We have maintained our Neutral rating on Coca-Cola Enterprises Inc. (CCE) following appraisal of first quarter 2012 results.
Coca-Cola Enterprises posted first quarter 2012 adjusted earnings of 36 cents per share beating the Zacks Consensus Estimate by 3 cents. Earnings were up 9% year over year driven by an improved top line and operating expense leverage.
During the quarter, net sales increased 1.5% to $1.87 billion including 2.5% impact of the French excise tax (FET) increase and a 3.5% currency headwind. Further, management provided a bullish outlook for top- and bottom-line growth. The company projects currency neutral earnings per share to grow 10%, driven by mid-single-digit growth in operating income and high single-digit growth in revenue.
In October 2012, Coca-Cola Enterprises sold its North American operations to The Coca-Cola Company (KO) and took over the latter’s bottling operations in Norway and Sweden. Coca-Cola Enterprises has thus transformed itself to an exclusive western European bottler consisting of legacy Coca-Cola Enterprise's European bottling operations, as well as the bottling operations in Norway and Sweden acquired from Coca-Cola Company.
Coca-Cola Enterprise is one of the largest Coca-Cola bottlers in the world. The company is the sole licensed bottler for Coca-Cola Company’s products in Western Europe. More than 90% of the company’s sales volume comprises products of The Coca-Cola Company. The collaboration helps the company to create and develop new brands, market products in an efficient manner and also maximize efficiency.
The company distributes one of the world's most recognized brand portfolios, with growing core brands led by the Coca-Cola trademark. Moreover, the company continuously focuses on growing value of existing brands. Further, the company focuses on innovation in new brands, flavor extensions, new packaging or sweeteners.
These initiatives ensure customer satisfaction and thereby generate additional revenue opportunities for the company. The company has solid marketing strategies in place for the Euro soccer championship and the upcoming London Olympics which will lift volumes from the slightly depressed first quarter.
The company also boasts of a solid balance sheet and strong cash flows which enable it to drive shareholder value both through share repurchase and increasing dividends. The company’s solid cash position also allows it to reinvest in its business and evaluate high return investment opportunities, including potential acquisitions.
Despite the positives, the FET increase and economic challenges in Europe create significant overhang. From January 2012, French regulatory authorities introduced an increased excise tax on beverages with added sweetener which is applicable to almost all drinks that the company sells in France.
The company expects this increased tax to hurt its overall cost of sales by 4% in 2012. Though the company expects to pass on these costs to consumers in the form of higher retail prices for its products, a fear of losing customers to its competitors due to steep pricing creates an overhang. The company’s geographic focus in Western Europe also exposes it to economic risks. We thus prefer to remain Neutral on the company.
COCA-COLA ENTRP (CCE): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
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