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Here's How Coca-Cola (KO) Stock is Poised Amid Cost Headwinds

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The Coca-Cola Company (KO - Free Report) has been benefiting from strategic transformation and ongoing recovery around the world. Alongside this, strength across the majority of the markets as well as the cycling of last year’s pandemic-led impacts led to the impressive first-quarter 2022 results, wherein the top and bottom lines beat the Zacks Consensus Estimate for the fifth straight quarter. Both metrics grew year over year.

As a result, this Zacks Rank #3 (Hold) company has gained 6.8% in the past three months compared with the industry’s growth of 1.9%.

Coca-Cola’s top line benefited from an improved price/mix and an increase in concentrate sales. It also witnessed volume growth across most categories in the first quarter. Category-wise, volume benefited from growth in trademark Coca-Cola; sparkling flavors; the nutrition, juice, dairy and plant-based beverages; and hydration, sports, coffee and tea categories.

 

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KO remains focused on the core brands via increased investments to meet the evolving needs of consumers. In the first quarter of 2022, it launched Maaza Aam Panna to expand in the fast-growing fruit-flavored sparkling subcategory. The successful rollouts of the Real Magic platform and Coke Starlight bode well.

The company’s recent acquisition of BODYARMOR, the agreement with Constellation Brands to launch FRESCA Mixed, and the partnership with Molson Coors to launch Simply Spiked Lemonade in the United States remained key growth drivers.

Coca-Cola’s e-commerce business has also been performing well, with a growth rate of the channel doubling in many countries. The company has been accelerating investments to build strong digital capabilities. It is strengthening consumer connections and further piloting numerous digital-enabled initiatives through fulfillment methods (B2B to home or B2C platforms in many countries) to capture online demand for at-home consumption. Also, the company is progressing well with the rollout of multi-category eB2B platforms with its bottlers globally.

Driven by these factors, management anticipates 2022 organic revenue growth of 7-8%. Revenues are likely to reflect a 3% positive impact of acquisitions. Adjusted comparable currency-neutral earnings are estimated to increase 8-10%, with adjusted comparable earnings growing 5-6% year over year.

However, Coca-Cola has been reeling under higher supply-chain costs, including higher commodity input costs and transportation expenses. The company is also witnessing pressures related to commodity and material cost inflation.

For 2022, It anticipates inflationary and supply-chain pressures to impact costs across several aspects of the business, including input costs, transportation, marketing and operating expenses. Management expects commodity price inflation to hurt the cost of goods sold at a mid-single-digit percentage range for 2022. Also, higher marketing investments remain concerning.

In first-quarter 2022, the company witnessed the adverse impacts of foreign currency, which hurt the top and bottom lines. Notably, currency headwinds of 4% affected the company’s revenues and an unfavorable currency of 8 points hurt comparable earnings per share.

Based on the current rates and the impacts of hedged positions, revenues and comparable earnings are expected to be impacted by currency headwinds of 2-3% and 3-4% in 2022, respectively. For second-quarter 2022, revenues and comparable earnings are likely to be affected by 4% of currency headwinds each.

Bottom Line

We believe that Coca-Cola’s strategic efforts, including product innovation, market recovery worldwide and solid online show, will help offset cost headwinds and supply-chain issues. Earnings estimates for the current financial year have increased 0.8% to $4.27 over the past 30 days. All said, a long-term earnings growth rate of 7% raises optimism in the stock.

Stocks to Consider

We highlighted some better-ranked stocks from the broader Consumer Staples space, namely Archer Daniels (ADM - Free Report) , McCormick & Company (MKC - Free Report) and Sysco Corporation (SYY - Free Report) .

Archer Daniels, one of the leading producers of food and beverage ingredients as well as goods made from various agricultural products, currently sports a Zacks Rank #1. It has an expected long-term earnings growth rate of 6.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Archer Daniels’ current financial-year sales and earnings per share suggests growth of 10.1% and 15.4%, respectively, from the year-ago reported numbers. The consensus mark for ADM’s earnings per share has been unchanged in the past 30 days.

McCormick is one of the leading manufacturers, marketers and distributors of spices, seasonings, specialty foods and flavors. It also currently carries a Zacks Rank #2 (Buy). It has an expected long-term earnings growth rate of 6.1%.

The Zacks Consensus Estimate for McCormick’s current financial-year sales and EPS suggests growth of 5% and 3.9%, respectively, from the year-ago period’s reported figures. MKC has a trailing four-quarter earnings surprise of 7.3%, on average.

Sysco, the marketer and distributor of food and related products, currently has a Zacks Rank #2. SYY has a trailing two-quarter earnings surprise of 93.75%, on average. It has an expected long-term earnings growth rate of 11%.

The Zacks Consensus Estimate for Sysco’s current financial-year sales and earnings per share suggests growth of 35.9% and 145.5%, respectively, from the year-ago reported numbers. The company has a trailing four-quarter earnings surprise of 3.7%, on average.