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On Nov 18, we maintained a Neutral recommendation on The Coca-Cola Company (KO - Analyst Report) 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 Oct 15, 2013, Coca-Cola announced mixed third-quarter results, barely meeting the Zacks Consensus Estimate for earnings but missing the same for revenues.

Coca-Cola’s third-quarter 2013 adjusted earnings of 53 cents per share were in line with the Zacks Consensus Estimate. Earnings grew 4% year over year as decent operating margins made up for the soft revenues. Revenues declined 3% year over year and missed the Zacks Consensus Estimate. Though volumes and price/mix improved from the second-quarter levels, currency headwinds took a toll on the top line.

Volumes grew 2% in the quarter, better than the last quarter’s 1% growth, driven by improved volume trends in many key markets including North America, China and India. However, volumes were still below last year’s 4% growth due to economic slowdown in Europe, Brazil and Mexico. Price/mix increased a strong 2% in the quarter, much better than flat price/mix seen in the first half.

Despite higher-than-expected currency headwinds and weak gross margins, operating margin grew 90 basis points to 23.5% in the quarter driven by favorable operating expense leverage.

Following the soft third-quarter results, estimates largely moved downwards over the past 60 days. The Zacks Consensus Estimate for 2013 decreased 0.5% to $2.09 per share while that for 2014 decreased 2.2% to $2.22 over the same period.

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. Moreover, its increased focus on product/packaging innovation and marketing strategies bode well for additional market share gains.

However, 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 carbonated beverage sales of Coca-Cola as well as other beverage giants like PepsiCo Inc. (PEP - Analyst Report). The continuously challenged consumer spending environment is another negative factor.

Other Stocks to Consider

Coca-Cola carries a Zacks Rank #3 (Hold). Other beverage companies that are currently doing well include Coca-Cola Amatil Limited (CCLAY) and The WhiteWave Foods Company (WWAV - Snapshot Report). While Coca-Cola Amatil carries a Zacks Rank #1 (Strong Buy), WhiteWave Foods carries a Zacks Rank #2 (Buy).

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