uploads/2019/07/Coca-Colas-Q2-Results-1.jpeg

Will Coca-Cola’s Q2 Results Beat the Expectations?

By

Updated

Coca-Cola (KO) will likely report its second-quarter results on July 23. The company reported strong first-quarter results in April. Analysts expect Coca-Cola’s second-quarter revenue growth rate to be higher than the first quarter.

The company’s second-quarter revenues could rise about 10% to $9.81 billion on a reported basis. Acquisitions, divestitures, and structural items are expected to have a 6% negative impact on the company’s second-quarter revenues. Negative currency fluctuations could impact Coca-Cola’s revenues by 4%–5%.

In comparison, PepsiCo delivered a 2.2% rise in its second-quarter revenues on a reported basis. PepsiCo’s organic revenue growth was 4.5% in the second quarter.

Overall, Coca-Cola’s first-quarter revenues of $8.02 billion beat analysts’ forecast of $7.88 billion. The company’s first-quarter revenues grew 5.2% on a year-over-year basis.

Article continues below advertisement

Coca-Cola’s organic revenue growth was 6.0% in the first quarter. Organic revenue growth excludes the impact of currency headwinds and acquisitions and divestitures. Notably, strong organic revenue growth in all of the operating groups drove Coca-Cola’s first-quarter top line. The company’s decision to build inventory due to Brexit uncertainty had a two percentage positive impact on the first-quarter revenues.

Coca-Cola’s earnings

Coca-Cola’s first-quarter adjusted EPS rose 2.1% to $0.48. The growth was a result of higher revenues and an inventory build-up related to Brexit. However, currency headwinds had a negative impact of 11 percentage points on the company’s first-quarter EPS. The company’s first-quarter adjusted EPS beat analysts’ forecast by two cents.

Analysts expect Coca-Cola’s second-quarter adjusted EPS to rise 1.6% to $0.62 due to higher revenues. However, currency movements are expected to be a drag on the company’s second-quarter earnings.

Article continues below advertisement

Key growth drivers

Coca-Cola’s strategy to innovate healthier drinks is driving its revenues. So, the company has been expanding its low-or-no sugar offerings to cater to the growing proportion of health-conscious consumers.

Notably, the company is experiencing huge success with its revamped Coca-Cola Zero Sugar. The product has delivered double-digit volume growth for six consecutive quarters.

Coca-Cola is creating new flavors to address the weakness in its soda business. In February, Coca-Cola introduced two new flavors—Orange Vanilla Coke and Orange Vanilla Coke Zero Sugar. The new flavors were launched in 12-ounce cans and 20-ounce PET bottles.

After a favorable ruling by an Arbitration Tribunal, the company is now allowed to roll-out its Coca-Cola Energy product to additional markets. The company introduced Coca-Cola Energy in Spain and Hungary in April. The new beverage contains caffeine from naturally-derived sources and guarana extracts. The beverage contains B vitamins. The drink doesn’t contain taurine.

The company has also made several acquisitions to expand its presence beyond the soda category. The beverage giant acquired Costa coffee company for $4.9 billion to grow in the $500 global hot beverages market.

Coca-Cola acquired Australia’s Organic & Raw Company, maker of MOJO Kombucha drinks in 2019. The company purchased a stake in Australia’s Made Group, which makes premium juices, dairy, and coconut water.

Also, Coca-Cola acquired the remaining stake in Nigeria’s Chi Limited, maker of juices, value-added dairy and iced tea.

Article continues below advertisement

Volume growth

Coca-Cola’s innovation, marketing efforts, and strategic acquisitions drove the 2% growth in its unit case volumes in the first quarter. The company’s sparkling soft drink volumes grew 1%. Overall, water, enhanced water, and sports drink volumes rose 6%.

The juice, dairy, and plant-based beverages category and the tea and coffee category had flat volumes on a YoY basis in the first quarter.

Rival PepsiCo continues to struggle with weak volumes, especially in the soda category. In the second quarter, the PepsiCo Beverage North America segment’s volumes fell 2%. So, the decline was a result of a 3% drop in soda volumes. The segment also experienced a 1% fall in non-carbonated beverage volumes.

Coca-Cola’s valuation

As of Thursday, Coca-Cola was trading at a 12-month forward PE ratio of 23.8x compared to PepsiCo’s ratio of 23.1x. Analysts expect Coca-Cola’s revenues to increase 13.7% to $36.2 billion in 2019. Analysts expect Coca-Cola’s adjusted EPS to rise about 1.0% to $2.10.

Coca-Cola expects organic revenue growth of 4% this year. The company expects its adjusted EPS growth to be -1%–1% in 2019.

The company has a strong brand name and presence in over 200 countries. Likewise, Coca-Cola has an extensive portfolio of over 500 soda and non-soda beverage brands. The company’s brands include the namesake Coca-Cola trademark, Powerade, Dasani, Honest Tea, and Minute Maid.

Coca-Cola is called a “dividend king.” The term is used for companies that increased their dividend for at least 50 consecutive years. In 2019, the company raised its annual dividend 2.6% to $1.60 per share. The company has increased its dividend for 57 consecutive years.

As of Thursday, the company’s dividend yield of 3.1% was higher than PepsiCo’s dividend yield of 2.9%.

Stock movement

As of Thursday, the stock has risen 9.9% on a year-to-date basis compared to a 20.3% rise in PepsiCo stock. The stock also lags the S&P 500, which has risen 19.5% in 2019.

Among the 25 analysts following Coca-Cola stock, 12 recommended a “buy,” while 13 recommended a “hold.” The average 12-month target price of $52.55 for the stock indicates an upside potential of about 1.0% as of Thursday. Analysts might revise the target price after the company’s second-quarter results.

Advertisement

More From Market Realist