Coca-Cola (KO) Beats Q4 Earnings, Revenues; Shares Rise - Analyst Blog
Shares of The Coca-Cola Company (KO) shot up around 4% in pre-market trading as the beverage giant ended 2014 on a strong note beating the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter of 2014 backed by aggressive cost cuts.
Better volume trends in the domestic market amid an improving economic scenario and improved soda sales caught investor attention.
Earnings Discussion
Fourth-quarter 2014 adjusted earnings of the maker of Coke and Fanta were 44 cents per share, which beat the Zacks Consensus Estimate of 42 cents by around 5%.
Earnings declined 5% year over year as a strong dollar eroded the value of its overseas sales. Excluding the impact of currency, earnings increased 5% driven by improved organic revenues and cost-cutting efforts.
The Coca-Cola Company - Earnings Surprise | FindTheBest
Revenues Improve
Net revenue declined 2% year over year to $10.87 billion due to headwinds from currency and structural changes.
Currency headwinds hurt sales by 4% as Coca-Cola generates a significant portion of its sales overseas. Structural changes hurt revenues by 2%, at the higher end of management’s expectation of 1–2%.
Adjusting for the impact of currency and structural changes, constant currency revenues increased 4%. Revenues also beat the Zacks Consensus Estimate of $10.77 billion by 1%.
An extra selling day, improved sparkling beverage performance and strong price/mix and volume gains in North America led the top-line performance in the reported quarter.
Margins Decline
Despite lower commodity costs, adjusted consolidated gross margins declined 10 basis points (bps) year over year and 50 bps sequentially to 60.7%.
Adjusted selling, general and administrative (SG&A) expenses increased 4% on a currency-neutral basis to $4.29 billion due to higher marketing expenses. Media investments increased in double digits.
Adjusted operating income on a constant currency basis increased 7% to $2.33 billion. Adjusted operating margin was 21.4%, down 20 bps year over year and 230 bps sequentially as efficient management of operating expenses was offset by higher marketing investments.
Currency and structural changes hurt operating income by 7% and 2%, respectively, both in line with expectations.
Volume and Pricing
Coca-Cola witnessed 1% volume growth, same as in the previous quarter.
In North America, volumes grew 1%, better than a decline of similar magnitude in the previous quarter, driven by marketing investments. Other developed nations like Europe and Japan, however, continued to witness volume declines. European volumes declined 1% due to overall challenging economic environment and aggressive competitive pressures. Japan volumes decreased 1% due to decline in still beverages.
Among the developing countries, high single-digit volume growth in India and 5% growth in Brazil was offset by 3% decline in China.
Among the non-alcoholic ready-to-drink beverages, sparkling beverages improved from the previous quarter, while still beverages remained stable.
Sparkling beverage volumes grew 1%, better than flat growth reported in the third quarter due to better performance of the Coca-Cola brand. The Coca-Cola brand grew 1%, a sequential improvement from the third quarter’s flat growth.
Sparkling beverages were seeing declining sales trends over the past few quarters due to carbonated soft drinks (CSD) category headwinds. Growing health and wellness consciousness, vigilance among consumers about the use of artificial sweeteners, high sugar content and related obesity concerns are affecting CSD demand and thereby hurting sales of Coca-Cola as well as other soft drink makers like PepsiCo, Inc. (PEP) and Dr Pepper Snapple Group, Inc. (DPS). Obviously, the positive volume increase of soft drinks this quarter encouraged investors.
Still beverages grew 2% in terms of volume, same as the previous quarter as positive growth in teas, packaged water and sports drinks was partially offset by a decline in juice and juice drinks. Higher pricing to combat increased commodity costs hurt juice volumes.
Price/mix (after adjusting for items impacting comparability) increased 2%, better than 1% in the previous quarter due to strong gains in North America. While Latin America, Europe and North America showed positive price mix growth, it declined in Eurasia and Africa and the Asia Pacific regions.
2014 Results
In fiscal 2014, the company witnessed 2% decline in revenues to $45.99 billion. However, revenues marginally beat the Zacks Consensus Estimate of $45.93 billion. Adjusting for the impact of currency and structural changes, constant currency revenues increased 3% in the year.
Adjusted earnings were $2.04 per share which beat the Zacks Consensus Estimate of $2.03 by a penny. Earnings declined 2% from the prior-year figure. Excluding the impact of currency, earnings increased 5%, below the long-term target of high single-digit range.
2015 Outlook
Management expects 2015 to be a “transition year” — a time to start implementing changes to create a new operating model.
In Oct 2014, Coca-Cola unveiled an aggressive cost-cutting plan to drive better profit growth. At that time, the company also announced that it would re-franchise the majority of its company-owned North American bottling territories by 2017-end which should improve margins going forward.
Moreover, Coca-Cola is in the process of developing a new partnership model through equity investments like those in Keurig Green Mountain, inc. (GMCR) and Monster (MNST) as well as pursuing mergers & acquisitions to enhance growth in key categories.
Management, however, warned that the initiatives will take time to deliver the desired results amid challenging global macro conditions.
Foreign exchange is expected to hurt 2015 revenues by 5% and profit before tax by 7–8%.
In 2015, the adjusted constant currency earnings per share are expected to increase in a mid single-digit range, similar to 2014 levels but below the long-term target.
The company expects to buyback shares worth $2.0 to $3.0 billion in 2015.
Currently, Coca-Cola has a Zacks Rank #4 (Sell), but that could definitely change following Coca-Cola’s impressive fourth quarter earnings result.
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