The Street's Reaction To Coca-Cola's Dip

Shares of beverage giant and Dow Jones component The Coca-Cola Co KO lost more than 8 percent Thursday in reaction to a weak earnings report and a cautious guidance for 2019. Here is a reaction of how some of the Street's top analysts reacted to the print.

The Analysts

  • Citi's Wendy Nicholson downgraded Coca-Cola from Buy to Neutral with a price target lowered from $56 to $50.
  • Wells Fargo's Bonnie Herzog maintains at Outperform, price target lowered from $52 to $50.
  • Bank of America's Bryan Spillane maintains at Buy, unchanged $55 price target.
  • UBS' Sean King maintains at Neutral, price target lowered from $51 to $50.
  • RBC Capital Markets' Nik Modi maintains at Outperform, unchanged $56 price target.

Shares of Coca-Cola were trading at $45.87 Friday morning.

Citi: EPS Stuck 'In A Rut'

Coca-Cola ended 2018 with a 5 percent organic sales growth and 11 percent (currency neutral) profit growth, Nicholson said in a note. But management's guidance for 2019 implies a slowdown to 4 percent organic growth and 8-9 percent (currency neutral) op profit growth. The outlook still implies strong market share performance and key categories remain healthy while the company should see earnings upside as multiple non-operating items stabilize.

Nevertheless, a downgrade is justified at this time as management's guidance implies EPS growth of around 1 percent in 2019. The absence of any strong earnings growth in the near term implies the stock is fairly valued at current levels.

Wells Fargo: 'Bright Spots' Outweigh Disappointments

Digging beyond Coca-Cola's headline numbers, Herzog said there are three disappointing readouts from the earnings report: 1) volumes were around flat from last year despite a 5 percent organic sales growth, 2) emerging markets showed softening trends, and 3) core gross margins fell 220 basis points from last year to 62 percent which was disappointing.

But the bullish case for Coca-Cola remains unchanged due to three "bright spots," including: 1) new beverage innovation drove an eight point acceleration in retail value growth for no-calorie drinks in 2018, 2) the acquisition of UK's Costa coffee chain continues to represent a large opportunity, and 3) a strong 2019 outlook for "category clusters" like tea.

BofA: Investors Were Frustrated

Coca-Cola's 8 percent sell-off is mostly due to investor frustration with another year of flat earnings and a miss on free cash flow guidance, Spillane said in a research report. But investors may be overlooking the "solid" underlying sales and profit growth in the fourth quarter with momentum expected to carry over to 2019.

Investors should pay attention to 2020 when Coca-Cola will start showing a long-term growth outlook from acquisitions and the lapping of headwinds like currency and higher net interest expenses.

UBS: Market Expected Growth In 2019

King said Coca-Cola may have earned itself a new nickname: "Coke Zero Growth" as the Street was looking forward to a year of growth in 2019. Instead, investors may need to wait until 2020 for the company to show growth although this assumption assumes the dollar doesn't significantly weaken in 2019.

RBC: Focus On The Long Term

Coca-Cola's 2019 EPS guidance looks to be "appropriately conservative" given an "extreme" foreign exchange near-term headwind, Modi said. But looking beyond 2019 the company boasts an underlying strategy designed for longer-term success. Coca-Cola's business hasn't been this strong to dominate the global Non Alcoholic Ready to Drink segment over the past decade.

The company's strong positioning is evident in management's 4 percent top-line guide, which is double the 2 percent forward organic growth guidance of its consumer packaged group peers at 2 percent.

Posted In: Bank of AmericabeveragesBonnie HerzogBryan SpillaneCitiCostaNik ModiRBC Capital MarketsSean KingUBSWells FargoWendy NicholsonAnalyst ColorEarningsLong IdeasGuidanceDowngradesPrice TargetTop StoriesAnalyst RatingsTrading Ideas