The Coca-Cola Company KO stock has been resilient in a tough industry, owing to the execution of strategies to evolve as a consumer-centric total beverage company. This bolstered its quarterly performances as evident from a robust surprise trend. Second-quarter 2019 marked the company’s eighth positive earnings surprise in the last nine quarters and eighth straight sales beat.
Ongoing productivity efforts and disciplined growth strategies as well as robust performance across segments are aiding its top and bottom lines. Innovation and investment in core categories and brands have been the key focus area, which led to the expansion of retail value share. Its global re-franchising initiatives are expected to boost margins.
These positives have aided the stock to outperform the industry in the past year. The Zacks Rank #2 (Buy) stock has gained 21.8% in a year, outpacing the industry’s growth of 4.4%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Looking more closely at stocks in the broader industry, we note that Coca-Cola also outpaced its peers. Notably, the Monster Beverage Corp. MNST has witnessed a decline of 6.2% in the past year while PepsiCo Inc. PEP and Keurig Dr Pepper Inc. KDP gained 21.5% and 15.9%, respectively.
Let’s delve deeper and find out reasons that are placing Coca-Cola ahead of its peers.
Factors Aiding Stock Growth
Innovation as well as investing in core categories and brands has been the key focus area for Coca-Cola, given the evolving beverage industry. This mantra extends to all business aspects, ranging from massive categories like hot beverages to emerging ones like Kombucha. Constant innovation of brands is the key to the company’s sustained growth.
For example, over the past three years, innovation at the Coke brand has helped the company to accelerate global retail value growth every year, reaching 6% growth in 2018. Coca-Cola continually maintains relevance for the Coke brand through updates to the flagship product and its many variants. The recent momentum at the Coke brand is attributed to the success of Coke Zero Sugar over time, with more growth potential ahead. Notably, Coke Zero Sugar delivered double-digit growth globally for the seventh straight time in second-quarter 2019. The company’s sparkling portfolio has been the prime beneficiary of the momentum in Coke Zero Sugar, and other flavor innovations like Orange Vanilla Coke and Orange Vanilla Coke Zero Sugar.
In April 2019, innovations for the Coca-Cola trademark began a new chapter, with the launch of Coca-Cola Energy — another variant of Coke — with more energy-boosting characteristics and new taste. The company launched this brand in select European countries in the quarter. Coca-Cola Energy is now launched in 14 countries, including the recent rollouts in Japan, Australia and South Africa. The company expects to expand Coca-Cola Energy to about 20 markets by the end of 2019, including Mexico and Brazil.
However, its innovation strategy is not focused on the Coke brand alone. In the second quarter, it launched its first Costa Coffee ready-to-drink (RTD) chilled product in Great Britain, which is Costa’s key market. This was Coca-Cola’s first major product launch since acquiring Costa in early 2019. The company expects to roll out this product in additional markets in the second half of 2019.
Simultaneously, Coca-Cola is on track with its productivity and reinvestment program that was launched in February 2012. The plan focuses on initiatives like restructuring the global supply chain — including optimization of the manufacturing footprint in North America, investing in technology to streamline operations, implementing a zero-based budgeting program, headcount reductions and driving increased efficiency in direct marketing investments. Savings from the program are being used to fund marketing programs and innovation to re-accelerate top-line growth, margin expansion and returns on capital.
The company has expanded the scope of the program three times since the launch, increasing productivity savings target to $3.8 billion (in April 2017) from $3 billion. Coca-Cola aims to achieve the target by 2019 from the initiatives implemented under this program since its beginning. The company is on track to achieve almost $5 billion in savings from 2008 through 2019 on productivity and reinvestment programs. As of the end of 2018, it had about $600 million remaining in growth productivity savings to be captured in 2019.
Backed by strong year-to-date performance, Coca-Cola has updated its outlook for 2019. It estimates organic revenue growth of nearly 5% in 2019 compared with the previously stated 4% rise. Comparable currency-neutral revenues are expected to increase 12%, with about 7% gain from acquisitions, divestitures and structural items. Earlier, the company projected a 12-13% increase in comparable currency-neutral revenues, aided by 8-9% benefit from acquisitions, divestitures and structural items.
Comparable currency-neutral operating income for 2019 is expected to rise 11-12%, marking an increase from 10-11% growth stated earlier. Acquisitions, divestitures and structural changes will likely continue to aid operating income by a low-single digit.
We believe that there is momentum left in the stock of this soft-drinks behemoth as it has a long-term impressive earnings growth rate of 6.8% and a Growth Score of B.
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