U.S. Markets open in 5 hrs 51 mins

Coca-Cola Kept at Neutral

Zacks Equity Research

On Nov 18, we maintained a Neutral recommendation on The Coca-Cola Company (KO) as we have faith in the cola giant’s long-term fundamentals despite its soft performance in the past few quarters.

Why the Neutral Recommendation?

On Oct 15, 2013, Coca-Cola announced mixed third-quarter results, barely meeting the Zacks Consensus Estimate for earnings but missing the same for revenues.

Coca-Cola’s third-quarter 2013 adjusted earnings of 53 cents per share were in line with the Zacks Consensus Estimate. Earnings grew 4% year over year as decent operating margins made up for the soft revenues. Revenues declined 3% year over year and missed the Zacks Consensus Estimate. Though volumes and price/mix improved from the second-quarter levels, currency headwinds took a toll on the top line.

Volumes grew 2% in the quarter, better than the last quarter’s 1% growth, driven by improved volume trends in many key markets including North America, China and India. However, volumes were still below last year’s 4% growth due to economic slowdown in Europe, Brazil and Mexico. Price/mix increased a strong 2% in the quarter, much better than flat price/mix seen in the first half.

Despite higher-than-expected currency headwinds and weak gross margins, operating margin grew 90 basis points to 23.5% in the quarter driven by favorable operating expense leverage.

Following the soft third-quarter results, estimates largely moved downwards over the past 60 days. The Zacks Consensus Estimate for 2013 decreased 0.5% to $2.09 per share while that for 2014 decreased 2.2% to $2.22 over the same period.

Despite softer performance in recent quarters, we believe Coca-Cola has sound long-term fundamentals with its global reach, strong brand power, expanding international presence, powerful global bottling network and its solid cash position. Moreover, its increased focus on product/packaging innovation and marketing strategies bode well for additional market share gains.

However, sluggish volume trends of its soft drinks are a concern. Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting carbonated beverage sales of Coca-Cola as well as other beverage giants like PepsiCo Inc. (PEP). The continuously challenged consumer spending environment is another negative factor.

Other Stocks to Consider

Coca-Cola carries a Zacks Rank #3 (Hold). Other beverage companies that are currently doing well include Coca-Cola Amatil Limited (CCLAY) and The WhiteWave Foods Company (WWAV). While Coca-Cola Amatil carries a Zacks Rank #1 (Strong Buy), WhiteWave Foods carries a Zacks Rank #2 (Buy).

Read the Full Research Report on KO
Read the Full Research Report on PEP
Read the Full Research Report on CCLAY
Read the Full Research Report on WWAV

Zacks Investment Research