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Should You Expect a Beat from Coca-Cola (KO) in Q1 Earnings

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The Coca-Cola Company (KO - Free Report) is slated to report first-quarter 2017 results on Apr 25, before the opening bell. Last quarter, the cola giant posted a positive earnings surprise of 2.78%.

In fact, Coca-Cola surpassed earnings estimates in each of the past four quarters, with an average surprise of 2.65%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

The company has been struggling to boost sales amid weak demand in certain emerging and developing markets and shift in consumer preference. Again, foreign exchange (Fx) is a major headwind for Coca-Cola with almost half of its revenues coming from outside the U.S. Although the dollar has weakened slightly, the negative currency impact is still alarming. Coca-Cola expects currency headwind and structural items to have an adverse impact of 3–4% and 1–2%, respectively, on its to-be-reported quarter's pre-tax income. It is also expected to hurt quarterly revenues by 1–2%.

Investors should note that Coca-Cola’s earnings declined for seven consecutive quarters due to weak sales accompanied by structural headwinds.

The company’s top line remained muted over the past several quarters primarily due to weak volumes especially in the sparkling beverage category. In 2016, the company’s worldwide unit case volume increased by a meager 1%. Although still beverage volumes grew 3%, sparkling beverage volumes were flat in 2016. Sparkling beverage accounts for more than 70% of the company’s 2016 worldwide unit case volume. Hence, such vast exposure in the sparkling beverage is a major cause of concern for Coca-Cola.

Sales of the company’s carbonated beverages are suffering due to increasing health consciousness among consumers. Consumers are looking for healthier beverage options and shifting away from carbonated soft drinks. The cola segment has been particularly affected by this. The diet drinks are also under pressure due to increasing consumer concern regarding the use of artificial sweeteners. The challenges have also been felt by another major soft drink maker, PepsiCo Inc. (PEP - Free Report) .

Nevertheless, Coca-Cola’s aggressive cost-cutting and strategic initiatives led to better-than-expected results in the fourth quarter amid heightened global volatility and macro headwinds. Increase in the company’s marketing investments supported volume growth, especially in North America. We expect to see similar trends in North America in the to-be reported quarter. Also, pricing gains, cost cuts and productivity savings should continue to support the bottom line.

Coca-Cola is also expanding its still beverage platforms via innovation and strategic deals. Last month, Coca-Cola and its largest Latin American bottler Coca-Cola Femsa SAB (KOF - Free Report) closed the proposed acquisition of AdeS soy-based beverage business from consumer products giant Unilever Plc (UL - Free Report) .

These strategic initiatives are expected to reflect in the to-be-reported quarter and will partly offset weak sales trend.

For the first quarter, the Zacks Consensus Estimate for earnings is pegged at 44 cents, reflecting a 3% year-over-year decrease. Meanwhile, our estimate for revenues is pegged at $8.97 billion, implying a 12.8% decrease.

Earnings Whispers

Our proven model does not conclusively show that Coca-Cola is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is 0.00% as the Most Accurate estimate of 44 cents per share is in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Coca-Cola’s Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Coca-Cola Company (The) Price, Consensus and EPS Surprise

 

Coca-Cola Company (The) Price, Consensus and EPS Surprise | Coca-Cola Company (The) Quote

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