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Why Is Coke (KO) Down 2.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Coca-Cola (KO - Free Report) . Shares have lost about 2.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Coke 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.

Coca-Cola Q3 Earnings In Line, Revenues Beat Estimates

Coca-Cola’s top line beat estimates in third-quarter 2019, while the bottom line met the same. Additionally, revenues improved year over year on robust volume and strong pricing. Meanwhile, comparable earnings declined year over year, owing to currency headwinds.

Coca-Cola’s third-quarter 2019 comparable earnings of 56 cents per share were in line with the Zacks Consensus Estimate. However, the bottom line declined 2% from the year-ago period. Currency translations negatively impacted earnings by 6%.

Revenues of $9,507 million surpassed the Zacks Consensus Estimate of $9,484 million and improved 8% year over year. Organic revenues grew 5%. The increase in reported as well as organic revenues was attributed to robust performance across all segments as well as growth in volume and price/mix.

Price/mix rose 6%, driven by revenue growth management initiatives as well as gains from a favorable geographic mix. Meanwhile, concentrate sales declined 2%, owing to the timing of shipments during the quarter. Further, increase in global value share, particularly in total non-alcoholic ready-to-drink (NARTD) beverages, aided the top line.

Volume and Pricing

Coca-Cola’s total unit case volume rose 2% in the third quarter on robust growth in developing and emerging markets. Strength in North America, driven by strong demand for Coca-Cola Zero Sugar, also boosted volume.

Category Cluster Performance: Sparkling soft drinks unit case volume was up 2% (compared with a 3% increase in the prior quarter), owing to 3% growth in the Coca-Cola trademark globally, with double-digit growth in Coca-Cola Zero Sugar. Volume for juice, dairy and plant-based beverages grew 1% year over year (compared with flat volume in the last reported quarter) on strong gains from the Minute Maid and Simply portfolios in North America as well as Minute Maid Pulpy in China. Water, enhanced water and sports drinks improved 2% (same as growth witnessed in the second quarter), and tea and coffee volume grew 4% (compared with 3% growth in the second quarter).

Segmental Details

Revenues grew 2% for North America, 4% for Latin America and 3% for the Asia Pacific segment. Meanwhile, revenues for the Europe, Middle East & Africa (“EMEA”) segment remained flat. The Bottling Investments segment’s revenues grew 8% in the quarter under review. However, the Global Ventures segment reported substantial revenue growth of 243%, gaining from the Costa acquisition.

Organic revenues grew across the board, backed by consistent innovation and revenue growth initiatives within sparkling soft drinks, with solid pricing and mix across all regions. Organic revenues improved 4% for EMEA, 12% for Latin America, 3% each for North America and the Asia Pacific, and 14% for the Global Ventures segment. The Bottling Investments segment recorded organic revenue growth of 9%.

Margins

Comparable currency-neutral operating income grew 5%. Comparable operating margin contracted 260 basis points (bps), driven by a 260-bps negative impact of unfavorable currency and net acquisitions.

Guidance

Backed by strong year-to-date performance, the company updated its outlook for 2019. It now estimates organic revenue growth of at least 5% in 2019. Comparable currency-neutral revenues are now expected to increase at least 12%, with 7% gain from acquisitions, divestitures and structural items. However, unfavorable currency is now likely to affect revenues by 4-5% compared with the previously mentioned 4% headwind.

Comparable currency-neutral operating income for 2019 is now expected to rise 12-13%, marking an increase from the earlier stated 11-12% growth. Acquisitions, divestitures and structural changes will continue to positively impact operating income by a low-single digit. However, foreign exchange is now expected to hurt comparable operating income by 8-9%. The company earlier projected currency headwinds of 7-8% on comparable operating income.

It continues to expect comparable earnings to be down 1% to up 1% from $2.08 recorded in 2018. Underlying effective tax rate is still estimated at 19.5%. Moreover, the company expects cash from operations of at least $8.8 billion in 2019 (up from the previously mentioned $8.5 billion), with capital expenditure of nearly $2.2 billion (a decline from $2.4 billion mentioned earlier).

For the fourth quarter of 2019, it anticipates comparable net revenues to include about 12% benefit from acquisitions, divestitures and structural items. Meanwhile, currency headwinds are likely to hurt comparable net revenues by 3% and comparable operating income by 7%.

Additionally, the company provided initial view for 2020, regarding currency impacts. It expects currency headwinds of nearly 1-2% on comparable net revenues and 2-3% on comparable operating income.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Coke has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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


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