Earnings Preview: How Is Coca-Cola Battling 12 Years Of Falling Soda Sales?

Though volatility has been the big story over the last week, remember it’s still earnings season, and fresh reports are still coming in. This week’s wave includes a handful of food, beverage and restaurants companies—all selling consumer products that might give some insight into current trends. Beverage giant The Coca-Cola Co KO is scheduled to report its Q4 results before the bell on Friday.

Coca-Cola: Beyond the Soda Machine

KO has been in a transition period that includes everything from operations to rebranding of its iconic Diet Coke brand, according to many analysts. Like its rival PepsiCo, Inc. PEP, KO has been battling a multi-year slump in soda sales as Americans have opted toward healthier beverages and bottled water, according to industry trade journal Beverage Digest. The journal said sales of carbonated soft drinks have declined for 12 consecutive years; bottled water surpassed soda sales in 2016 to make its claim as the largest beverage category in the U.S.

KO has been remaking its beverage portfolio to better reflect the drinking tastes of consumers, the company said. To that end, it has heavily marketed its basic Dasani bottled water product and its premium-priced Smartwater, as well as Vitaminwater, ZICO coconut water and its Honest Tea—categories that are growing faster than sparkling drinks, according to some analysts. Don’t forget as we look at the Company Profile on the thinkorswim® platform (see figure 1), Coca Cola comprises 20.7% of revenues and water makes up 20.3%.

FIGURE 1: KO COMPANY PROFILE. Sales of its flagship Coca Cola still top the revenue list, with water sales close behind. Image source:  The thinkorswim® platform from TD Ameritrade. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

In January, it introduced four “bold” new diet Coke flavors in sleek new packaging as part of a campaign that is “re-energizing and modernizing Diet Coke for a new generation of drinkers—and offering its millions of current fans a new look and more flavors,” according to the KO press release. Though the products’ initial sales will not be part of the 4Q earnings results, some analysts said they will be listening to how the rollout is going and how future sales might be impacted. KO said its introduction of the Coke Zero Sugar brand—a riff on Coke Zero—last fall resulted in double-digit growth.

KO also is testing a slushy-making machine, called “Arctic Coke,” in about 800 U.S. stores.

Last October, the company announced that it had completed the largest refranchising initiative in its history, marking a major milestone with 70 independent KO bottlers across the nation running their own trucks and bottling operations. That, some analysts noted, may have an impact on top-line sales.  

Since peaking at an all-time high of $48.62 in late January, KO’s stock has lost some 9.3%. That represented a little less than half of its year-over-year gains; the stock is up 9.8 since Feb. 14, 2017. Like PEP, KO shares tumbled initially Jan. 29.

Earnings Estimates and Options Trading Activity

The consensus earnings estimate from third-party Wall Street analysts is $0.38 a share, according to the Earnings Analysis tab on the thinkorswim® platform from TD Ameritrade. That would be a penny increase over the year-ago results of $0.37 a share. KO has beaten Wall Street’s profit projections in 11 of the last 13 quarters. Revenue is projected to tumble 21% to $7.36 billion from $9.37 billion a year ago, which at the time outpaced Wall Street’s $9.09 billion forecast.

The options market has priced in an expected share price move of 1.9% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.  

Call activity has been higher at the 45-strike while put activity is concentrated at the 44-strike. The implied volatility sits at the 68th percentile. (Please remember past performance is no guarantee of future results.) 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

FIGURE 2: KO SHARES DOWN BUT NOT KO’D. Shares of KO climbed some 20% until Jan. 29, when shares joined the stock market decline. In recent sessions, shares have turned higher. Chart source: thinkorswim^® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Looking Ahead

Though volatility has eased over the last couple trading sessions, uncertainty over inflation and interest rates remain high on some investors’ minds. As the market digests fresh reads on consumer prices and retail sales, remember that the week is only half over. More data, including the Producer Price Index (PPI), the Philadelphia Fed Manufacturing Index, and an update on consumer sentiment from the University of Michigan, are coming later this week.

On the earnings front, more consumer-focused companies are scheduled to report this week as well as a handful of manufacturing, technology and healthcare companies. Some to watch could include Shopify Inc SHOP, Shake Shack Inc SHAK, Deere & Company DE, Applied Materials, Inc. AMAT and Cisco Systems, Inc. CSCO.

 

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.