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Coca-Cola (KO) Down 1.9% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for The Coca-Cola Company (KO - Free Report) . Shares have lost about 1.9% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is KO due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

First-Quarter 2018 Results

Earnings Beat

First-quarter 2018 comparable earnings of the company were 47 cents per share, surpassing the Zacks Consensus Estimate of 46 cents.

Earnings also improved 8% from the year-ago profit level of 43 cents, helped by ongoing productivity efforts.

Sales Beat

Revenues of $7.63 billion in the quarter surpassed the Zacks Consensus Estimate of $7.43 billion. However, net revenues declined 16% year over year due to the negative impact of structural items, marking the 12th consecutive quarterly fall. Acquisitions/divestitures and structural items had 26% negative impact on revenues. The structural changes primarily include the impact of bottler refranchising efforts.

Organic revenues grew 5% in the quarter, aided by concentrate sales improvement of 4% and price/mix growth of 1%. Currency also impacted revenues positively by 2%.

Volume and Pricing

Coca-Cola’s total unit case volume grew 3% in the quarter versus flat growth in the preceding quarter.

Category Cluster Performance: Sparkling beverage unit case volume increased 4% (versus no growth in the prior quarter). Juice, dairy and plant-based beverages witnessed 3% decline (versus 2% growth in the preceding quarter). Water, enhanced water and sports drinks were up 1% (versus 2% in Q4), and Tea and Coffee were up 5% (compared with 2% growth in Q4).

Notably, Diet Coke’s North America volume grew in the quarter following a full brand revamp. The introduction of four bold, new flavors, along with contemporary, sleek packaging and innovative marketing, helped in the upside.

Quarterly Segment Details

Revenues grew 11% at North America, 13% at Europe, the Middle East & Africa, and 8% at the Latin America segment. However, revenues at Asia Pacific segment increased modestly by 1%.

Organic revenues grew across the board, increasing 1% in North America, 8% in Europe, Middle East & Africa, 6% in Latin America, 3% in Asia Pacific and 13% in Bottling Investments.

Geographic Analysis

The company has five operating segments – Europe, Middle East and Africa (EMEA), Latin America, North America, Asia Pacific and Bottling Investments.

EMEA division registered revenues of $1.84 billion, up 13% year over year.

Price/mix had a 1% negative impact on revenues as positive pricing in the marketplace was offset by negative geographic mix due to growth in emerging and developing markets outpacing developed markets. That said, currency and concentrate sales had a 7% and 9% positive impact on revenues, respectively. Unit case volume grew 4%, driven by strong performance in Turkey and South Africa, partially offset by declines in Nigeria and Western Europe. Organic revenues grew 8%.

The Latin America segment registered revenues of $998 million, up 8% from the prior-year quarter. Price/mix growth was 6% in the quarter, primarily driven by strong price/mix in Mexico and the South Latin business unit. Organic revenues grew 6%.

Unit case volume increased 1% as low to mid-single-digit growth in Brazil, Argentina and Mexico was offset by decline in both Peru and Chile.

The North America segment revenues totaled $2.68 billion, increasing 11% year over year. Organic revenues grew 1% in the quarter. Price/mix declined 1% in the quarter, as low single-digit underlying pricing was offset by the cycling of certain product launches, incremental freight costs and timing of the Easter holiday.

Unit case volume grew 2% in the quarter. Sparkling soft drinks volume growth was 3%, which includes double-digit growth in Coca-Cola Zero Sugar, along with positive performance in Diet Coke.

Juice, dairy and plant-based beverages declined 2%. The downside was due to the decline in juice (mainly due to deprioritizing lower-margin juice drink brands and packaging re-sizing across the juice portfolio) that was offset by the growth in dairy and plant-based beverages. Tea and coffee grew 5% while water, enhanced water and sports drinks accelerated to 1% growth.

The Asia-Pacific segment registered revenues of $1.22 billion, up 1% from the year-ago quarter. Organic revenues were up 3% in the quarter and price/mix was down 2%. Unit case volume growth was 5% in the quarter. Volume of the brand Coca-Cola in China grew more than 20% in the quarter. However, total China business was slightly less as the company de-emphasized low-value water in favor of building its broader consumer franchise and value proposition. Meanwhile, Southeast Asia volume declined in low single digits.

Bottling Investments segment revenues decreased 73% (up 13% on an organic basis) to $1.1 billion as volumes declined 32% and structural headwinds impacted revenues by 90%.

Price/mix growth of 2% in the quarter was driven by the strong performance in India.

During the three months ended Mar 30, 2018, intersegment revenues were $149 million for Europe, Middle East & Africa, $19 million for Latin America, $55 million for North America and $106 million for Asia Pacific.

Margins

Comparable gross margin expanded 270 bps year over year to 64%. The company’s comparable operating margin grew 600 bps to 30.7% in the quarter, given the divestitures of lower-margin bottling businesses and ongoing productivity efforts. The upside was partly offset by adoption of the new revenue recognition accounting standard.

2018 Guidance Reaffirmed

Organic revenues are expected to rise 4%. Acquisitions/divestitures (mainly bottler re-franchising efforts) are expected to hurt revenues by 17%, while Fx is likely to have a positive impact of 1% on revenues. Again, revenues will be positively impacted by 1-2% from Accounting Standards Update 2014-09.

Comparable currency income before income taxes (structurally adjusted) is expected to increase 8-9%. Foreign exchange is expected to hurt comparable income before taxes by 0-1%. Structural changes are likely to have a 2% negative impact on it.

The company expects adjusted EPS to grow 8-10% from the prior-year’s comparable EPS of $1.91.

The company expects to buy back shares worth $1 billion in 2018. The adjusted effective tax rate is likely to be 21%. Cash from operations is likely to be at least $8.5 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been six revisions lower for the current quarter.

Coca-Cola Company (The) Price and Consensus

VGM Scores

At this time, KO has an average Growth Score of C, though it is lagging a bit on the momentum front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, KO has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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