(MONEY Magazine) – For decades, Coca-Cola was a company that could do little wrong. To the small shareholders who owned many of its 2.5 billion shares, it was the sweetest stuff on earth--and with good reason. Coke's earnings just about always went higher and higher, helping the stock (ticker symbol: KO) compound more than 25% annually for the two decades through its July 1998 peak. So the collapse that began that year with Asia's meltdown (Coke makes more than 70% of its money overseas) and ended with the abrupt departure of chief executive Douglas Ivester last winter was a stunner--and investors ultimately slashed more than $100 billion off Coke's market value as a result.

New CEO Douglas Daft is trying to put all that behind him in his efforts to turn around Big Red. So far, it seems, he's succeeding. In the second quarter, Coke reported profits of 42[cents] a share (before a nickel-a-share restructuring charge), beating Wall Street expectations by a penny, on a 7% rise in worldwide volumes, a key performance measure. "I'm very confident we're moving in the right direction," Daft boasted.

Many analysts agree. "Coke runs in waves of growth," explains Douglas Lane of Merrill Lynch, who reversed his negative opinion on the stock last winter. "The late 1980s were terrific, and so were the mid-1990s. We're getting ready to catch the next wave of growth."

Coke stock, battered to a 52-week low of $42.75 in mid-March, has since risen 40% to $60 in mid-August--not that far from its 52-week high of $69. For investors, the question now is whether this is just a bounce back from the lows or the beginning of another sustained rise. And the answer depends on Daft and his ability to overcome the company's past problems and create a new Coca-Cola.

Coke is the ultimate global company, selling $20 billion worth of beverages in nearly 200 countries. Its mission seems simple--sell more drinks to more people in more countries. But the execution can be difficult. The soda market in the U.S., by far the company's largest, is stagnant. Overseas markets, and especially the developing ones that Coke depends on for growth, are volatile. And the theory that everyone, everywhere, will someday be drinking as much of Coca-Cola's sodas as Americans do now--425 cups per person per year--doesn't seem to hold water. Coke also has been slow to recognize consumers' shift away from soda and toward an array of juices, sports drinks, teas, coffees and bottled waters. Making matters tougher, the company has suffered through a series of corporate missteps the past few years--from a health scare in Belgium to allegations of racial discrimination in the U.S.

It's clear that Daft (who declined to be interviewed for this article) has already made major changes at the soft-drink giant. Advocating a nimbler, less centralized approach, he has cut 5,200 jobs (including some 30% of the Atlanta headquarters' staff), sent regional chiefs out to the field and begun improving rocky relations with the company's bottlers. The 57-year-old Australian also has drawn on lessons he learned in his previous post as head of Coca-Cola's Asian operations. His mantra: "Think local, act local."

Daft wants to sell more products suited to local tastes, under existing U.S. brands (Minute Maid juices, Powerade sports drinks, Dasani water) or new ones tailored to local markets (like a drink in Japan called Tea Water Leafs). In theory, this will let Coke use its mighty sales channels to push more stuff across the board. "Coke has this global distribution infrastructure that would be impossible to replicate, so Daft's strategy to use that tailored to local markets is smart," says Paul Wayne, director of research at Kayne Anderson Investment Management, which owns 2.3 million KO shares, many of them bought this year.

This strategy is based on two facts about the global market. One is that Coke already controls 51% of carbonated drink sales around the world but only 18% of the total nonalcoholic beverage market. On that basis alone, there's simply much more room for Coke to expand in noncarbonated drinks. Second, outside the U.S., noncola drinks are far more popular than colas. Daft once said that he learned his lesson in Indonesia in the 1970s, when he saw volume really crank up not with the launch of Coke but with the subsequent introduction of Fanta. Maureen Depp, an analyst at State Street Research, which owns shares of Coke, recalls being impressed with Daft's cultural sensitivity--and his ability to translate that into business decision-making--when she met him a few years back in Asia. "He knows what he is talking about when he talks about local markets," she says.

Drinking the Kool-Aid

Emphasizing brands other than Coke would have been heresy in the old days of Coca-Cola--which built a phenomenally successful business on the global power of one brand--and Daft's strategy isn't without risk. The company, after all, has always been a marketing machine that created desire for the Coke brand (at whatever price), rather than a sales company that gave consumers what they wanted. Not only does the Coke brand (including Coca-Cola Classic and Diet Coke) account for about two-thirds of the company's volume, but Coca-Cola uses the popularity of Coke as a wedge to get more space for its other beverages on the crowded shelves of supermarkets and convenience stores--a hardball practice that has landed it in court. Can Coke decentralize and keep its aura? "This is a struggle for the heart and soul of the company," says Tom Pirko, head of the beverage consultancy BevMark.

The Daft Effect has already had an impact on the stock. Among the investors snapping up shares this year: Saudi billionaire Prince Alwaleed, fund manager Tom Marsico and Fidelity Magellan honcho Bob Stansky. Coke bulls figure there's still a way to go. Merrill's Lane thinks shares could reach $74 in 12 months, while Kayne Anderson's Wayne hopes for $110 in three years.

But Coke being Coke, getting in on the turnaround doesn't come cheap. Coke trades at a fat 41 times estimated 2000 earnings of $1.45 a share, a premium to both the beverage industry (30 times) and the broader Standard & Poor's 500-stock index (26). That's especially rich if you consider that Coke's main brand is 114 years old, the company can't raise prices all that much and its long-term earnings growth rate is expected to be just 14% a year. That's topnotch for a consumer-products business like Coke but hardly justifies the P/E of a technology company.

The shares can look pricier still if you dig into the numbers. That 14% earnings growth represents a mere 7% to 8% increase in sales, in volume terms, of its drinks and soda syrups; the rest comes from higher prices, equity earnings from its bottlers and share repurchases. Coke bears point to the muddied relationship between Coke's higher-margin syrup and marketing business and its bottlers, such as publicly traded Coca-Cola Enterprises (CCE), whose biggest shareholder is Coke, as reason enough to steer clear. Coke, which books revenues when it sells concentrate to the bottlers, said earlier this year that it wouldn't be able to raise prices as much as it had in 1999 and that it would work to reduce bottler inventories.

When it comes to Coke, perhaps the best advice is to follow Warren Buffett. His Berkshire Hathaway is Coke's largest shareholder, with 200 million shares, or 8.1% of the company, worth $12 billion. Buffett hasn't been selling--but he hasn't been buying either.

Clearly, Coke is coming back. But any blip could hit this company hard. Unless you really believe that Coke's brand power and distribution clout make it worthy of the premium--and you have Buffett-like patience to wait for the payoff--Coke at this price could be hard to swallow.