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Can Coca-Cola (KO) Retain Earnings Trend in Q1 Despite Odds?

Zacks Equity Research

The Coca-Cola Company KO is scheduled to report first-quarter 2019 earnings on Apr 23, before the opening bell. The company boasts an impressive surprise history, having surpassed earnings estimates in six of the past seven quarters. Moreover, it delivered sales beat for the last six quarters.

The Zacks Consensus Estimate for first-quarter earnings is pegged at 46 cents, which reflects a decrease of 2.1% from the year-ago quarter. Further, estimates remained unchanged in the last 30 days. The consensus estimate for quarterly revenues is pegged at $7,887 million, mirroring year-over-year growth of 3.4%.

Meanwhile, Coca-Cola witnessed year-over-year decline in revenues for 15 straight quarters. In the last reported quarter, revenues declined 6% year over year due to the adverse impact of the refranchising of company-owned bottling operations and currency headwinds.

Coca-Cola Company (The) Price and EPS Surprise

 

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

Let’s see how things are shaping up for this announcement.

Factors to Influence Q1 Performance

Coca-Cola’s positive surprise trend is well supported by the effective execution of the strategies to evolve as a consumer-centric total beverage company. Its strategy of introducing new products alongside focus on lifting and shifting successful brands globally is aiding performance. It is also benefiting from the acceleration of sparkling soft drink category through investment and innovation. All these initiatives should continue to aid the company’s results in the upcoming quarter.

Further, Coca-Cola’s commitment to the productivity and reinvestment program is worth mentioning. The program focuses on initiatives — including restructuring the global supply chain, investing in technology to streamline operations, implementing a zero-based budgeting program, headcount reductions and driving efficiency in direct marketing investments — which is likely to support growth in the future. Notably, the company is on track to deliver savings of about $3.8 billion by 2019 through productivity programs.

Driven by these positives, the Coca-Cola stock showed resilience. The stock has gained 6.7% in the past year against the industry’s decline of 4.2%.

 



However, currency headwinds have persistently hurt the company’s results for the past few quarters, including fourth-quarter 2018. It issued bleak earnings and sales view for 2019 as it expects currency headwinds to hurt revenues and operating margin in the first quarter and full year. Currency headwinds are expected to hurt comparable revenues by 6-7% and comparable operating income by 10-11% in the first quarter. In 2019, currency headwinds are likely to affect comparable revenues by 3-4% and operating income by 6-7%.

Moreover, the company estimates organic revenues to rise nearly 4% in 2019, lower than 5% increase in 2018. Comparable earnings are expected to either decline 1% or increase 1% from earnings of $2.08 per share in 2018. Further, emerging market volatility and soft CSD volume continued to remain impediments.

Segmental Discussion

Europe, Middle East and Africa or EMEA

Coca-Cola’s EMEA division delivered soft results in the last reported quarter, courtesy of lower price/mix, flat unit case volume and adverse currency. Revenues at this segment dropped 2% year over year in fourth-quarter 2018. However, the company gained value share in total NARTD beverages, and the juice, dairy and plant-based beverages cluster as well as the tea and coffee cluster.

For the first quarter of 2019, the Zacks Consensus Estimate for the EMEA segment’s revenues is pegged at $1,621 million, reflecting a decrease of nearly 12% year over year and a decline of 5.7% from the last reported quarter.

Further, estimates for the segment’s operating income is pegged at $794 million, reflecting nearly 13.3% decline from the prior-year quarter and 4.3% decline from fourth-quarter 2018.

Latin America

In the Latin America division, Coca-Cola has been gaining from strong performance in Mexico through revenue growth initiatives and positive price/mix. However, the segment’s revenues declined 12% in the last quarter due to adverse currency and lower unit case volume despite solid price/mix. Further, the company gained value share in total NARTD beverages and in all category clusters, except for tea and coffee.

The Zacks Consensus Estimate for the segment’s first-quarter revenues is pegged at $974 million, mirroring a decline of 2.4% from the prior-year quarter and 0.8% from the last reported quarter.

Further, estimates for the segment’s operating income stands at $516 million, down 10.1% year over year and 0.4% sequentially.

North America

The company delivered robust performance in the North America region. Revenues in the region grew 7% year over year. The segment’s price/mix improved 2% as gains from pricing actions offset higher costs. Nevertheless, the consensus mark for revenues stands at $2,590 million, which reflects a decline of 3.4% from the year-ago quarter and 8.9% on a sequential basis.

The consensus estimate for the segment’s operating income stands at $549 million, down 2.7% year over year and 1.7% sequentially.

The Asia Pacific

Revenues at the Asia Pacific segment rose 1% year over year in the fourth quarter. Price/mix improved 2% due to strong pricing across majority markets while volume benefited from robust growth across India and Southeast Asia. However, the consensus estimate for revenues for the division is pegged at $1,240 million, up 1.8% from first-quarter 2018 and 19.3% from fourth-quarter 2018.

Estimates for the segment’s operating income stands at $556 million, down 1.6% from the prior-year quarter but reflects a sequential increase of 41.5%.

Bottling Investments

Revenues at the Bottling Investments segment declined 53% in fourth-quarter 2018 due to impacts of acquisitions and divestitures while solid pricing and volume growth offset this decline. The consensus mark for the division’s revenues is pegged at $1,139 million, up 8.4% year over year and 97.7% sequentially.

Bottom Line

Despite the odds, we expect the company’s efforts — including improved marketing, innovation, strong brand power, focus on driving revenues by improved price/mix and refranchising initiatives — to boost first-quarter 2019 results.

Zacks Model

Our proven model does not predict that Coca-Cola is likely to beat earnings estimates this quarter. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Coca-Cola currently has a Zacks Rank #3 and an Earnings ESP of 0.00%. The combination of the company’s positive rank and Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks Likely to Beat on Earnings

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Estee Lauder Companies Inc. EL has an Earnings ESP of +1.39% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kimberly-Clark Corporation KMB has an Earnings ESP of +0.76% and a Zacks Rank #2.

Altria Group, Inc. MO has an Earnings ESP of +0.31% and a Zacks Rank #3.

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Kimberly-Clark Corporation (KMB) : Free Stock Analysis Report
 
Coca-Cola Company (The) (KO) : Free Stock Analysis Report
 
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Altria Group, Inc. (MO) : Free Stock Analysis Report
 
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