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Coca Cola at Neutral, Yet Again

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On May 23, we maintained a Neutral recommendation on cola giant, The Coca-Cola Company (KO - Free Report) , following decent first-quarter results announced on Apr 16, 2013. However, muted volume trends of carbonated beverages concern us. Coca-Cola carries a Zacks Rank #3 (Hold).

Why the Neutral Recommendation?

Coca-Cola’s first-quarter 2013 earnings of 46 cents per share beat the Zacks Consensus Estimate by a penny. Moreover, earnings grew 5% year over year as revenue decline was offset by significantly improved margins.

Revenues declined 1% as benefit from volume growth was offset by currency headwinds, structural changes and two fewer selling days in the quarter. Volumes grew 4% in the quarter, better than last quarter’s 3% growth. While still beverage volumes grew, those of sparkling beverages declined.

Gross margins expanded 80 basis points (bps). Operating margin grew 70 bps year over year and 200 bps sequentially gaining from gross margin expansion and improved operating expense leverage.

Overall, it was a good quarter for Coca-Cola. Following the decent first-quarter results, estimates mostly moved upwards over the past 60 days. The Zacks Consensus Estimate for 2013 increased by almost 1% to $2.16 while that for 2014 increased 0.4% to $2.35 over the same period.

Moreover, we are encouraged by Coca-Cola’s global reach, strong brand power, expanding international presence, powerful global bottling network and its solid cash position.

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 the company’s sparkling beverage sales.

Though Coca-Cola has increased marketing investments and is driving package and product innovation to boost its carbonated beverage business, we prefer to wait until we see a substantial turnaround. The continuously challenged consumer spending environment is another negative factor.

Other Stocks to Consider

Rival PepsiCo, Inc. (PEP - Free Report) carries a Zacks Rank #2 (Buy).

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