We expect The Coca-Cola Company (KO) to beat expectations when it reports second-quarter fiscal 2014results on Jul 22. Last quarter, the company delivered in-line earnings.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Coca-Cola is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +4.76%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Coca-Cola carries a Zacks Rank #3 (Hold) which, when combined with +4.76% ESP, makes us confident about a positive earnings beat.
Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-Than-Expected Earnings?
Better pricing and volume growth drove a much refreshing top-line result last quarter – first-quarter 2014. Softness in developed markets is being offset by strength in developing countries. Accelerated marketing investments are expected to improve volume growth in the second quarter. Importantly, the company launched its much awaited naturally sweetened mid-calorie cola, Coca-Cola Life in the quarter. It remains to be seen how the new beverage performs.
However, higher marketing costs will hurt margins in the quarter which should be offset by cost savings and pricing gains. Currency headwinds and structural changes are expected to continue to hurt revenues and profits in the quarter. Foreign exchange (including the negative impact of the Venezuela currency devaluation) is expected to hurt second-quarter operating income by 7%.
Overall, though 2013 revenues and profits fell short of the company’s expectations, management aims to accelerate growth in its "year of execution" – 2014. It expects to resume growth in 2014 through aggressive investments across marketing, innovation, product development, infrastructure, distribution and overall improved execution.
In 2014, the company plans to accelerate growth of sparkling beverages (led by Coca-Cola brand), expand its still beverage portfolio and increase its brand building investments.
Coca-Cola’s sparkling beverages have been reporting sluggish volumes for several quarters due to weak category headwinds. Growing health and wellness consciousness, vigilance among consumers about the use of artificial sweeteners, high sugar content and related obesity concerns are affecting the sales of carbonated beverages (CSD) of Coca-Cola as well as other soft drink makers like PepsiCo, Inc. (PEP) and Dr Pepper Snapple Group, Inc. (DPS). We expect the CSD softness to continue this quarter as well. However, the Easter shift tailwind and improved weather conditions could result in some improvement.
Other Stocks to Consider
Other stocks in the beverage/food sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Dr Pepper Snapple Group with an Earnings ESP of +3.30% and a Zacks Rank #3 (Hold)
The J. M. Smucker Company (SJM), with an Earnings ESP of +1.46% and a Zacks Rank #3.
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