It has been about a month since the last earnings report for Coca-Cola (KO - Free Report) . Shares have added about 0.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Coke due for a pullback? 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 catalysts.
Coca-Cola Q1 Earnings & Revenues Surpass Estimates
Coca-Cola delivered top and bottom-line beat in first-quarter 2020. Comparable earnings of 51 cents per share beat the Zacks Consensus Estimate of 44 cents and improved 8% from the year-ago period. Currency translations negatively impacted earnings by 2%. Comparable currency-neutral earnings per share rose 10%.
Revenues of $8,601 million surpassed the Zacks Consensus Estimate of $8,403 million but declined 1% year over year. Organic revenues remained the same as the prior-year quarter. During the quarter, both concentrate sales and price/mix were flat. Further, the first quarter had one less operational day, which hurt revenue growth by nearly 1 percentage point. Moreover, currency headwinds hurt the company’s top line by 2%. It continued to witness increase in global value share, particularly in total non-alcoholic ready-to-drink (NARTD) beverages.
Price/mix was flat, driven by adverse channel and category mix in key markets due to the coronavirus outbreak. Despite being flat, concentrate sales were 1 percentage point ahead of unit case volume, backed by bottler inventory backlog due to the uncertain environment, offset by one less day in the quarter and cycling of inventory build due to Brexit in the prior year. Coca-Cola’s total unit case volume was down 1% in the first quarter on declines in the Asia Pacific due to the coronavirus outbreak, slightly offset by growth in North America. The company stated that it witnessed robust unit case volume growth through the end of February, excluding China. In the aforesaid period, unit case volume rose 3%.
Category Cluster Performance: Sparkling soft drinks’ unit case volume was down 2% (against a 3% increase in the prior quarter), driven by a decline in the Asia Pacific, particularly China. However, the Coca-Cola trademark rose 1% on strength in Coca-Cola Zero Sugar. Volume for juice, dairy and plant-based beverages declined 6% (compared with flat volume in the last reported quarter). Strong gains from the North America portfolio as well as Chi in West Africa was largely negated by the dismal performance of Minute Maid Pulpy in China. Water, enhanced water and sports drinks improved 2% (same as growth witnessed in the fourth quarter), and tea and coffee volume dipped 6% (compared with 4% growth in the fourth quarter).
Revenues grew 6% for North America and 4% for Latin America. Meanwhile, revenues declined 5% for the Asia Pacific, 3% for Europe, Middle East & Africa (“EMEA”), 8% for Bottling Investments and 2% for Global Ventures segments.
Organic revenues improved 13% for Latin America and 4% for North America, offset by a 7% decline in the Asia Pacific, 1% drop in EMEA, 2% fall in Global Ventures segment and a 6% decline in Bottling Investments.
Comparable currency-neutral operating income grew 11% on strong operating expense leverage in Latin America and favorable timing of certain corporate expenses. Comparable operating margin expanded 250 basis points (bps) to 30.7%. In dollar terms, comparable operating income grew 7% to $2,634 million.
Coronavirus-Related Strategy and Business Update
In response to the coronavirus outbreak, the company has allowed office-based staff to work remotely. However, employees within the Coca-Cola system continue to work relentlessly to ensure uninterrupted supplies to consumers, while following health and safety measures. It is working with its bottlers and retail customers to maintain adequate inventory in key channels. It is also investing in e-commerce to support retailers and meal delivery services, shifting toward fit-for-purpose package sizes for online sales, and redeploying consumer and trade promotions toward digital.
The company notes that it entered 2020 with great momentum, with about 3% unit case volume growth recorded as of the end of February, excluding China. With the spread of the virus across the globe in March, it witnessed significant declines in away-from-home channels. Meanwhile, the at-home channel witnessed a demand splurge due to early pantry loading, followed by a normalized demand later. Further, the e-commerce channel witnessed strong growth.
As away-from-home channels contribute nearly 50% of the company’s revenues, it expects to witness the altered consumer purchase patterns to significantly impact the second-quarter results. Notably, the company has experienced nearly 25% decrease in global volume since the start of April, most of which is attributed to declines in the away-from-home channel. Given the extended and uncertain period of the social distancing and shelter-in place mandates, the company is unable to ascertain the impacts of the coronavirus outbreak on its second-quarter and yearly results. However, it expects material impacts on the second-quarter performance at this time. Nonetheless, it expects the performance to improve in the second half of 2020, as it expects the aforesaid impacts to be temporary.
Though the company did not provide guidance for the second quarter and 2020 due to the uncertainties related to the coronavirus pandemic, it outlined the expected currency impacts on its results for both periods. For 2020, it estimates currency headwinds of mid-single digits on comparable net revenues and high-single digits on comparable operating income, based on current rates and hedge positions. It expects underlying effective tax rate of 19.5% for 2020. For the second quarter, the company expects currency impacts of 4-5% on comparable net revenues and 5-6% on comparable operating income.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -23% due to these changes.
At this time, Coke has a subpar Growth Score of D, however its Momentum Score is doing a lot 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.