Two food and beverage giants are scheduled to release results in the coming days. The Coca-Cola Co KO is first up and reports before market open on Wednesday, July 25. The following day, McDonald’s Corp MCD takes the stage and reports before the open on Thursday, July 26.
When the two report, it might be instructive to watch their overseas sales to see if they’re continuing to make strides with consumers outside of the traditional American market. KO, for instance, has done a good job adjusting to healthier American tastes by focusing more on bottled and sparkling water, but it still has a great audience overseas for sweet drinks, and if consumers there seem to be buying lots of pop, it could help to loosen up some of the tariff worries.
Coca-Cola Earnings and Options Trading Activity
KO is expected to report adjusted EPS of $0.60 per share, up a penny compared to last year, on revenue of $8.54 billion, according to third-party consensus analyst estimates. Revenue is projected to decline 12.1 percent year over year, largely because of the company refranchising its bottling operations.
KO has been in the midst of a multi-year refranchising of its bottling operations that is coming closer to an end. Management indicated it had made the decision in the past to exit the low-margin bottling business, and instead focus on its core portfolio of brands.
When KO last reported, management said that the refranchising created a 26 percent revenue headwind. First-quarter revenue declined 16 percent year over year to $7.6 billion, although organic revenue was up 5 percent. There were signs that KO was achieving cost-savings and higher margins from exiting its bottling operations. Comparable operating margin was up by 600 basis points in Q1.
Coca-Cola Zero Sugar, FUZE Tea, AdeS plant-based beverages and sparkling water have been some of the growth drivers KO cited in recent quarters. KO reported that Coca-Cola Zero Sugar grew at a double-digit pace in Q1, the fastest of the Coca-Cola branded products.
Several of the faster-growing brands in the company’s portfolio were from acquisitions, including FUZE Tea and AdeS beverages, a soy-based beverage sold in South America. Management has said in the past it will continue to pursue bolt-on M&A to fuel growth, as well as scaling its smaller brands globally.
KO has done this with FUZE Tea, which it bought in 2007. In Q1, KO said it rolled the product out to an additional 37 countries in Europe, greatly expanding from the 49 countries where it was being distributed previously. Most recently, KO said it has been doing the same after it acquired Topo Chico sparkling water for $220 million in October 2017.
Around the upcoming earnings release, options traders have priced in a 2.1 percent stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was on the low end at the 29th percentile as of this morning.
In short-term trading at the July 27 weekly expiration, calls have been active at the 45 and 45.5 strike prices, while puts have been active at the 44.5 strike. Overall, volume has been pretty light. The 45.5-strike call had the highest volume during Monday’s session with 1,534 contracts.
At the August 17 monthly expiration, recent trading on the call side has been concentrated at the 45 strike, which also had the highest open interest with 30,074 contracts. Trading has been pretty light on the put side, with a smattering of activity across a range of strikes. The 43 and 44 strike puts do have higher open interest, with 8,972 and 8,730 contracts open at the end of Monday’s session, respectively.
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.
McDonald’s Earnings and Options Trading Activity
MCD is expected to report adjusted EPS of $1.93, down from $2.01 in the prior-year quarter, on revenue of $5.33 billion, according to third-party consensus analyst estimates. Revenue is projected to decline 11.9 percent year over year.
When MCD last reported, comp store sales were up 5.5 percent year over year, making it the company’s 11th quarter of positive comps. That was also MCD’s fifth consecutive quarter of positive guest counts, which were up 0.8 percent.
U.S. comp sales grew at a slower pace in Q1 and were only up 2.9 percent, which management attributed to higher average checks from price increases and sales mix. Traffic was a challenge in Q1 and the U.S. was the only region that had a decline, according to the company. MCD’s has been in the process of adding new menu items and implementing other changes to increase traffic at its U.S. locations, so investors could get an idea if those steps are getting traction on the earnings call.
The company reported that traffic was up across the board in its other segments in Q1, helping boost comp sales growth. Comp sales in the International Lead segment increased 7.8 percent, driven by strength in the U.K. and Germany. Comp sales in the High Growth segment were up 4.7 percent, helped by sales in China and Italy but pressured by ongoing challenges in South Korea, and the Foundational Markets segment had an 8.7 percent increase.
Like KO, MCD has also been in the midst of its own multi-year refranchising effort where it is reducing the number of corporate-owned locations, which it has said it eventually plans to bring down to 5 percent of total stores. The company is almost there as it reported that 8 percent of its locations were corporate-owned. The company said that this transition has negatively impacted revenue, but margins have greatly improved as the company earns more from rent, royalties and other fees from franchise locations. MCD reported operating margin of 41 percent in Q1, up from 31 percent in the prior-year period.
Options traders have priced in a 3.1 percent stock move in either direction around MCD’s earnings release, according to the Market Maker Move indicator. Implied volatility was at the 47th percentile as of this morning.
At the July 27 weekly expiration, recent trading has been heavier at the 160-strike call, with volume of 1,882 contracts during Monday’s session, and open interest of 11,594 contracts. Trading has been light on the put side, with some activity spread out between the 150 and 160 strike prices.
Further out at the August 17 monthly expiration, activity on the call side has again been concentrated at the 160 strike, while puts have been active at the 155 strike. The 150-strike put has the highest open interest with 10,968 contracts open.
There’s also been some heavier put activity at the September 21 monthly expiration. During Monday’s session, the 145-strike put and the 150-strike put had volume of 4,242 and 3,372 contracts, respectively.
What’s Coming Up
A busy week of earnings continues and these are some of the major upcoming reports:
- Boeing Co BA and General Motors (GM) report before market open on Wednesday, July 25
- Facebook, Inc. FB and Ford Motor Company F report after the close Wednesday, July 25
- Amazon.com, Inc. AMZN and Intel Corporation INTC report after the close Thursday, July 26
- Oil supermajors Exxon Mobil Corporation XOM and Chevron Corporation CVX report before the open Friday, July 27
For a look at what else is going on, check out today’s Market Update if you have time.
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