Every earnings season has its own “feel” and the early read on the consumer staples Q1 EPS reports is that so long as the report isn’t a complete disaster, the momentum behind the stock (and the sector) is likely to continue as money flows into consumer staples persist for a variety of reasons (low volatility, yield, etc).
KO is an interesting test case – the stock was down hard with the market yesterday, but simplistically held the $40 level (old resistance, now support) and is up over 5% today on a print where the positives outweighed the negatives, but we wouldn’t characterize as outrageously bullish.
The company posted 4% global volume growth (versus consensus closer to +3% and against a +3% comp) –reported revenue declined 0.9% against a +5.9% comp while constant currency revenue grew 1.1% (+6.9% in the comparable quarter). One change in this quarter when compared with recent history was the degree of operating leverage - +1.1% constant currency top line translated into +5.1% growth in operating income (currency neutral).
What we liked:
- Solid global volume growth number
- Degree of operating leverage
- Superb volume performance in Eurasia (+15.0%) which drove much of the upside versus consensus
- +$0.01 versus consensus on EPS (not a lot, but better than the alternative)
- Beginning stage of bottler transformation in the U.S. (long-term positive) – expanding, swapping and consolidating territories with the ultimate goal of improving both efficiency of distribution and efficacy of delivering product to consumers
What we didn’t like:
- We probably won’t see any material change to 2013 consensus (for our part, estimates remain unchanged following this quarter’s results)
- Cash from operations declined 3.7%, as accounts receivable increased 4.0% and inventories increased 4.8% (Q1 is not a significant cash flow quarter for the company, however)
- Price/mix was flat in the quarter (against a +3.0% comp)
Like many of the names in consumer staples, we don’t see a compelling need to run out and chase KO (particularly +5.0% today). Difficult comparisons persist though the balance of 2013, but the quarter just reported displayed the company’s ability to effectively manage through multiple headwinds. Looking at the sector more broadly, we are happy to take a beer frame (watch and learn) on the short side as it is clear that the demand for low volatility, relatively high-yielding assets persists.
Call with questions,
HEDGEYE RISK MANAGEMENT, LLC