On Apr 10, we downgraded Coca-Cola Enterprises, Inc. CCE to a Zacks Rank #5 (Strong Sell) apprehending that the company will have a difficult journey ahead in 2015.
Management expects modest headwinds in 2015 as currency shifts unfavorably, commodity cost tailwinds weaken and operating challenges persist.
Why the Downgrade?
Coca-Cola Enterprises is The Coca-Cola Company’s KO strategic bottling partner in Western Europe. Coca-Cola Enterprises is thus, geographically focused in Western Europe and exposed to the economic uncertainties of the region.
The company has been facing tough retail consumer and competitive environment in Great Britain. Though trends are improving, consumers in the country remain apprehensive of spending extravagantly.
Ongoing economic softness and operating challenges in Europe, evolving consumer landscape and an increasingly competitive environment hurt the company’s top line in 2014. Management expects these challenges to persist in 2015 which will limit revenue growth.
Moreover, management expects a benign commodity cost environment in 2015 versus the benefits realized in 2014. Cost of sales decreased 1% last year.
Also, currency translation is expected to be a significant headwind in 2015 as against being a tailwind in 2014.
With the Euro deteriorating versus the dollar, currency had a significant negative impact on Coca-Cola Enterprises’ fourth-quarter earnings. The company expects Fx to be a much greater headwind to 2015 earnings than expected by management earlier. Currency translation is expected to hurt earnings by 16%, more than double the previous expectation.
These external factors that supported results in 2014 are likely to disappear in 2015 making it a challenging year for Coca-Cola Enterprises.
Over the past 60 days, the Zacks Consensus Estimate for first-quarter 2015 has declined more than 16%, while that for 2015 went down around 7%.
Stocks to Consider
A couple of better-ranked beverage stocks are Monster Beverage Corporation MNST and Coca-Cola Amatil Limited CCLAY. While Monster sports a Zacks Rank #1 (Strong Buy), Coca-Cola Amatil has a Zacks Rank #2 (Buy).
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