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Iconic Stock's Major Uptrend Could Deliver Double-Digit Profits by Fall

Melvin Pasternak

Around the world, the average person consumes one of this beverage company's products every four days, with 1.7 billion servings being consumed each day. Fifteen of its 500 brands generate at least $1 billion in global sales or more a year. While its most famous product comes in classic, diet and zero versions, it is also the maker of Fanta, Sokenbicha, Vitamin Water, Powerade, Minute Maid orange juice and Dasani water.

Coca-Cola (KO) is one of the most well-known brands in the world. The company sells its products in more than 200 countries, and management plans to spend over $30 billion during the next several years to expand in emerging markets like Russia, Mexico, China and several African countries.

Already, Eurasia and Africa comprise the company's biggest growth areas. In the recently reported fourth-quarter 2012 results, the company said it saw a 10% rise in global volume growth in Eurasia and Africa, and a 5% gain in Latin America.

And if you're concerned that in an increasingly health-conscious America, soft drink consumption is slipping, I wouldn't worry too much. It's true that in the 1990s, one of every three bottled drinks consumed was soda. Since 2002, soft drink consumption has declined about 16%. But thirsty consumers drink 50% more bottled water and twice as many energy drinks now as they did then. And, of course, Coke is a major player in both categories.

Even with other beverage types becoming more popular, soda sales still comprise almost 25% of the U.S. beverage market. Despite intense competition, Coke dominates with the largest market share.

The company is also a master of adapting to consumer tastes. Coca-Cola recently acquired Zico, a maker of popular coconut water, as well as a stake in the workout recovery shake company, Core Power.

The technicals support a bullish outlook in Coca-Cola stock. Shares of the soft drink maker have been in a major uptrend since mid-2010, and show no signs of slowing down.

Coca-Cola Stock Chart

The uptrend began in July 2010 at about $22.88, and KO held well above this trendline until November 2012, when it was tested for the first time in over two years. Note how on the test the shares bounced sharply off trendline support, a sign of strong buying interest. Also note that the stock hit a multi-year high in late July 2012, near round number resistance at $40.

By early November, the shares fell to $35.36, the trendline test. For the next several months, shares consolidated in a narrow range between about $35 and $38, eventually retesting the round number resistance in March.

Last month, shares broke through the $40 barrier, and the stock bullishly completed a U-shaped basing pattern. This pattern is marked by the July $39.83 high and the November $35.36 low.

Shares are now trading around $40, near a multi-year high. With no short-term resistance in sight, the stock could move higher. The April 1998 all-time high of $42.75 (on a split-adjusted basis) should be the next major obstacle. If that level is exceeded, a 15-year base of roughly $22 in height would be created, and the eventual target would be in the low $60s. That's about a 50% gain from current prices for those with a lot of patience, say someone willing to hold for two years.

Short-term investors could use the measuring principle for a basing pattern -- calculated by adding the height of the pattern to the breakout level -- to set a nearer-term target. According to this principle, the stock should reach a target of $44.30 ($39.83-$35.36 = $4.47; $4.47+$39.83 = $44.30). At current levels, this target represents 10%-plus returns.

The bullish technical outlook is supported by solid fundamentals.

Although analysts expect first-quarter 2013 revenue to decline 0.8% to $11.05 billion from $11.14 billion in the comparable year-ago period, they project full-year 2013 revenues will increase 2% to $49 billion, compared with $48 billion last year, as overseas expansion should drive sales.

The earnings picture is somewhat more optimistic. For the upcoming first quarter, to be reported April 16, analysts project earnings will rise 2% to $0.45 per share from $0.44 in the year-earlier period. For the full 2013 year, analysts expect international expansion will help earnings increase 6.5% to $2.14 per share from $2.01 per share last year.

In addition to a solid growth outlook, the company offers a forward annual dividend yield of about 2.8% ($1.12 per share), which pays you to be patient. Management has consistently increased the dividend, most recently in February, when it announced a 10% bump in its quarterly payout.

Risks to consider: A decline in U.S. soda consumption may be of some concern. However, the company is expanding its offerings of bottled water, energy drinks and juices to compensate. Growth, while moderate, is steady. I think this growth will help the shares rise over time.

Recommended Trade Setup:

-- Buy KO at the market price
-- Set stop-loss at $37.49, slightly below major trendline support
-- Set initial price target at $44.30 for a potential 11% gain by fall 2013 

Long-term investors may wish to hold for a larger move into the high $40s or beyond while collecting a healthy dividend.

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