Coca-Cola Earnings Preview: Unfavorable Foreign Exchange To Dampen Organic Growth

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KO: The Coca-Cola Company logo
KO
The Coca-Cola Company

As one of the biggest FMCG (fast-moving consumer goods) companies in the world, the extra cash with customers due to the continual slump in oil prices should have benefited The Coca-Cola Company (NYSE:KO) in its last quarter of 2015. The company is scheduled to announce Q4 and full year results on February 9, and while the domestic market could have performed positively in the quarter, unfavorable foreign exchange and lower demand in certain crucial emerging economies could play spoilsport. The 5% year-over-year organic sales growth through September was wiped out by the negative 7 percentage points impact of currency translations, considering that the majority of Coca-Cola’s top line comes from international markets, whose local currencies struggled to keep up with the dollar all through 2015.

We estimate a $42 stock price for Coca-Cola, which is slightly below the current market price.

See our full analysis for Coca-Cola

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The U.S. alone forms ~45% of the net sales for the company, and the carbonated soft drinks (CSD) segment forms over 40% of the country’s non-alcoholic beverage market. Since a bulk of Coca-Coca’s sales are in CSDs, the increase in disposable income due to the sustained low oil prices are expected to boost the company’s top line in Q4. Gasoline prices have dropped by over 50% in the last 18 months. [1] According to a survey by Wells Fargo, nonalcoholic beverage sales rose 5.5% in Q4 at the U.S. convenience stores, faster than at supermarkets. The extra cash with customers is expected to bode well for beverage makers. This momentum could continue, with convenience-store owners expecting soda sales to increase 3.8% this year, along with at least a 7% sales growth in bottled water, energy drinks and ready-to-drink (RTD) iced teas.

Q1-Q3 coke pepsi dr pepper

On the other hand, consumption growth could not come in as expected in the last quarter, as some customers, even with the extra cash, are opting to save more, or are using the extra money to purchase expensive luxury items. The U.S. GDP expanded only 0.7% in Q4 and personal consumption expenditure grew only 2.2% (3% in Q3). However, even if volume growth comes in lower than expected, what could boost Coke’s results is the higher revenue per volume. The company has emphasized more on sales of smaller bottles and packs, as opposed to more volume, in the last three years. The push for more volume sales in previous years was incentivized by the company’s financial model of selling beverage concentrates to bottlers. However, volume sales of CSDs have consecutively fallen in the domestic market, as customers have cut down on their consumption of beverages containing high amounts of sugar. Hence, the drive to obtain higher volumes would probably meet with customer resistance. Coca-Cola is now pushing for more sales of its smaller cans and bottles, which have higher prices per unit. The transaction packages (smaller packs) represent about 15% of the company’s U.S. CSD volume, growing by double-digit percentages in Q3, and should boost revenue per volume in the last quarter, as well.

Incremental marketing is also helping Coca-Cola to boost its top line growth. The company’s investment plans are supported by its plans to save an incremental $1 billion in productivity gains by this year, 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. The company’s various marketing strategies and product campaigns have resonated with consumers, which is crucial considering that soft drinks are mostly an impulse buy, and what gives a company an edge is more reach, availability, and its social connect with the customer.

Coca-Cola is also investing in brands that could help grow its top line going forward, especially brands in categories such as organic juices, bottled water, ready-to-drink teas, etc, that are growing at the expense of CSDs. The company signed a distribution agreement in the U.S. with Suja, a high growth organic cold-pressed juice company, and has announced plans to expand into plant-based protein drinks through the acquisition of the beverage business of China Green Culiangwang Beverages Holdings in China. So basically, Coca-Cola, being the beverage behemoth it is, is still looking to expand and find ways to grow consumption.

2015 was a transitional year for Coca-Cola. The company is looking to restructure, consolidate some of its operations, and spin-off some others — all in a bid to drive operational efficiencies, reduce supply-chain costs, and improve profitability. And then, there is the Monster deal and the premium milk brand Fairlife, which could add incremental sales going forward. Although organic sales growth could remain strong through Q4, what could offset Coca-Cola’s growth, yet again, is the negative impact of currency translations.

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Notes:
  1. Coca-Cola, PepsiCo thirst for oil dividend, wsj.com []