Coca-Cola Beats Consensus Estimates; Delivers Strong Growth In Q1

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The Coca-Cola Company

The Coca-Cola Company (NYSE:KO) reported better than expected Q1 results on April 22, which resulted in a 1.3% rise in the stock price just after the announcement. Organic revenues grew by an impressive 8% on the back of strategic pricing as well as higher concentrate sales, but also due to the inclusion of six additional days this quarter that added incremental concentrate sales. [1] For the first time in nine quarters, net revenues grew for Coca-Cola, rising by 1% on a 1% rise in global unit case volumes. As expected, as Coca-Cola is highly exposed to the risk of depreciation of foreign currencies against the U.S. dollar (~57% of net revenues came from outside the U.S. in 2014), negative currency translations were a 6 percentage point headwind on the top line this quarter. Volatility in some of the key emerging markets took a toll on both the volume sales and net revenues for Coca-Cola in Q1, but what pulled the company through was an effective product pricing. Price per mix was up 3% in the quarter, and up 2% for the North America unit. [2]

We estimate a $41 stock price for Coca-Cola, which is in line with the current market price. However, we are in the process of incorporating the recent quarterly results into our forecasts.

See our full analysis for Coca-Cola

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2015 is supposed to be a transitional year for Coca-Cola, and the company believes there is still some time for its investments and implementations to reap benefits. The company is focusing on improving its operating performance in North America–looking to refranchise two-thirds of its bottling territories in the region by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. And then there are the Monster and Keurig deals, and the premium milk brand Fairlife, which could add incremental sales going forward. The Monster deal is expected to close in the later half of the second quarter. These new developments are expected to help lift sales going forward, but the positive Q1 results in Coke’s ‘transitional year’ reflect how the company’s core business is performing strongly.

North America Reports 6% Rise In Net Revenues

An improving economic environment in North America, and higher customer purchasing power, had a positive impact on Coca-Cola’s sales this quarter. Excluding the impact of one-time items, including acquisitions and divestitures, revenues were up 9% in North America. Coca-Cola was able to derive growth in an otherwise stagnating U.S. carbonated soft drinks (CSD) market, due to a 2% rise in price per mix and higher concentrate sales. 43% of Coca-Cola’s net revenues came from the U.S. last year, and CSDs in the country alone form approximately 15% of the company’s net volume sales. As customers continue to ditch sodas for healthier beverage alternatives, CSD volumes in the U.S. fell for the tenth consecutive year last year.

One notable trend in 2014 was the rise in unit prices of soft drinks, which meant that higher revenues per unit case made up for declining volume sales. The improving economic environment in the U.S. was instrumental in boosting customer purchasing power, and this, in turn, prompted strategic price increases by retailers and beverage makers. In the twelve weeks to February 14, dollar sales for Coca-Cola’s CSDs grew by 1.9% in measured convenience store channels in the U.S. [3] Coca-Cola also put more emphasis on sales of its 7.5 ounce packs, which have higher price per unit compared to value packs. As the company continues to drive top line growth through premiumization of sodas, and higher proportionate sales of small bottles and cans, net domestic revenues grew 6% year-over-year in Q1.

The staple drink Coca-Cola grew volumes by 1% globally this quarter, which is a huge lift for the company amid headwinds in the CSD category and volatility in key developing economies. The drink Coca-Cola alone forms ~23% of the company’s net sales, and growth in this brand has come on the back of increased media and advertising investments by the company, and successful campaigns such as the Share-a-Coke campaign, and the new Coca-Cola marketing campaign during the Chinese New Year, which helped grow brand Coca-Cola’s volume by 9% in China, despite slowing economic conditions in the country in Q1.

A major win for the company this quarter was the 5% growth in its diet drink Coke Zero. Low/no calorie drinks have lost more sales in the last couple of years, compared to regular sugary sodas, as customers remain skeptical about the usage of artificial sweeteners in these drinks. Case in point — volume sales for Diet Coke declined 6.6% last year in the U.S., and the drink lost its place to Pepsi-Cola as the second highest-selling CSD in the country behind Coke. Diet Coke declined again by 6% globally this quarter, but the growth in Coke Zero represents further potential growth for Coca-Cola, which has for long now tried to solve the problem of falling diet sales.

Foreign Currency Continues To Choke Growth

Although emerging markets present strong growth opportunities for Coca-Cola, due to increasing disposable incomes and low current penetration levels, continual volatility in some of the key developing markets such as Russia, Ukraine, Brazil, and a slowdown in China, effected the beverage maker’s business growth. Currency translations alone dragged down Coca-Cola’s top-line growth by 6% in the quarter, as aforementioned, after dragging down last year’s top line by 2%. Moreover, volume sales suffered as consumer spending remained weak in these markets. Volume sales fell by a high-single digit and mid-single digit in Russia and Brazil respectively this quarter.

Coca-Cola expects to see more currency headwinds this year, but remains committed to increase spending behind its beverage portfolio, aiming for future growth. The company’s investment plans are supported by its plans to save an incremental $1 billion in productivity gains by 2016, and raise that to $2 billion by 2017, and $3 billion by 2019, through system standardization, supply-chain optimization, and industrious resource and cost allocation. Coca-Cola remains on track for $500 million in cost savings this year.

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Notes:
  1. Coca-Cola 8-k []
  2. Coca-Cola earnings transcript []
  3. CSDs: Not ready to go flat []