Coke (KO) Up 0.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Coca-Cola (KO). Shares have added about 0.6% in that time frame, outperforming 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 drivers.

Coca-Cola Beats Q2 Earnings & Sales Estimates

Coca-Cola delivered strong second-quarter 2019 results, wherein earnings and sales beat estimates. Results gained from the effective execution of the company’s strategies to evolve as a consumer-centric total beverage company.

Coca-Cola’s second-quarter 2019 comparable earnings of 63 cents per share beat the Zacks Consensus Estimate of 62 cents. The bottom line also improved 4% from the year-ago period, driven by the focus on consumer-centric innovation, solid core brand performance and improved execution in the marketplace. Currency translations negatively impacted earnings by 9%.

Revenues of $9,997 million surpassed the Zacks Consensus Estimate of $9,702.6 million and rose 6% year over year. Organic revenues also grew 6%. The increase in reported as well as organic revenues were attributed to robust performance across all segments as well as balanced volume and price/mix. Concentrate sales improved 4%, owing to the timing of shipments in Brazil. Price/mix grew 2%, benefiting from strong pricing across all operating segments. 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 gained 3% in the second quarter as it witnessed robust growth in developing and emerging markets.

Category Cluster Performance: Sparkling soft drink unit case volume was up 3% (compared with a 1% increase in the prior quarter), owing to robust 4% growth in the Coca-Cola trademark globally, including the original Coca-Cola, along with continued double-digit growth in Coca-Cola Zero Sugar. Volume for juice, dairy and plant-based beverages remained flat year over year (compared with flat volume in the last reported quarter). Water, enhanced water and sports drinks improved 2% (in comparison with 6% growth in the first quarter), and Tea and Coffee volume was down 3% (compared with flat volume in the first quarter).

Segmental Details

Revenues grew 3% in North America and 2% for the Asia Pacific segment. However, revenues at the Europe, Middle East & Africa (EMEA), and Latin America segments declined 4% and 3%, respectively. Meanwhile, the Bottling Investments segment’s revenues were up 9% in the quarter under review. However, the Global Ventures segment reported substantial revenue growth of 201%, gaining from the Costa acquisition.

Organic revenues grew across the board, except in North America, backed by consistent innovation and revenue growth initiatives within sparkling soft drinks, with solid pricing and mix across all regions. Organic revenues improved 2% for EMEA, 1% for Latin America, 7% for the Asia Pacific and 5% for the Global Ventures segment. The Bottling Investments segment recorded organic revenue growth of 30%. Meanwhile, organic revenues for North America dropped 1%.

Margins

Comparable currency-neutral operating income grew 14% on strong organic revenue growth, gains from acquisitions and ongoing benefits of productivity initiatives. Comparable operating margin contracted 30 basis points (bps) as a 185-bps negative impact of unfavorable currency and net acquisitions more than offset strong underlying operating margin expansion.

Guidance

Backed by strong year-to-date performance, the company updated its outlook for 2019. It now estimates organic revenue growth of nearly 5% in 2019 compared with the previously stated 4% increase. Comparable currency-neutral revenues are expected to increase 12%, with about 7% gain from acquisitions, divestitures and structural items. Earlier, the company projected a 12-13% increase in comparable currency-neutral revenues, aided by 8-9% benefit from acquisitions, divestitures and structural items. However, unfavorable currency is now likely to affect revenues by 4% compared with the previously mentioned 3-4% headwinds.

Comparable currency-neutral operating income for 2019 is now expected to increase 11-12%, marking rise from the earlier stated 10-11% growth. Acquisitions, divestitures and structural changes will continue to positively impact operating income by a low-single digit. However, foreign exchange is expected to hurt comparable operating income by 7-8%. The company earlier projected currency headwinds of 6-7% 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 $8.5 billion in 2019 (up from the previously mentioned $8 billion), with capital expenditure of nearly $2.4 billion (an increase from $2 billion mentioned earlier).

For the third quarter of 2019, it anticipates comparable net revenues to include about 6% benefit from acquisitions, divestitures and structural items. Meanwhile, currency headwinds are likely to hurt comparable net revenues by 3% and comparable operating income by 6%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Coke has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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.

Outlook

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 #2 (Buy). We expect an above average return from the stock in the next few months.

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