On Jun 3, we maintained a Neutral recommendation on Coca-Cola Enterprises Inc. (CCE - Analyst Report), due to its mixed first-quarter 2013 results.
Why the Neutral Recommendation?
On Apr 25, CCE announced first-quarter 2013 results. Adjusted earnings of 39 cents per share beat the Zacks Consensus Estimate of 38 cents by a penny. Adjusted earnings rose 8.3% year over year as declining costs and a lower share count resulting from significant share repurchases made up for the slim revenue growth in the quarter.
Revenues missed the Zacks Consensus Estimate and declined 1% year over year due to volume shortfall as the macroeconomic difficulties continue. More than 90% of the sales volume of Coca-Cola Enterprises comprises products of The Coca-Cola Company (KO - Analyst Report). In Oct 2012, Coca-Cola Enterprises sold its North American operations to The Coca-Cola Company and took over the latter’s bottling operations in Norway and Sweden. The company is thus, geographically focused in Western Europe and is exposed to the economic uncertainties of this region, including the debt burdens of some of these countries and the challenging consumer spending environment.
Following the sluggish first-quarter results, estimates largely moved downwards for 2013 and 2014. The Zacks Consensus Estimate declined 0.4% for 2013 and 1% for 2014 over the last 60 days.
In concurrence with the earnings release, CCE announced its plans to not exercise its right to acquire KO’s interest in its German bottling business and let it expire. This decision enabled Coca-Cola Enterprises to essentially double its share repurchase goal for the year.
Accordingly, CCE increased its prior guidance for fiscal 2013 earnings to reflect accelerated share repurchases. It however, reduced its expectation for revenues due to ongoing macroeconomic challenges. The second quarter is expected to be quite challenging in terms of volume and operating profits despite easy comparisons. However, results are expected to improve in the second half on the back of strong marketing and operating plans, together with cost savings initiatives and favorable commodity cost outlook.
Overall, we believe that the company has solid long-term fundamentals. Its strong brand portfolio, solid cash position, cost saving initiatives and accelerated share buybacks will help it manage through the current environment and spur profitability. Its latest decision of not moving forward with the purchase of the German bottler and instead return excess cash to shareholders in the form of accelerated share repurchases is also prudent. We therefore, maintain a Neutral recommendation on the stock.
Other Stocks to Consider
Coca-Cola Enterprises carries a Zacks Rank #3 (Hold). In the beverage/soft drinks sector sector, stocks worth mentioning are PepsiCo, Inc. (PEP - Analyst Report) and The WhiteWave Foods Company (WWAV - Snapshot Report), both carrying a Zacks Rank #2 (Buy).