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Coca-Cola Enterprises Inc. (CCE - Analyst Report), one of the largest Coca-Cola bottlers in the world, recently discussed its expectations regarding fiscal 2012 and 2013. The company revealed its long term plans, share repurchase programs and dividends and capital structure.  Following are the details of the update:

Fiscal 2012 Outlook

For fiscal 2012, Coca-Cola Enterprises expects earnings per share toward the upper end of the previously announced range of $2.20 to $2.24. The Zacks Consensus Estimate for fiscal 2012 is $2.23 per share. The guidance includes adverse effect of currency headwinds, which is expected to impact earnings by 7.5%. The company’s guidance of the currency headwinds has declined from the prior guidance of 8%.

Coca-Cola Enterprises has maintained its revenue guidance. The company expects revenue and operating income (both currency neutral) to grow in the low- to mid-single digit range.

Coca-Cola Enterprises further expects free cash flow for fiscal 2012 to be around $500 million, which is at the top end of the prior expected range of $475 million to $500 million. Capital expenditure is expected to be around $375 million, which is at the low end of the prior expected range of $375 million–$400 million.  The company expects the weighted average cost of debt to be around 3% (in line with prior expectations) and effective tax rate to be in the range of 26% to 27% (tighter compared to the prior expectations of 26% - 28%).

All of the above expectations consider several challenges that the company has been facing. These include steep price competition in Great Britain, overall soft macro economic conditions and increase in French excise tax. The hike in French excise tax was introduced by French regulatory authorities from January 2012. An increased excise tax was levied on beverages with added sweetener, which is applicable to almost all drinks that the company sells in France.  

Update on Share Repurchase and Dividends

Coca-Cola Enterprises completed repurchase of 27 million shares worth $780 million in fiscal 2012, thereby completing the share repurchase program of 65 million shares authorized by its board of directors.

The board authorized the third share repurchase program worth $1.5 billion. The company expects to repurchase shares worth at least $500 million during 2013.

The company also intends to increase its 2013 dividend by 30% to 35% of 2013 diluted earnings per share (currency neutral). This would mark an approximately 15% increase from the prior-year quarter.

Long Term Outlook

Coca-Cola Enterprises reaffirmed its prior long-term targets. The company intends to achieve annual revenue growth of 4% to 6%,  operating income growth of 6% to 8%,  high single digit growth in terms of annual earnings per common share and at least 20 basis points growth in annual return on invested capital (ROIC).

Capital spending is expected to decline 5% from the prior-year quarter and be in the range of 4% to 4.5% of net sales, down from the prior guidance of 5% of net sales. The capital spending guidance includes the expected impact of increase in French excise tax and cost control strategies of the company.

Fiscal 2013 Outlook

The company expects earnings per share to grow 10%, including a mild positive impact of currency translation. The Zacks Consensus Estimate for fiscal 2013 is $2.53 per share, up 13.5% from the Zacks Consensus Estimate for fiscal 2012.  

The company expects net sales and operating income to grow in a mid single digit range. However, gross margin is expected to decline owing to weaker net pricing per case compared to higher cost of sales per case.  The likely dip in gross margin is due to sustained macroeconomic headwinds. As such, operating income margins are also expected to be weak in fiscal 2013.

Coca-Cola Enterprises expects free cash flow for fiscal 2013 to be around $450 to $500 million. Capital expenditure is expected to be around $350 million.  The company expects the weighted average cost of debt to be around 3% and effective tax rate to be in the range of 26% to 28%.

As a peer of PepsiCo Inc. (PEP - Analyst Report), it is encouraging to note that the company’s underlying guidance was raised slightly for net sales and operating income in fiscal 2013.

Overall, we are optimistic about the company’s long-term fundamentals. We appreciate the company’s strong brand portfolio and solid cash position. However, the anticipated margin weakness in 2013 is a matter of concern. Also, the currency headwinds and economic challenges in Europe may drag the company’s performance in the upcoming quarters.

Coca-Cola Enterprises carries a Zacks #3 Rank in the near term (Hold rating). We currently have a Neutral recommendation on the company over the long term.

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