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Coca-Cola Kept at Neutral; Volumes Weak

Zacks Equity Research

On Aug 14, 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 Jul 16, 2013, Coca-Cola announced weak second-quarter results, barely meeting the Zacks Consensus Estimate for earnings but missing the revenues estimate. Coca-Cola’s second-quarter 2013 earnings of 63 cents per share were in line with the Zacks Consensus Estimate. Moreover, earnings grew 4% year over year as the revenue decline was offset by decent margins. Revenues declined 3% due to lower-than-expected volume growth, flat price/mix and headwinds from currency and structural changes.

Volumes grew 1% in the quarter, much lower than the last quarter’s 4% growth. Poor weather conditions in North America, India and parts of Europe and slow economic growth in Europe, Asia and Latin America hurt volumes in the quarter. Social unrest in southeast Europe, Middle East and Brazil also hurt volumes.

Gross margins expanded 90 basis points (bps). Operating margin grew 70 bps year over year and 310 bps sequentially gaining from gross margin expansion and improved operating expense leverage.

Following the weak second-quarter results, estimates largely moved downwards over the past 30 days. The Zacks Consensus Estimate for 2013 decreased 1% to $2.10 while that for 2014 decreased 1.3% to $2.27 over the same period.

Moreover, 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 the company’s as well as rival PepsiCo Inc.’s (PEP) sparkling beverage sales. The continuously challenged consumer spending environment is another negative factor.

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. Volumes are expected to improve in the second half as comparisons ease and weather normalizes. Moreover, Coca-Cola’s increased focus on product/packaging innovation and marketing strategies bode well for additional market share gains. Further, Coca-Cola has also increased marketing investments and is driving package and product innovation to boost its carbonated beverage business.

Other Stocks to Consider

Coca-Cola carries a Zacks Rank #4 (Sell). Other consumer staples companies that are currently doing well include Chiquita Brands International Inc. (CQB) and The Chefs' Warehouse, Inc. (CHEF). While Chiquita Brands carries a Zacks Rank #1 ( Strong Buy), The Chefs' Warehouse 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 CQB

Read the Full Research Report on CHEF

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