Coca-Cola Beats Overall


The Coca-Cola Company (KO) delivered adjusted operating earnings of $1.22 per share in the second quarter of 2012, beating the Zacks Consensus Estimate by 2.5%. Earnings were also 4% above the prior-year adjusted earnings driven by positive revenue and volume growth which made up for higher commodity costs and currency headwinds.

In the quarter, net revenues increased 3% year over year to $13.09 billion, as benefits from an increase in concentrate (syrups, powders, etc. used in finished beverages) sales and positive pricing were largely pulled down by currency headwinds of 4%. The top-line results were marginally above the Zacks Consensus Estimate of $13.01 billion.

Volume Growth in Detail

The cola giant witnessed volume growth of 4% in the reported quarter driven mainly by solid growth in the emerging markets of India, Russia, China and Brazil. The developed nations of North America, Japan and Germany registered positive volume growth as against weakness in Europe.

Among the non-alcoholic ready-to-drink (:NARTD) beverages, sparkling beverages, like Coca-Cola, Fanta and Sprite, grew only 2% in terms of volume. Specifically, the Coca-Cola soft drink volume grew 2% saved mainly by strong performances in emerging countries of India, Russia and Brazil.

Still beverages grew 9% in terms of volume, registering much better volume growth than the popular soft drinks. The company’s packaged water, juices and juice drinks, ready-to-drink tea and coffee, energy drinks and sports drinks all registered impressive growth in the quarter.

Geographically, volume was up 5% in international markets while North America recorded volume growth of only 1% as Coca-Cola shifted focus to the fast expanding emerging markets with the developed markets nearing saturation.

Coca-Cola recorded adjusted consolidated gross margin of 60.3% in the second quarter of 2012, down 70 basis points year over year due to rising commodity costs. Adjusted operating margin was 26.1%, down 30 basis points from the prior-year quarter mainly due to gross margin declines and foreign exchange headwinds.

Geographic Analysis

Geographically, the Eurasia & Africa division recorded revenues of $840 million, up 5% (up 16% on a currency neutral basis) over the prior-year quarter as benefits from volume growth, concentrate sales and positive price/mix were partially offset by currency headwinds.

The segment witnessed volume growth of 12% year over year led by India, which surged 20%, followed by the Middle East and North Africa posting year-over-year volume growth of 20% in the quarter. Sparkling beverages volume was up 11% versus 18% volume growth for still beverages. Adjusted operating income was up 15% on a currency neutral basis in the quarter to $347 million driven by revenue growth which offset input cost headwinds.

The Latin America segment recorded revenues of $1.15 billion, up 1% (up 11%) over the prior-year quarter as benefits from concentrate sales and positive price/mix were tempered by currency headwinds.  Volumes increased 3% in the segment, with Brazil, South Latin, Latin Center and Mexico all showing positive volume growth.

Volume growth, however, lagged the 6% surge witnessed in the prior-year quarter. Adjusted operating income was up 13% on a currency neutral basis to $686 million in the quarter, benefiting from volume growth and favorable pricing.

The North America segment recorded revenues of $5.8 billion, up 5% on the back of positive price/mix. Volumes increased 1% in the segment. Sparkling beverage volume declined 2% against 8% volume gain for still beverages as Americans become more health conscious. Adjusted operating income was flat on a currency neutral basis to $832 million in the quarter.

The Pacific segment recorded revenue of $1.7 billion, up 7% (up 6%) over the prior-year quarter benefiting from volume growth as well as positive concentrate sales, price/mix and currency impact. The Pacific Group’s volume climbed 8% in the quarter, with growth of 7% in China, 4% in Japan, 24% in Thailand and 6% in Philippines. Adjusted operating income was up 12% on a currency neutral basis to $823 million in the quarter driven by positive geographic mix.

The Europe segment recorded revenues of $1.49 billion, down 9% (down 2%) over the prior-year quarter due to declines in volumes, concrete sales and negative impact from currency. Volume in Europe declined 4% in the quarter due to sluggish economy and unfavorable weather in the region.

Adjusted operating income was down 3% on a currency neutral basis to $895 million due to top-line decline as well as increased investments for the Olympic Games and Euro Cup championships.

Our Recommendation

We currently have a Neutral recommendation on The Coca-Cola Company. The stock carries a Zacks #3 Rank (a short-term Hold rating).

We are encouraged by the company’s global reach, strong brand power, expanding presence outside the U.S. and its solid cash position. Moreover, the company’s acquisition of Coca-Cola Enterprises’ (CCE) Bottling business and its productivity initiatives are expected to result in significant cost savings.

However, Coca-Cola needs to ramp up its advertising spending to match arch competitor PepsiCo Inc.’s (PEP) increased focus on North American beverages. Moreover, rising costs of inputs have hurt the company’s margins.

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