Coca-Cola's New Plans in Focus: Should You Invest?
On Nov 11, 2014, we issued an updated research report on The Coca-Cola Company (KO).
In the third quarter (results announced on Oct 21), the Zacks Rank #4 (Sell) company failed to sustain the momentum it had picked in the first half of the year. This was mainly due to volume deceleration in Europe and China.
While the company beat the Zacks Consensus Estimate for earnings by a penny, it missed for revenues. Earnings of 53 cents per share were flat year over year as improved margins were offset by soft revenues. Organic revenues grew only 1% due to the ongoing macroeconomic headwinds.
At the third-quarter conference call, Coca-Cola announced the expansion of its productivity initiatives and plans to streamline its operations to drive revenue and profit growth.
In February, the company unveiled an expanded productivity program to generate $1 billion of additional savings by 2016. Concurrent with the third-quarter earnings release, the company yet again announced an expansion of the productivity program, targeting $2 billion annualized savings by 2017 and $3 billion by 2019.
Coca-Cola also announced that it would re-franchise the majority of its company-owned North American bottling territories by 2017-end. In April last year, Coca-Cola announced plans to launch a beverage partnership model in the U.S., under which it will gradually grant new expanded U.S. territories to its bottlers to distribute beverages.
Moreover, the company is acquiring equity stake in other growing companies. Coca-Cola bought a 10% stake in Keurig Green Mountain, Inc. (GMCR) in Feb 2014 for about $1.25 billion and subsequently announced its intention to gradually increase its stake to up to 16%. Coca-Cola also plans to purchase a 16.7% stake in energy drink maker Monster Beverage Corp. later this year for $2.15 billion. The new beverage partnership model should improve margins going forward.
Management expects 2015 to be a “transition year” — a time to start implementing changes to create a new operating model.
Though the initiatives sound encouraging, management remains apprehensive of the broader economic challenges in 2015. Management warned that earnings growth could miss the long-term target in both 2014 and 2015.
Moreover, muted volume trends for carbonated beverages over the past few years remain a concern. These carbonated soft drinks (CSDs) have been seeing declining sales trends for the past few quarters due to category headwinds. Growing health and wellness consciousness — consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns — new taxes on sugar-sweetened beverages and growing regulatory pressures have been affecting CSD sales of all major soft drink makers — Coca-Cola, PepsiCo, Inc. (PEP) and Dr Pepper Snapple Group, Inc. (DPS).
However, despite the near-term pressures, Coca-Cola’s global reach, strong brand power, expanding international presence, a solid global bottling network and an impressive cash position keeps our faith in the stock.
Read the Full Research Report on KO
Read the Full Research Report on DPS
Read the Full Research Report on PEP
Read the Full Research Report on GMCR
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