Coca-Cola Investors Brace for Weak Q2 Results



Beverage giant Coca-Cola (NYSE:KO) will likely announce its second-quarter results on July 21. PepsiCo (NASDAQ:PEP) reported better-than-expected second-quarter results on July 13. Strength in the snack foods business drove PepsiCo’s second-quarter results. However, the company’s beverage business suffered. Restaurant closures and canceled sports, and postponed events impacted away-from-home consumption.

Coca-Cola cautioned in April that the decline in the away-from-home consumption will likely hurt its second-quarter results.

Pandemic will likely hurt Coca-Cola’s Q2 results

Wall Street expects Coca-Cola’s revenue to decline 28.1% YoY (year-over-year) to $7.18 billion in the second quarter. The at-home-consumption of beverages benefited from pandemic-led demand. However, the sales volumes in restaurants and other away-from-home channels might decline. Also, COVID-19 related costs might be a drag on the company’s second-quarter earnings. Analysts expect the company’s second-quarter adjusted EPS to decline about 36.5% YoY to $0.40.

In the first quarter, Coca-Cola’s revenue declined by 1.1% to $8.60 billion. COVID-19 related disruption and currency headwinds impacted the company’s revenue. The company’s first-quarter adjusted EPS grew 6.3% to $0.51 and beat analysts’ forecast of $0.44. Improved margins helped drive the company’s earnings growth.

Meanwhile, PepsiCo’s revenue fell 3.1% in the second quarter and 0.3% on an organic basis. Higher organic volumes of snacks and cereals helped offset the weakness in the company’s beverage business.

Analysts hopeful about post-COVID-19 recovery

Currently, 16 out of 21 analysts recommend a “buy” for Coca-Cola stock. Five analysts recommend “hold,” while none of the analysts recommend a “sell.” Year-to-date, the stock has underperformed PepsiCo and the broader market. As of July 16, Coca-Cola stock has declined 16.6%, while PepsiCo has declined 2.04%. The S&P 500 has fallen 0.5% as of Thursday.

With an average 12-month target price of $52.63, analysts predict an upside of 14% in Coca-Cola stock. Unlike several companies that have canceled dividend payments due to the pandemic, Coca-Cola and PepsiCo continue to pay dividends. Earlier this year, Coca-Cola increased its dividend for the 58th consecutive year. The company rewarded its investors with $6.8 billion in dividends last year. As of July 16, Coca-Cola’s dividend yield was 3.6%, while PepsiCo’s dividend yield was 3.1%.

Several analysts expect an improvement in Coca-Cola’s prospects when the COVID-19 situation gets addressed. The company has been focusing on better beverages to address consumers’ evolving needs. The company introduced several beverages with low or no-sugar options. So far, the company’s revamped Coca-Cola Zero Sugar drink has resonated well with consumers.

The company has also been investing in growth in other categories beyond soda. To boost the company’s growth in the coffee category, Coca-Cola completed the acquisition of Costa in January 2019. The company has also enhanced its presence in the e-commerce channel. Online sales have surged amid the pandemic.

Investors will want to know if the trend in Coca-Cola’s away-from-home channel has improved amid easing lockdowns.

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