Coca-Cola (KO) Beats On Earnings & Revenues; View Intact

The Coca-Cola Company (NYSE:KO) reported impressive third-quarter 2016 results. Meanwhile, though the cola giant’s earnings and revenues beat the Zacks Consensus Estimate, both have declined year over year due to severe macroeconomic challenges in many international markets.

International weakness and the stronger U.S. dollar have impacted quarterly results for the company, which generates about half its sales abroad. However, higher prices and smaller packaging in the U.S. have helped the company partially offset the declines.

This Atlanta-based company maintained its sales guidance for 2016. This has been appreciated by investors as is evident from the 1.43% share price hike in pre-market trading.

Earnings Beat

Third-quarter 2016 adjusted earnings of the company were 49 cents per share, which beat the Zacks Consensus Estimate of 48 cents by 2.1%.

Earnings declined 3.9% year over year due to currency headwinds. Excluding the 3% negative Fx impact and 24% from other items impacting comparability, earnings declined 27%.

Sales Beat; Organic Revenues Improve

Net revenue declined 7% year over year to $10.63 billion due to currency headwinds and the negative impact of structural items. Currency headwinds hurt sales by 2%. Acquisitions/divestitures and structural items had an 8% impact on revenues.

After adjusting for the negative Fx impact and acquisitions/divestitures, organic revenues rose 3%, same as the previous quarter, evenly split between volume and price/mix growth.

Revenues surpassed the Zacks Consensus Estimate of $10.54 billion by 0.8%.

Operating Margins Improve

Adjusted consolidated gross margins expanded 40 basis points (bps) year over year to 61.1% as positive pricing, productivity gains and lower commodity costs were offset by currency headwinds, the effects of refranchising the North American bottlers.

Adjusted selling, general and administrative (SG&A) expenses declined 4.7% on a currency-neutral basis to $4.0 billion.

Adjusted operating income, on a constant currency basis, was $2.48 billion, down 8.2% year over year. Adjusted operating margin was 23.4%, down 30 bps year over year.

Reported Profit-before-tax (PBT) declined 17%. Currency translations hurt PBT by 3%. Structural changes had a negative impact of 2% on PBT. Excluding currency headwinds and structural changes, PBT rose 2% on the back of positive impact of its productivity initiatives and an increase in equity income, partially offset by net interest expense.

The structural changes mainly include the impact of bottler re-franchising efforts and the brand transfer agreement with Monster which closed in 2015.

Volume and Pricing

Coca-Cola witnessed 1% volume growth in the third quarter, compared with flat growth in the previous quarter. Sparkling beverage unit case volume was even as growth in three of the four geographic operating segments was offset by a 2% decline in Latin America. Moreover, still beverages volumes grew 3% in the quarter.

In North America, volumes grew 1%, same as the previous quarter, reflecting ongoing pricing initiatives in the company’s sparkling business as well as continued growth in stills portfolio.

Sparkling beverage volume growth was slightly positive, rounding to even. Coca-Cola’s North America still beverage volumes rose 2%, down from 3% in the previous quarter.

Western Europe and Middle East & North Africa business units remained strong, partly offset by the weakness in Central & Eastern Europe business units. Again, Mexico registered mid-single-digit growth. Growth in Japan and China were partly offset by India and Brazil.

Price/mix increased 1% compared with a 3% rise in the previous quarter.

2016 Outlook

The company reaffirmed the previously issued profit outlook for 2016.

Organic revenues are expected to rise 3%. Acquisitions/divestitures (mainly the bottler re-franchising efforts) are expected to hurt revenues by 6–7%, while Fx is expected to have a negative impact of 2–3% on revenues.

Excluding currency headwinds and structural changes, PBT is expected to increase 6–8%, in line with long-term estimates.

Foreign exchange is expected to hurt PBT by 8–9%. Structural changes are expected to have a 4% negative impact on PBT, primarily due to accelerated re-franchising.

In 2016, the company expects adjusted EPS to be down 4% to 7% versus prior year’s comparable EPS of $2.00.

The company expects to buy back shares worth $2.0 billion to $2.5 billion in 2016. Adjusted effective tax rate is likely to be 22.5%.

Zacks Rank

Currently, Coca-Cola has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Releases

PepsiCo, Inc. (NYSE:PEP) reported better-than-expected third-quarter 2016 results (ending Sep 3), with earnings and revenues beating the Zacks Consensus Estimate.

Upcoming Peer Releases

Dr Pepper Snapple Group, Inc. (NYSE:DPS) is set to report third-quarter 2016 results on Oct 27, before the market opens.

Monster Beverage Corporation (NASDAQ:MNST) is expected to report its quarterly results on Nov 3.

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