On Sep 5, we issued an updated research report on Coca-Cola Enterprises Inc. (CCE).
On Jul 24, Coca-Cola Enterprises reported second-quarter 2014 adjusted earnings of 90 cents per share which beat the Zacks Consensus Estimate by 2.3% and improved 16.9% from the year-ago figure. Improved volume, currency benefits, lower cost of sales and lower share count made up for higher operating costs which resulted in the earnings outperformance. Revenues fell short of the Zacks Consensus Estimate but grew 8% year over year.
More than 90% of the sales volume of Coca-Cola Enterprises comprises The Coca-Cola Company (KO) products. In Oct 2012, Coca-Cola Enterprises sold its North American operations to The Coca-Cola Company and took over the latter’s bottling operations in Norway and Sweden.
Coca-Cola Enterprises is thus geographically focused in Western Europe and is exposed to the economic uncertainties of this region.
Coca-Cola Enterprises has been facing a tough retail consumer and competitive environment in Great Britain. Though trends are improving, consumers in Great Britain remain apprehensive of spending extravagantly. Though the company saw improving customer relationships in France in the first half of 2014 after witnessing difficult beverage market conditions since the increase in French excise tax (FET) in Jan 2012, a sustained recovery from the volume elasticity due to the tax increase is required.
In fact, due to the challenging retail consumer and competitive environment in Great Britain and poor weather conditions in France in the first few weeks of the third quarter, management lowered expectations for 2014 during the Barclays Back-to-School investor conference held in Boston on Sep 3.
In 2014, adjusted earnings are still expected to increase approximately 10% in constant currency. However, adjusted constant currency net sales and operating incomes are expected to come in at the lower end of the previous expectations of an increase in the low single-digit and mid single-digit range, respectively.
Also, the sales and profit guidance range are below the company’s long-term targets. Over the long term, net sales are expected to grow in the 4–6% range and operating income within 6–8%.
Though the earnings per share guidance of approximately 10% growth is above the long-term target of high single-digit range, we believe it will be mostly driven by share buybacks.
However, the company’s solid share buyback program, aggressive cost cutting initiatives, innovation plans, solid marketing and continued strong performance of the Coca-Cola brands should drive growth in the second half. Coca-Cola Enterprises plans to launch Coca-Cola Life, a naturally sweetened mid-calorie cola with one-third less calories, in Sweden and Great Britain in September,and Smartwater in Great Britain later this year. The company’s marketing pipeline for the second half includes special summer and traditional holiday and Christmas activation programs.
Other Stocks to Consider
Coca-Cola Enterprisescarries a Zacks Rank #3 (Hold). Better-ranked beverage stocks include The WhiteWave Foods Company (WWAV) andPepsiCo, Inc. (PEP). Both the companies have a Zacks Rank #2 (Buy).
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