Will Cost Saving Plans Support Coca-Cola's (KO) Q4 Earnings?

The Coca-Cola Company (NYSE:KO) is slated to report fourth-quarter 2017 results on Feb 16, before the opening bell.

A Look at Coca-Cola’s Revenue Performance

Coca-Cola has been struggling to boost sales amid weak demand in certain emerging and developing markets, and shift in consumer preference. The company has been witnessing a decline in revenues for the last 10 quarters, primarily due to weak volumes especially in the sparkling beverage category, and structural changes.

Coca-Cola’s third-quarter revenues declined 15% year over year due to the negative impact of structural items. Acquisitions/divestitures and structural items had a 18% impact on revenues. The company’s soon-to-be reported quarter is also expected to be adversely impacted by 27% in net revenues from acquisitions, divestitures and other structural items. However, the company expects currency to have a positive impact on quarterly net revenues by 0-1%.

Overall, for the fourth quarter, the Zacks Consensus Estimate for Coca-Cola’s total revenues stands at $7.36 billion, implying a 21.7% year-over-year decrease.

Efforts to Boost Margins

The cola giant has been focusing on increasing their efficiency and improving their margins amid tough business conditions. For that, Coca-Cola’s strategy to refranchise its bottling operations facilitated improved margins by reducing its exposure to the capital-intensive bottling business. The refranchising efforts, though hurting sales/profits in the near term, will result in higher operating margins, lower capital spending and improved return on invested capital over the long term.

Coca-Cola’s adjusted EPS increased 2% from the year-ago level (after falling for nine consecutive quarters) in the prior quarter despite weak revenues. The company’s earnings have topped the consensus mark in 12 of the past 13 quarters.

The improvement was attributable to its ongoing productivity initiatives. Its adjusted gross margin expanded 170 basis points or bps in Q3. Comparable operating margin also grew 404 bps. The company’s plan to refranchise its low-margin bottling operations and transform into a capital-light business are helping to improve its margins. The trend is likely to continue in the to-be-reported quarter as well.

Again, the company is on track to deliver annualized savings of about $3 billion by 2019 through its productivity programs. These include restructuring of its global supply chain, zero-based budgeting and streamlining its operating model.

Segment Discussion

North America, comprising about 30% of the total revenues, is expected to see tepid growth in the fourth quarter. The Zacks Consensus Estimate for the segment revenues of $2.4 billion reflect growth of 1.7% from the year-ago quarter.

Latin America revenues are likely to witness 9.9% growth. On the other hand, consensus estimate for Europe, Middle East and Africa segment revenues of $1.7 billion indicates a decrease from $1.6 billion a year ago. Bottling Investments revenues are likely to decrease to $1.3 billion from $4.1 billion a year ago. Again, Asia Pacific revenues are expected to increase 3.2% on a year-over-year basis.

Overall, the beverage behemoth’s fourth-quarter revenues are likely to decline owing to structural changes and currency headwind. We feel pricing gains, cost cuts and productivity savings should continue to support bottom line to some extent.

For the fourth quarter, the Zacks Consensus Estimate for Coca-Cola’s earnings is pegged at 38 cents, reflecting a 2.7% year-over-year increase.

Here is What Our Quantitative Model Predicts:

Coca-Cola does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — which is required to be confident of an earnings beat.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Coca-Cola is -1.16%.

Zacks Rank: Coca-Cola carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coca-Cola Company (The) Price and EPS Surprise

Coca-Cola Company (The) Price and EPS Surprise | Coca-Cola Company (The) Quote

Peer Release

PepsiCo, Inc. (NASDAQ:PEP) reported fourth-quarter 2017 (ending Dec 30) results, with earnings and revenues beating the Zacks Consensus Estimate. Notably, this is the seventh consecutive quarter of positive earnings surprise.

Upcoming Peer Releases

Coca-Cola European Partners Plc (NYSE:CCE) is slated to report quarterly results on Feb 15.

Monster Beverage Corp. (NASDAQ:MNST) is expected to report quarterly results on Mar 7.

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