We issued an updated research report on The Coca-Cola Company KO on Mar 30, 2015.
Coca-Cola ended 2014 on a strong note surpassing the Zacks Consensus Estimate for both earnings and revenues in the fourth quarter of 2014. Excluding the impact of currency, earnings of 44 cents increased 5% driven by improved organic revenues and cost cuts. Organic revenues increased 4% driven by an extra selling day, improved soda sales and better volume and price trends in North America amid an improving economic scenario.
Management expects 2015 to be a “transition year” — a time to start implementing changes to create a new operating model.
In Oct 2014, Coca-Cola unveiled strategic actions to drive higher profit. Other than aggressively cutting costs, the plan includes targeting brand and growth investments as well as aligning incentive plans. The company is also refranchising the majority of its company-owned North American bottling territories to create a more efficient system. It closed several transaction in 2014 and plans to complete 2/3rd of the refranchising by 2017-end and the remaining territories no later than 2020 to improve margins and returns. Management started implementing these initiatives in the fourth quarter which led to the better than expected results in the quarter.
Moreover, Coca-Cola owns 16% stake in specialty coffee retailer Keurig Green Mountain, Inc. GMCR. Coca-Cola also has an innovative partnership deal with Keurig Green Mountain under which the latter will exclusively make Coca-Cola branded single-serve pods for use on its upcoming Keurig Cold at-home beverage system. The deal opens up an exciting new packaging format for Coca-Cola’s brands.
Coca-Cola also plans to purchase a 16.7% stake in energy drink maker, Monster Beverage Corporation MNST, for $2.15 billion. The transaction is expected to close at the beginning of the second quarter. Under the deal with Monster, Coca-Cola will swap its global energy drink business with Monster’s non-energy drink business.
These strategic investments will help Coca-Cola adapt to changing consumer trends while accelerating innovation.
Management, however, warned that the restructuring and strategic initiatives will take time to deliver the desired results amid challenging global macro conditions. Management expects the economic environment in 2015 to be more volatile than 2014. While the macro environment is expected to improve in the U.S., management expects deflation environment in Europe and continued softness in many emerging and developing markets.
Other Stocks to Consider
Coca-Cola carries a Zacks Rank #3 (Hold). A better-ranked beverage stock is Coca-Cola Amatil Limited CCLAY carrying a Zacks Rank #2 (Buy).
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