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On Dec 10, we maintained a Neutral recommendation on Coca-Cola Enterprises Inc. (CCE - Analyst Report), despite strong third-quarter 2013 results. We prefer to stay on the sidelines due to a cautious outlook for the next quarter owing to continued operating and marketplace challenges.

Why the Retention?

On Oct 24, Coca-Cola Enterprises announced decent third-quarter 2013 results. Third-quarter 2013 adjusted earnings of 82 cents per share beat the Zacks Consensus Estimate of 80 cents by 2.5% and the year-ago earnings of 71 cents by 15.5% driven by currency tailwinds, share buybacks and lower taxes. Revenues grew about 5.0% year over year to $2.17 billion and came in line with the Zacks Consensus Estimate. Excluding currency tailwinds, revenues grew 2.5% driven by improvement in both volumes and pricing.

Overall, volumes (bottle and cans) grew 2.5% in the quarter, much better than a similar decline in the second quarter. Volumes were positively impacted by favorable weather conditions and seasonal promotional initiatives, especially the ‘Share a Coke’ campaign. However, while volumes improved strongly in the month of July due to exceptionally warm weather conditions, it returned to more normal patterns thereafter; remaining flat in August and declining in September as the macro headwinds persisted.

Coca-Cola Enterprises has been facing many challenges lately. These include steep price competition in Great Britain, overall soft macroeconomic conditions and difficult beverage market conditions in France due to the increase in French excise tax. These persistent macro headwinds caused the company to lower its underlying top line and operating income guidance for full-year 2013.

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.

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 ride out the current environment and spur profitability. However, the poor macro conditions across Europe and challenging consumer environment are restricting meaningful volume/top-line growth.  We, therefore, maintain a Neutral recommendation on the stock.

Other Stocks to Consider

Coca-Cola Enterprises carries a Zacks Rank #3 (Hold). Better-ranked beverage companies include Coca-Cola Amatil Limited (CCLAY) and The WhiteWave Foods Company (WWAV - Snapshot Report). While Coca-Cola Amatil sports a Zacks Rank #1 (Strong Buy), WhiteWave Foods carries a Zacks Rank #2 (Buy).

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