KO Takes It on the Chin

Takeaway: Coke takes it on the chin, but there may be room for optimism.

This note was originally published July 16, 2013 at 14:17 in Consumer Staples

KO is trading down today as volume results for Q2 2013 came in below expectations (globally +1% vs +4% last quarter) with the company citing a challenged macro environment (U.S., Europe, Asia, and Latin America), social unrest, and poor weather conditions (wet and cold across multiple regions) that impacted consumer spending and demand. North America, which is ~ 44% of sales, saw volume down a disappointing -1% in the quarter.  

 

Performance was hit by tough Q2 comps given the especially good weather in 1H last year: Pacific volumes were +2% vs +10% last year; Brazil’s volume was even cycling +6% a year ago; and India’s volume grew +1% versus a +20% comp.

 

The company cited optimism around a turnaround in 2H for its key international markets (China, Brazil, Russia, Mexico, and India) on improvement in the macro environment, continued marketing support of its brands, weather improvements (India performs historically stronger in the back half), and its systems execution.

 

While we expect many of the forces dragging on confidence and demand to remain in the back half of the year,  including  high unemployment (especially in southern Europe), social unrest, and inflation, we like that the back half quarters of 2013 are lapping much easier comparisons year-over-year.  On the top line, the Q3 2012 comp is +0.8% versus this quarter’s +2.8%. Gross margin was pretty consistent throughout last year, however the operating margin gets easier in the final two quarters of last year (+23.6% and +21.7%, respectively) versus +26.1% this quarter.

 

The stock is currently trading above its intraday lows at around $40.45. Our quantitative levels suggest that KO has an intermediate term price TREND line of support at $40.14.

 

KO Takes It on the Chin - hed

 

What we liked:

  • EPS inline with consensus at $0.63
  • Outperformance of still beverages, volume +6%  vs sparkling 0%
  • Packaged water volume up +6% and energy drinks +5%
  • Russia volume +11% with a strong marketing calendar tied to the 2014 Sochi Winter Olympics
  • COGS decreased -5%
  • Eurasia and Africa volume up 9% (benefitting from Aujan partnership)
  • New guidance on the effective tax rate of 23.0% for 2013 vs last quarter’s estimate of 23.5%

What we didn’t like:

  • Net Revenues were down -2.6%  in the quarter and missed estimates ($12.75B vs $12.96B)
  • Operating income fell -1.5% in the quarter
  • Europe volume -4% (vs -4% in Q1 2013) on colder weather and flooding in Germany and central Europe

 

Matthew Hedrick

Senior Analyst


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more