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Weak Sales Likely to Dampen Coca-Cola's (KO) Q3 Earnings

The Coca-Cola CompanyKO is slated to report third-quarter 2017 results on Oct 25, before the opening bell.

Coca-Cola has been struggling to boost sales amid weak demand in certain emerging and developing markets and shift in consumer preference. The company has been witnessing a decline in revenues for the last nine quarters, primarily due to weak volumes especially in the sparkling beverage category, and structural changes.

Coca-Cola's second-quarter revenues declined 16% year over year due to currency headwinds and negative impact of structural items. Acquisitions/divestitures and structural items had a 17% impact on revenues, while currency headwinds hurt sales by 2%. The company's soon-to-be reported quarter is also expected to be adversely impacted by 19-20% in net revenues from acquisitions, divestitures, and other structural items. The company also expects currency headwinds to hurt quarterly net revenues by 1-2%.

Segment Discussion: North America, comprising about 30% of the total revenues, is expected to see tepid growth in third quarter. The Zacks Consensus Estimate for the segment revenues of $2.6 billion reflect growth of 1% from the year-ago quarter.

Latin America revenues are likely to witness 4.8% growth. On the other hand, consensus estimate for Europe, Middle East and Africa segment revenues of $1.9 billion indicates a decrease of 7.1% from the prior quarter and Bottling Investments revenues are likely to decrease 54% year over year. Again, Asia Pacific revenues are expected to decrease 0.4% on a year-over-year basis.

Coming to the company's bottom line, i.e. EPS, the cola giant has surpassed analysts' expectations for earnings in 12 of the past 13 quarters. However, the company's adjusted EPS, excluding one-time items, have fallen for the past nine consecutive quarters.

As mentioned earlier, Coca-Cola expects net impact of acquisitions, divestitures, and other structural items to have a headwind of 9-10% on profits before taxes in the to-be-reported quarter. Currency fluctuations are anticipated to have an adverse impact of 2-3% on quarterly profits before taxes.

That said, Coca-Cola is taking aggressive cost-cutting and strategic measures to mitigate the impact of lower sales and weak volumes. Adjusted consolidated gross margins expanded 210 basis points (bps) year over year to 62.6% in the second quarter of 2017, as currency headwinds were offset by positive pricing and productivity gains. We expect to witness similar trends in the to-be reported quarter as well.

Overall, the beverage behemoth's third-quarter revenues/profits are likely to decline owing to structural changes and currency headwind. We feel pricing gains, cost cuts and productivity savings should continue to support bottom line to some extent. The refranchising efforts, though hurting sales/profits in the near term, will result in higher operating margins, lower capital spending, and improved return on invested capital in the long run by reducing exposure to the low-margin bottling operations.

For the third quarter, Coca-Cola's Zacks Consensus Estimate for earnings is pegged at 49 cents, reflecting a 0.7% year-over-year decrease. Meanwhile, the Zacks Consensus Estimate for total revenues is pegged at $8.84 billion, implying 16.9% decline.

Here is what our quantitative model predicts:

Coca-Cola has the right combination of the two key ingredients - a positive Earnings ESP and Zacks Rank #3 (Hold) or higher - which is required to be confident of an earnings beat.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks ESP: The Earnings ESP for Coca-Cola is +0.17%.

Zacks Rank: Coca-Cola carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP.

Coca-Cola Company (The) Price and EPS Surprise

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

Stocks Worth a Look

Here are a few consumer staples stocks you may consider, as they have the right combination of elements to post an earnings beat this quarter.

The Hershey Company HSY has an Earnings ESP of +0.13% and a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

The company is set to report third-quarter results on Oct 26 before the opening bell.

Mondelez International, Inc. MDLZ has an Earnings ESP of +1.40% and a Zacks Rank #3. The company is set to report quarterly results on Oct 30.

Monster Beverage Corporation MNST has an Earnings ESP of +0.36% and a Zacks Rank #3. The company is expected to report third-quarter results on Nov 2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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