KO & Select Buy Stake in Fair Oaks

Beverage giant The Coca-Cola Company (KO - Analyst Report) and dairy cooperative Select Milk Producers, Inc recently announced their decision to purchase equity stakes in Fair Oaks Farms Brands, LLC, a company that produces and markets value added nutrition products, including Core Power, a popular high protein milk shake.

As it is, Core Power is distributed by Coca-Cola Refreshments (a Coca-Cola subsidiary) and is well accepted among consumers. The acquisition of stakes in Fair Oaks will bring together the technological expertise, sustainability and innovation of Select and Coca Cola’s brand building and distribution capabilities. Together, the companies intend to create a new portfolio of healthy beverages with high growth potential.

A peer of Pepsico, Inc. (PEP - Analyst Report), The Coca-Cola Company is still largely dependent on its carbonated beverages. However, with increasing consumer health awareness, Coca-Cola is slowly expanding the portfolio of non-carbonated drinks. Coca-Cola commands a leading position in the juices or still beverages category, with its flagship brands Minute Maid, Simply and POWERade. With the recent acquisition, the company will add nutritious dairy products to its portfolio, thus increasing the health quotient of its portfolio.

On the other hand, Select Milk Producers, Inc., which operates in Texas, New Mexico and the Midwest, will be able to benefit from the wide distribution network of the Coca-Cola Company.

We are encouraged by The Coca-Cola Company’s global reach, strong brand power, expanding presence outside the U.S. and its solid cash position. Moreover, the company’s strategy of growing through acquisitions and its productivity initiatives are expected to result in significant cost savings and improved productivity in the near future. However, soft economic conditions and a tough currency environment ahead concern us.

Currently, we have a Neutral recommendation on The Coca-Cola Company over the long term. The Coca-Cola Company carries a Zacks #3 Rank in the near term (Hold rating).