Can Coca-Cola (KO) Keep The Earnings Streak Alive In Q2?

The Coca-Cola Company (NYSE:KO) is slated to report its second-quarter 2016 results on Jul 27, before the opening bell. Last quarter, the company delivered a positive earnings surprise of 2.27%.

In fact, the cola giant surpassed earnings estimates in each of the past four quarters with an average surprise of 2.99%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Coca-Cola’s aggressive cost-cutting and strategic initiatives led to better-than-expected results in the first quarter amid a heightened global volatility and macro headwinds. Increase in the company’s marketing investments supported better volume growth, especially in North America. We expect to see similar trends continuing in North America in the yet-to-be reported quarter as well.

Also, pricing gains, cost cuts and productivity savings should continue to support the bottom line.

However, unfavorable currency impact and lower volumes of carbonated soft drinks due to a declining demand will continue to hurt the top line. Moreover, Coca-Cola’s bottler re-franchising will impact sales/profits in the quarter, though they are anticipated to enhance margins and returns as well as ensure solid growth in the long term.

Currency headwinds are expected to affect sales by 2–3% and profit-before-tax (PBT) by 11% in the second quarter. Acquisitions/divestitures and structural items (mainly the bottler re-franchising efforts) are expected to hurt revenues by 2–3% and PBT by 3%.

In the last few quarters, the company observed softness in some key emerging markets like Brazil and China, which we expect to continue in the second quarter as well.

Earnings Whispers

Our proven model does not conclusively show that Coca-Cola is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for the company is 0.00% as the Most Accurate estimate as well as the Zacks Consensus Estimate stand at 58 cents.

Zacks Rank: Coca-Cola’s Zacks Rank #3 increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

We caution against stocks Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are three companies you may want to consider in the broader food/beverage sector as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Kraft Heinz Company (NASDAQ:KHC) with an Earnings ESP of +4.23% and a Zacks Rank #3.

Campbell Soup Co. (NYSE:CPB) with an Earnings ESP of +6.00% and a Zacks Rank #3.

Post Holdings, Inc. (NYSE:POST) with an Earnings ESP of +12.77% and a Zacks Rank #1.