On Aug 14, we maintained a Neutral recommendation on
The Coca-Cola Company
) 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
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
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
) 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.
The Chefs' Warehouse, Inc.
). While Chiquita Brands carries a Zacks Rank #1 ( Strong Buy),
The Chefs' Warehouse carries a Zacks Rank #2 (Buy).
CHEFS WAREHOUSE (CHEF): Free Stock Analysis
CHIQUITA BR INT (CQB): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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