Coca Cola (NYSE:KO)) usually capitalizes on the holiday season by incorporating Santa Clause and polar bears into their campaigns, but the soda company has recently come under fire by Wintergreen Advisers after a report admitted that Coca Cola will not meet its targets.
In addition to ending their sponsorship of American Idol, Coca Cola stated on December 15th that they are expecting earnings per share to only increase by 4-5% for 2014, lower than the forecast of about 9%. The report went on to state that Coca Cola “does not expect comparable currency neutral EPS growth in 2015 to be significantly different from 2014.”
On the same day, Wintergreen released a report highlighting the excessive paychecks for Coke’s executives given the company’s stalled profit growth, and their pattern of “routinely outspending its cash flow in recent years and funding the gap with debt.” The report goes on to blame CEO Muhtar Kent for costing shareholders $16.3 billion. Kent became CEO of Coca Cola in 2008. He began working with the company in 1978 and worked his way through the ranks. Despite this, Wintergreen has not been impressed with his performance. To put it bluntly, Wintergreen stated that Kent is “incapable of leading Coke’s turnaround and should be replaced.”
Wintergreen stated that “resolving Coke’s issues is relatively easy and straightforward – get rid of bad compensation plans, bring in new and more capable management, get expenses and overhead under control, and replace the board with a shareholder-focused board.”
On December 16th Amit Sharma, an analyst for BMO Capital, reiterated a Market Perform rating for Coca Cola with a price target of $44. Sharma reasoned that the challenges Coca Cola faced in 2014 will persist in 2015. He is “encouraged by the company’s heightened sense of urgency and the fact that management is committing to a quarterly “dashboard” to publicly track progress on key action items” despite EPS growth missing estimates. Sharma highlighted several points, first stating that “2015 EPS likely will decline below the year-ago level as expected 4-5% core… “Slight” structural headwinds, and higher pension and incentive compensation costs.” Second, he notes that Coca Cola will increase sales from 120 million in 2014 to 200 million cases in 2015, “negatively affecting 2015 EPS by $0.02, net sales and gross profits by $1.90-2.10 per case, and profit before tax (PBT) by $0.45-0.55 per case.” Sharma’s third point states, “the MNST transaction likely will close by end-1Q15 and is expected to add $750-800million of net revenue and be “slightly” positive/accretive for PBT and EPS in 2015.”
Sharma has a 61% overall success rate recommending stocks with an average return of +8.5% per recommendation.
However, not all investors are skeptical of the iconic soda company. Michael Steib, an analyst for Credit Suisse, reiterated an Outperform rating on Coca Cola on December 16th, though he did not provide a price target. Steib acknowledged that Coke “does not expect the external environment to improve, but is working on improving its operational performance against this background.” The analyst is encouraged that “the specifics of the company’s new productivity program, the US refranchising and new revenue management strategy in the US are taking shape.” He assured that Coke “expects to largely recover its $13bn investment in CCR over time… KO appears confident that it can recover its initial capital outlay. If realized over time, this would be a more positive outcome than we had assumed so far with significant implications for KO’s long-term ROIC vs our current base case assumptions.”
Steib has a 48% overall success rate recommending stocks with an average return of +4.9% per recommendation.
Coca Cola may be coming under attack for its leadership and inability to meet estimates, but will the soda remain a fan favorite around the world?
Disclosure: Recommendations for Coca Cola sourced from TipRanks