CCE reported Q1 2013 EPS this morning in which the company saw meaningful volume improvement in the quarter, yet we believe persistent economic weakness and a challenged consumer will remain headwinds in the coming quarters. The announcement to walk away from acquiring the German bottling business will equate to $1 billion in share repurchases in 2013; future expectations around how the company may position itself with a strong balance sheet (net debt/ebitda of 2.5-3x) may further stoke the stock. We remain neutral on the stock until there’s more clarity on the sustained improvement in the underlying business. That said, easy Q2 2013 revenue comps of -8.3% may make CCE attractive into the print.
We expect that the decision to walk away from Germany will disappoint some investors - there is certainly some percentage of the shareholder base that is special situation/merger oriented in its investing style. However, while this deal moves into the rear view mirror, KO certainly isn't through re-imaging its global bottling network and CCE is very likely in those plans, perhaps even as a target at some point down the road.
What we liked:
- EPS $0.39 vs consensus of $0.38
- FY EPS growth 11%-12% versus prior guidance of ~10%
- The decision to let the right to acquire the German bottling business from The Coca-Cola Company expire spells an increase in share repurchases of approximately $1 billion in 2013
- The company moves further past aggressive excise tax measures, in France in particular
What we didn’t like:
- Revenue came in below expectations at $1.85B vs consensus of $1.90B, or +0.5% Y/Y (Volume -1.5; Pricing +2%)
- FY Net sales growth guidance was lowered to the low to mid-single-digit range v. prior guidance of mid-single-digit range
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HEDGEYE RISK MANAGEMENT, LLC