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Coca-Cola (KO) Q4 Earnings In Line, Stock Slips on Soft View

Zacks Equity Research
Coca-Cola (KO) delivers in-line earnings and sales in fourth-quarter 2018. However, concerns regarding increased impacts of currency fluctuations are likely to mar results in 2019.

The Coca-Cola Company KO has delivered a strong fourth-quarter 2018, with earnings and sales almost in line with estimates. Fourth-quarter results gained from the effective execution of the company’s strategies to evolve as a consumer-centric total beverage company.

Alongside the introduction of products, the company is focused on lifting and shifting successful brands globally. It also benefited from the acceleration of the sparkling soft drinks category through investment and innovation. However, adverse impacts of currency fluctuation and refranchising of company-owned bottling operations hurt top and bottom lines.

Shares of Coca-Cola dropped as much as 4.2% in the pre-market session, owing to a soft outlook for 2019 due to concerns regarding increased impacts of foreign currency. This is likely to reduce organic revenues and earnings in 2019.

The company expects increased impacts of adverse currency in the first quarter and 2019. Currency headwinds are likely to hurt comparable revenues by 6-7% and comparable operating income by 10-11% in the first quarter. For the year, foreign currency is likely to affect comparable revenues by 3-4% and operating income by 6-7%.

Consequently, the company estimates organic revenues to rise nearly 4% in 2019, lower than 5% increase witnessed in 2018. Comparable earnings are expected to either decline 1% or increase 1% from earnings of $2.08 per share reported in 2018.

Nonetheless, this Zacks Rank #3 (Hold) stock has surged 11.1% in the past year against the industry’s decline of 7%. This is mostly attributed to the company’s growth strategies.

Q4 in Detail

Coca-Cola’s fourth-quarter 2018 comparable earnings were 43 cents per share, in line with the Zacks Consensus Estimate. The bottom line improved 14% from the year-ago period, driven by ongoing productivity efforts and disciplined growth strategies. Currency translations negatively impacted earnings by 10%.

Coca-Cola Company (The) Price, Consensus and EPS Surprise | Coca-Cola Company (The) Quote

Revenues of $7,058 million were nearly in line (marginally up) with the Zacks Consensus Estimate of $7,055 million. However, net revenues decreased 6% year over year due to 13% adverse effects of the refranchising of company-owned bottling operations and currency headwinds. This represented the company’s 15th consecutive quarterly decline.

However, organic revenues grew 5% as concentrate sales improved 1% and price/mix increased 4%. For the sixth straight quarter, organic revenues grew within the company’s long-term target.

Volume and Pricing

Coca-Cola’s total unit case volume remained flat in the fourth quarter as strong growth in Central and Eastern Europe as, well as India, was negated by the challenging economic conditions in some emerging markets, including Argentina and Central America. Price/mix increase of 4% was backed by continued strength in the core business and a 1-point benefit of segment mix from bottling investments.

Category Cluster Performance: Sparkling soft drinks unit case volume declined 1% (compared with 2% decrease in the prior quarter). Juice, dairy and plant-based beverages witnessed a 2% decline (compared with 3% decrease in the last reported quarter). Water, enhanced water and sports drinks were up 1% (in comparison with 5% growth in Q3), and Tea and Coffee grew 3% (compared with 2% decline in Q3).

Segmental Details

Revenues grew 7% in North America and 1% in the Asia Pacific segment. However, revenues at Europe, the Middle East & Africa (EMEA); and Latin America segments declined 2% and 12%, respectively. Meanwhile, Bottling Investments were down 53% in the quarter under review.

Organic revenues grew across the board, backed by consistent innovation and revenue growth initiatives within sparkling soft drinks, with solid volume growth for Coca-Cola Zero Sugar across all regions. Additionally, tea and coffee categories witnessed strong growth. Organic revenues for North America were flat while it improved 5% for EMEA, and 7% for both Latin America and the Asia Pacific segments.  Bottling Investments segment recorded organic revenue growth of 11%.

Margins

Comparable currency neutral operating income grew 8% on the back of strong organic revenue growth and ongoing benefits from productivity initiatives. Comparable operating margin expanded 13 basis points (bps), given the divestitures of lower-margin bottling businesses and ongoing productivity efforts. The upside was partly offset by the adoption of the new revenue recognition accounting standard and currency headwinds.

Guidance

For 2019, the company estimates organic revenue rise of nearly 4%. Comparable currency neutral revenues are expected to increase 12-13%, aided by 8-9% benefit from acquisitions, divestitures and structural items. However, unfavorable currency is likely to affect revenues by 3-4%.

Comparable currency neutral operating income for 2019 is expected to increase 10-11%. Acquisitions, divestitures and structural changes will positively impact operating income by a low-single digit. However, foreign exchange is expected to hurt comparable operating income by 6-7%.

The company expects comparable earnings to be down 1% to up 1% from $2.08 recorded in 2018. Underlying effective tax rate is estimate at 19.5%.

Moreover, the company expects cash from operations of at least $8 billion in 2019, with capital expenditure of nearly $2 billion.

Don’t Miss These Better-Ranked Soft-Drink Stocks

Monster Beverage Corp. MNST, with long-term earnings growth rate of 16%, currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coca-Cola European Partners PLC CCEP, with long-term earnings growth rate of 8.7%, presently carries a Zacks Rank #2.

New Age Beverage Corp. NBEV delivered a positive earnings surprise of 11.1% in the last reported quarter. It currently carries a Zacks Rank #2.

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