Will Coca-Cola Enterprises (CCE) Return to Growth in 2015?

On Nov 19, we issued an updated research report on Coca-Cola Enterprises Inc. CCE.

On Oct 23, announced dismal third-quarter 2014 earnings. Though Coca-Cola Enterprises beat the Zacks Consensus Estimate for earnings, it missed revenue expectations. Adjusted earnings of 92 cents per share increased 12.2% year over year driven by operating income growth, lower share count and currency benefits. However, the top line remained weak in the quarter, declining 1.5% year over year due to ongoing macroeconomic softness and poor weather conditions in France.

More than 90% of the sales volume of Coca-Cola Enterprises comprises The Coca-Cola Company KO products. In Oct 2012, Coca-Cola Enterprises sold its North American operations to The Coca-Cola Company and took over the latter's bottling operations in Norway and Sweden.

Coca-Cola Enterprises is thus, geographically focused in Western Europe and exposed to the economic uncertainties of this region.

Coca-Cola Enterprises has been facing a tough retail consumer and competitive environment in Great Britain. Though trends are improving, consumers in the country remain apprehensive of spending extravagantly.

Though the company witnessed improving customer relationships in France in the first half of 2014 after facing difficult beverage market conditions since the increase in French excise tax FET in Jan 2012, a sustained recovery from the volume elasticity due to the tax increase is required. With volumes and sales remaining weak, the company is forced to drive profit only through cost cutting and share repurchases.

Concurrent with the third-quarter earnings release, the company lowered its full-year 2014 sales and profit outlook — for the second time this year — due to ongoing macro and competitive pressures in Europe.

Management expects the ongoing economic softness and operating challenges to persist in the fourth quarter as well as in 2015, thereby limiting revenue growth. Moreover, management expects to have limited benefit from the improved commodity cost outlook in 2015 as the benefits have already been realized in 2014. Also, currency translation is expected to be a headwind in 2015 as against being a tailwind in 2014.

With these external factors that supported results in 2014 likely to disappear in 2015, it could prove to be a challenging year for Coca-Cola Enterprises.

However, the company's solid share buyback program, aggressive cost cutting initiatives, innovation plans, solid marketing and continued strong performance of the Coca-Cola brands keep our faith in the stock.

Coca-Cola Enterprises launched Coca-Cola Life, a naturally sweetened mid-calorie cola with one-third less calories, in Sweden and Great Britain, and Smartwater in Great Britain this year. The company's marketing pipeline for the rest of the year includes special summer and traditional holiday and Christmas activation programs. It remains to be seen if these product launches and aggressive marketing plans can offset the macro headwinds to improve volumes for Coca-Cola Enterprises.

Other Stocks to Consider

Coca-Cola Enterprises carries a Zacks Rank #4 (Sell). Better-ranked beverage stocks include Monster Beverage Corp. MNST and Dr Pepper Snapple Group, Inc. DPS. Both the companies have a Zacks Rank #2 (Buy).