Coca-Cola's 2015 EPS Outlook Short of Long-Term Target - Analyst Blog

The Coca-Cola Company (KO) stated on Dec 15, that earnings growth will fall short of the long-term target in both 2014 and 2015, repeating the warning it issued during the third-quarter conference call held in October.

Currency headwinds, difficult operating environment in the U.S. and slower growth in some international markets have resulted in management's bearish stance. Moreover, the Atlanta-based company has been battling lower demand for carbonated soft drinks amid rising health consciousness and related obesity concerns among consumers.

Full-Year 2014 Outlook

The beverage giant expects full-year 2014 adjusted earnings per share (EPS) growth in the range of 4% to 5%, excluding currency headwinds. This is in line with management's expectation of 2014 EPS growth rate coming in below the long-term range of a high single-digit increase announced at the conference call.

Foreign exchange volatility is expected to hurt 2014 EPS by 7%.

Fourth-Quarter Outlook

In the fourth quarter, management expects adjusted currency neutral EPS growth to be flat to slightly positive. Foreign exchange is expected to hurt operating income by 6–7% (lower than previous expectation of 7%) and EPS by 9%.

2015 Outlook

As previously indicated management does not expect 2015 EPS growth to be any different from 2014 — falling short of the long-term target. Currency headwinds are expected to hurt 2015 profit before tax by 5–6%. The company also expects to buy back shares worth $2.5 to $3.0 billion in 2015.

Strategic Plans in Progress

During the third quarter conference call, Coca-Cola announced the expansion of its productivity initiatives and plans to streamline its operations to drive revenue and profit growth. Concurrent with the latest press release, management announced that it is progressing well on the plan.

Under its productivity program, Coca-Cola is targeting $2 billion in annualized savings by 2017 and $3 billion by 2019. The resultant savings are expected to fund marketing programs and innovation which, in turn, will re-accelerate top-line growth, margin expansion and returns on capital.

The company also has plans to re-franchise the majority of its company-owned North American bottling territories by 2017-end. In April last year, Coca-Cola announced plans to launch a beverage partnership model in the U.S., under which it will gradually grant new expanded U.S. territories to its bottlers to distribute beverages.

Moreover, the company is acquiring equity stake in other growing companies. Coca-Cola bought 10% stake in Keurig Green Mountain, Inc. (GMCR) in Feb 2014 for about $1.25 billion and subsequently announced its intention to gradually increase its stake to up to 16%. Coca-Cola also plans to purchase 16.7% stake in energy drink maker, Monster Beverage Corporation (MNST), later this year for $2.15 billion. The new beverage partnership model should improve margins, going forward.

Management expects 2015 to be a “transition year” — a time to start implementing changes to create a new operating model.

Though the initiatives sound encouraging, management remains apprehensive of the broader economic challenges in 2015.

The Coca-Cola Company carries a Zacks Rank #3 (Hold). A better-ranked beverage company is Dr Pepper Snapple Group, Inc. (DPS) with a Zacks Rank #2 (Buy).