Coke tops Q3 view, guides FY17 revenue growth outlook of 3%

Aided by a decrease in expenses and an increase in volume of Coca-Cola Zero sugar in the US, last Thursday, carbonated soft drink producer Coca-Cola Company (NYSE: KO) reported its fiscal 2017 third-quarter results that beat analysts’ estimates.

However, the company reported a 14.8% y-o-y decline in revenue. That kept the stock range bound between 46 and 46.60.

As explained below, Coca-Cola is restructuring itself to align with the changing consumer preferences. Thus, we forecast a short-term uptrend in the stock price.

The Atlanta-based company reported a 15% decline in Q3 revenue to $9.078 billion, from $10.633 billion in the corresponding quarter of fiscal 2017. Net income for the September quarter was $1.447 billion, an increase of 38% from $1.046 in the year-ago period. On a per share basis, the third-quarter earnings were $0.33, up 40% from $0.24 last year. Coca-Cola attributed the refranchising of its bottling plants for the decline in revenue.

Coca-Cola

Excluding asset impairment/restructuring charges, transaction gains, and tax related charges, among others, Q3 2017 non-GAAP earnings increased to $2.176 billion, or $0.50 per share, from $2.150 billion, or $0.49 per share, in Q3 2016. On average, analysts surveyed by Thomson Reuters had expected earnings of $0.49 per share on revenues of $8.72 billion.

Total unit case volume, which excludes the currency exchange impact and pricing, was almost flat. Still, Coke was able to improve its earnings due to higher pricing and an increase in sales of its expensive lineup of products.

Non-GAAP operating margin grew 400 basis points, mainly driven by divestments of bottling businesses and able expense management.

In Latin America, Coke realized a 10% increase in sales, despite a 3% drop in volumes. The company reported a 6% organic revenue growth in Latin America. In North America, volume remained flat. In Europe, the Middle-East and Africa, the volume increased marginally by 1%. In Asia Pacific, the volume increased 3%. The volume of other products such as juice, plant-based beverages, dairy products, tea, and coffee drinks grew 1%. While the sales of soda remained unaltered, water and sports drinks recorded a 1% decline in sales.

The company continues to focus on acquisitions and innovations. The sales of Coca-Cola Zero Sugar doubled, compared to the similar period last year. Coca-Cola acquired sparkling mineral water brand Topo Chico in October and is also in the process of launching frappe, a ready-to- drink coffee line, in cooperation with McDonald’s in 2018. Further, the company is also preparing to develop lesser known brands such as Blue Sky soda. Coca-Cola has also launched an alcohol mixer, known as Royal Bliss, in Spain.

With due consideration to the current headwinds faced by the company, Coca-Cola anticipates an organic revenue growth of 3% in the current fiscal year. The company also expects earnings to remain flat or decline 2% from $1.91 a share recorded in 2016. Thus, strong earnings growth, impressive acquisitions and the introduction of new products to boost sales is expected to turn Coca-Cola bullish.

Technically, the stock is consolidating at 45 levels. The oscillator of moving average is rising towards the zero level, while the momentum indicator’s reading is above 100. That confirms a bullishness in the share price.

To capitalize on the probable bullish reversal, we may purchase a call option from one of the binary brokers listed here. The option will be bought only when the stock is trading near $46 in the cash market.

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