We have maintained our Neutral rating on
The Coca-Cola Company
) following the appraisal of second quarter 2012 results.
The Coca-Cola Company delivered adjusted operating earnings of
$1.22 per share in the second quarter of 2012, beating the Zacks
Consensus Estimate by 2.5%. Earnings also improved 4% from the
prior-year quarter. The quarter's earnings were driven by positive
revenue and volume growth, which diluted the impacts from higher
commodity costs and currency headwinds.
In the quarter, net revenue increased 3% year over year to
$13.09 billion, as benefits from an increase in concentrate sales
and positive price/mix were largely pulled down by currency
headwinds of 4%. The top-line results were marginally above the
Zacks Consensus Estimate of $13.01 billion.
The cola giant witnessed volume growth of 4% in the reported
quarter driven mainly by solid growth in the emerging markets of
India, Russia, China and Brazil. Among the non-alcoholic
ready-to-drink (NARTD) beverages, sparkling beverages grew only 2%
in terms of volume. Still beverages rose 9% in terms of volume,
registering much better volume growth than the popular soft
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Coca-Cola Beats Overall
Coca-Cola has a formidable portfolio of globally recognized
brands. Coca-Cola markets four of the world's top five nonalcoholic
sparkling beverage brands, including Coke, Diet Coke, Sprite and
Fanta, thus boasting a high level of consumer acceptance.
Similarly, the company also commands a dominating presence in the
juices or still beverages category, with its flagship brands such
as Minute Maid, Simply and POWERade. Moreover, the company
possesses one of the largest distribution networks in the world,
which gives it a huge competitive advantage.
As the developed markets are nearing saturation, Coca-Cola is
showing keen interest in the emerging markets of India, Russia and
China, encouraged by the high-growth nature of these countries.
Currently, 43% of the company's business is being generated in the
developed markets (US, Western Europe, Australia, Japan), 37% in
developing nations and 20% in the emerging markets. Management
believes that due to the higher growth rates in the emerging and
developing markets, each of these geographic segments will
contribute 33% of the company's business by the end of 2020.
Coca-Cola is undertaking various productivity initiatives to
streamline its cost structure and boost profitability. In 2011, the
company successfully completed its four-year productivity program,
with annualized savings of over $500 million. Further, in February
2012, Coca-Cola launched a four-year productivity and reinvestment
program which is expected to generate incremental annualized
savings of $550 million to $600 million that will be phased over a
four-year period (starting in 2012 through the end of 2015). The
savings will be used toward further brand building and also help
mitigate the negative impact from commodity costs, thereby boosting
long-term profitability. Further, the acquisition of North American
bottling business from
Coca−Cola Enterprises Inc
) is expected to generate synergies of at least $350 million in the
next four years.
Despite all the benefits, we prefer to remain on the sidelines
due commodity cost and currency volatility. Moreover, Coca-Cola
needs to ramp up its advertising spending to match up competitor
) increased focus on North American beverages. Further, a slow
economic recovery, strained consumer discretionary spending,
changing consumer preferences, and increasing health consciousness
also create headwinds.
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