(KO) Coca-Cola Analyst Maintains Neutral on Shares

We reaffirm our Neutral recommendation for The Coca-Cola Co. (KO) following the second quarter 2011 earnings of $1.17 per share, which exceeded the Zacks Consensus Estimate by a penny. It also exceeded the prior-year quarter earnings of $1.06 and were ahead of the company’s long-term growth target.

In both the current and the prior-year quarters, Coca-Cola was impacted by restructuring charges and costs related to global productivity initiatives as well as the acquisition of the North American operations of bottler Coca-Cola Enterprises Inc (CCE) in the third quarter of 2010.

The North American segment was one of the largest contributors, accounting for over 30% to total revenue. However, it delivered sluggish volume trends for almost two years.

Since the third quarter of 2010, it has started reporting positive volume growth, showing the company’s focused integration efforts and strong marketing strategies. The segment contributed to an increase in volumes of 4%, with positive organic growth in the second quarter of 2011.

The company also witnessed strong results from high-growth emerging markets like India, China, Mexico, Brazil, and Russia. Management is further extending its reach in emerging markets through the introduction of water and juices. The company also invests in infrastructure programs that drive volume through increased access to consumers. However, unfavorable currency translations during times of U.S. dollar strength severely impact the company.

Moreover, the company uses different types of commodities and raw materials including high fructose corn syrup, sucrose, citric acid, orange juice concentrate, and packaging materials for bottles and aluminum for cans.

The increases in the prices of these commodities affect the company’s margins and profitability. In the second quarter of 2011, gross margin of Coca-Cola contracted 510 basis points to 60.8% due to increased commodity costs.

Coca-Cola is thus undertaking various productivity initiatives to streamline its cost structure and boost profitability. The initiatives include aggressive management of operating expenses, redesigning key processes and reducing indirect costs.

Coca-Cola has incurred a charge of $54 million in the first half of 2011, related to productivity initiatives, with $26 million incurred as charges in the second quarter. The company is targeting annualized savings to slightly exceed the upper end of the original targeted range of $400 to $500 million by year-end 2011.

Coca-Cola is the world’s largest producer and marketer of non-alcoholic beverages with a market capitalization of $156 billion. The company has a formidable portfolio of globally recognized brands and markets four of the world’s top five non-alcoholic sparkling beverage brands, including Coke, Diet Coke, Sprite and Fanta.

Similarly, the company also commands a leading place in the juices or still beverages category, with its flagship brands of Minute Maid, Simply and POWERade. However, the non-alcoholic beverages segment of the commercial beverages industry remains highly competitive.

In addition, Coca-Cola continues to anticipate challenges in the remainder of 2011 in Japan as a result of the natural disasters earlier in the year that are expected to dilute the full-year comparable EPS in the range of 3 cents to 5 cents. This impact will be primarily observed in the third and fourth quarters of 2011.

In addition to the prime global competitor PepsiCo Inc (PEP), Coca-Cola also encounters intense competition from Nestlé, Dr Pepper Snapple Group Inc (DPS), Kraft Foods Inc (KFT) and Unilever Plc (UL). Coca-Cola currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, which translates into a short-term Hold rating.

COCA-COLA ENTRP (CCE): Free Stock Analysis Report

DR PEPPER SNAPL (DPS): Free Stock Analysis Report

KRAFT FOODS INC (KFT): Free Stock Analysis Report

COCA COLA CO (KO): Free Stock Analysis Report

PEPSICO INC (PEP): Free Stock Analysis Report

UNILEVER PLC (UL): Free Stock Analysis Report

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