Coca-Cola (KO) Down 3% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for The Coca-Cola Company KO. Shares have lost about 3% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is KO due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fourth-Quarter 2017 Results
The Coca-Cola Company reported better-than-expected results in the fourth quarter of 2017, ending the year on an impressive note. Despite reporting flat soda volumes, the cola giant gained from its growing beverage portfolio and re-structuring efforts. Cost-cutting initiatives led by the refranchising of its low-margin bottling operations helped it to come up with better numbers.
Earnings Beat
Fourth-quarter 2017 comparable earnings of the company were 39 cents per share, surpassing the Zacks Consensus Estimate of 38 cents.
Earnings also improved from the year-ago profit level of 37 cents, helped by ongoing productivity efforts.
Sales Beat
Revenues of $7.51 billion in the quarter surpassed the Zacks Consensus Estimate of $7.36 billion. However, net revenues declined 20% year over year due to the negative impact of structural items, marking the 11th consecutive quarterly decline. Acquisitions/divestitures and structural items had a 26% negative impact on revenues, partly offset by a 4% positive contribution of price/mix and concentrate sales growth of 1%. The structural changes primarily include the impact of bottler refranchising efforts.
Volume and Pricing
Coca-Cola’s total unit case volume remained unchanged (similar to the preceding quarter). Emerging and developing markets saw some improvements in unit case volume. However, volumes showed no growth during the quarter in developed markets. Meanwhile, North America volume grew 1%.
Category Cluster Performance: Sparkling beverage unit case volume remained unchanged. Juice, dairy and plant-based beverages witnessed 2% decline (versus 1% growth in the preceding quarter). Water, enhanced water and sports drinks were up 2% (versus down 1% in the third quarter), and Tea and Coffee was up 2% (compared with 1% growth in the prior quarter).
Quarterly Segment Details
Revenues grew 6% at North America, 6% at Europe, the Middle East & Africa, and 14% at Latin America segment. However, revenues declined 1% in the Asia Pacific segment.
Organic revenues grew across the board, increasing 3% in North America, 8% in Europe, Middle East & Africa, 13% in Latin America, 1% in Asia Pacific and 12% in Bottling Investments.
Geographic Analysis
The company has five operating segments – Europe, Middle East and Africa (EMEA), Latin America, North America, Asia Pacific and Bottling Investments.
EMEA division registered revenues of $1.75 billion, up 6.1% year over year driven by solid marketing and innovation along with improved alignment with its bottling partners.
Price/mix growth of 6% for the quarter was driven by strong price/pack initiatives across Europe and Southern Africa. Organic revenues grew 8%.
Unit case volume remained flat year over year as solid volume growth across the Central & Eastern Europe business unit and Turkey were offset by declines across Africa and the Middle East.
The Latin America segment registered revenues of $1.12 billion, up 14% year over year. Price/mix was 11% in the quarter, primarily driven by strong price/mix in Mexico and the South Latin business unit. Organic revenues grew 13%.
Unit case volume was flat as volume growth in Brazil and the South Latin business unit was offset by 1% decline in both Mexico and the Latin Center business unit.
The North America segment revenues totaled $2.62 billion, increasing 6% year over year. Organic revenues grew 3% in the quarter. Price/mix growth of 2% for the quarter, including sparkling price/mix growth of 3%, reflected the continued execution of the company's disciplined occasion, brand, price, package and channel strategy, as well as strong performance in the foodservice business.
Unit case volume grew 1% in the quarter. Sparkling soft drinks volume growth was even. Juice, dairy and plant-based beverages declined 1% as mid single-digit growth in Minute Maid and Simply was offset by a decline in Hi-C. Tea and coffee grew 8% while water, enhanced water and sports drinks accelerated to 3% growth.
The Asia-Pacific segment registered revenues of $1.03 billion, down 1% from the year ago quarter, on account of negative currency impact. Organic revenues were up 1% in the quarter and price/mix was down 2%. Unit case volume growth of 2% in the quarter was driven by high single-digit growth in the ASEAN business unit, partially offset by 1% decline in both the Greater China & Korea business unit, and Japan. The decline in China was largely due to timing of the Chinese New Year.
Bottling Investments segment revenues decreased 69% (up 12% on an organic basis) to $1.27 billion as volumes declined 32% and structural headwinds impacted revenues by 83%.
During the three months ended Dec 31, 2017, intersegment revenues were $42 million for Europe, Middle East & Africa, $19 million for Latin America, $187 million for North America, $69 million for Asia Pacific and $12 million for Bottling Investments.
Price/mix growth of 15% in the quarter was largely driven by the timing of various bottler funding settlements and positive price/mix within the India bottling operations.
Margins
Adjusted consolidated gross margin expanded 480 basis points (bps) year over year to 64.2%. The company’s comparable operating margin grew 540 bps to 26.5% in the quarter, given the divestitures of lower-margin bottling businesses and ongoing productivity efforts.
Other Developments
The company remains on track to pursue Revenue Growth Management ("RGM") initiatives across its key markets that include the South Latin and Central & Eastern Europe business units.
Coca-Cola has been focusing more on creating a consumer-centric brand portfolio. The beverage giant expanded its Venturing & Emerging Brands model to Central & Eastern Europe, partnering with Coca-Cola HBC AG in September 2017.
Meanwhile, throughout the year, the company also made major decisions related to profitable growth by deprioritizing low-margin water in major markets including China, Japan and Mexico.
Coca-Cola now has fully refranchised after the closing of two important territories during the quarter in the United States.
2017 Highlights
Full-year comparable earnings came in at $1.91, same as the year-ago adjusted profit level.
Net revenues were $35.41 billion, down 15% from $41.86 billion in 2016. Organically, revenues grew 3% for the full year.
2018 Guidance
Organic revenues are expected to rise 4%. Acquisitions/divestitures (mainly the bottler re-franchising efforts) are expected to hurt revenues by 17%, while Fx is likely to have a positive effect of 1% on revenues. Again, revenues will be positively impacted by 1% to 2% from Accounting Standards Update 2014-09.
Comparable currency income before income taxes (structurally adjusted) is expected to increase 8-9%. Foreign exchange is expected to hurt comparable income before taxes by 0-1%. Structural changes are likely to have a 2% negative impact on it. The company expects adjusted EPS to grow 8-10% from the prior year’s comparable EPS of $1.91. The company expects to buy back shares worth $1 billion in 2018. The adjusted effective tax rate is likely to be 21%. Cash from operations is likely to be at least $8.5 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.
Coca-Cola Company (The) Price and Consensus
Coca-Cola Company (The) Price and Consensus | Coca-Cola Company (The) Quote
VGM Scores
At this time, KO has a subpar Growth Score of D, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Outlook
KO has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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