Coke Maintains Revitalization Plan

The Coca-Cola Company (KO) has strong soft drink brands, leading market shares, and generates solid cash flow. The company's new Chief Executive Officer, Muhtar Kent, will continue with predecessor Isdell's revitalization plan to deal with the challenges of sluggish volume trends.

While focusing on the long-term objective of high single-digit earnings per share growth, the management is improving the Coca-Cola system's health by balancing volume and price, along with new product innovation and marketing initiatives. Discounts and allowances to the Coca-Cola bottlers have been re-configured.

Though world-wide volume growth has begun to improve, it is being driven by non-carbonated beverages and international markets along with incremental marketing spending of $400 million annually. However, the high-margin carbonated soft drink market in North America is maturing and competition in the U.S. soft drink market remains a concern. Profit warnings by two Coca-Cola bottlers Coca-Cola Enterprises (CCE) and Coca-Cola Hellenic (CCH) are also concerning. The Hold recommendation is maintained.

The stock has experienced pronounced P/E multiple contraction for the last six years, as several CEOs have attempted to jump-start the company's volume growth. With its unique global franchise, Coca-Cola stock should trade in a P/E multiple range of 18 to 25 until the execution of the revitalization plan begins to show results in North America. The target price of $56.25 is 20 times 12-month trailing EPS.

Expect Good Things from Unilever

Unilever (UL) (UN) has benefited from the Path to Growth strategy in terms of expanding margins, building momentum of key brands, rationalizing costs and streamlining the asset base. Impressively, positive pricing fully compensated for rising input costs in the first quarter. The Buy rating is maintained.

Unilever has simplified the management hierarchy to replace the dual chairman structure with a single chief executive officer and a non-executive Chairman. The organizational changes should expedite decision making and the one-to-one equivalence between PLC and NV shares should improve financial transparency.

The current Accelerating Change strategy should stimulate underlying sales and earnings growth through 2010 and beyond, in addition reducing the annual cost base by about $2.2 billion by the end of 2010.

The developing and emerging markets are expected to continue driving incremental top-line growth. The percentage of revenue from these markets has increased to 44 percent from 20 percent over the last 15 years.

Unilever generates strong cash flow, which is being used to increase shareholder value through share repurchases and dividend increases.