North American market was one that he singled out in a positive light.  "What we are seeing today is not an aberration," he said on a conference call. "We firmly believe that North America will be a growth market of great opportunity for the next 10 years and beyond."  That being said, sales abroad continued to pace the company’s overall growth particularly in Eurasia and Africa where sales increased by double-digits.

At Ockham, we reiterated our Fairly Valued or neutral stance on Coke at this price level as of this week’s report, but KO may be due for an upgrade in coming reports.  It appears priced relatively attractively compared to the market’s historical valuation on KO.  Over the past ten years, Coke has historically fetched a price-to-cash earnings multiple of between 17.3x and 24.5x, and it is currently less than 16x.  They have finally stopped the declines in shipping volumes in the US (something Pepsi has been unable to do), and we continue to believe the growth potential abroad remains explosive with rising consumerism in emerging markets.  Based on the current fundamentals and the potential for growth, our methodology suggests KO could rise to $62 before we would become worried about its valuation getting overheated.