- Average Wall Street EPS estimates are at $0.37 per share for Coca-Cola.
- Cost cutting and unloading of bottling assets will be part of the discussion in Coca-Cola’s Q4 earnings.
- Coca-Cola remains committed to growing free cash flow and boosting its dividend.
On 9 Feb 2016, beverage company Coca Cola (NYSE:KO) is due to report its Q4 2015 earnings. The average earnings estimates currently stand at at $0.37 per share. This number would represent a 16% YoY decline, if Coca-Cola were to meet the estimates. A strong dollar and flat to declining demand could contribute to this decline. This earnings announcement represents the wrap up for 2015, and investors should keep an eye out for the following items:
Discussions About Streamlining
Coca-Cola is a huge global beverage company that contends not only with market saturation, but also with the healthy lifestyles movement. Coca-Cola’s sparkling volume, while still growing, has remained anaemic since 2012. Like most large companies, it still has room to grow in Emerging Markets like China and India, and in developing nations like Mexico. However, soda consumption taxes in places like Mexico, due to rising obesity, serve as further friction against carbonated soda demand.
As a result, Coca-Cola has resorted to cost cutting strategies such as headcount reduction and selling away its bottling assets. Coca-Cola wants to return to an “asset light” company that merely makes the syrup, with the bottling companies selling the final product. Coca-Cola Refreshments, Coca-Cola’s customer service and bottling subsidiary, bottles less than 50% of its volume right now, down from 80% prior to the purchase of Coca Cola (NYSE:CCE) in 2010, according to a slide presentation presented at the Morgan Stanley Global Consumer & Retail Conference. Coca-Cola also formed a National Product Supply Group that will serve as an alliance of bottlers, providing them the scale required to function cost effectively, though separately from Coca-Cola.
While cost cutting provides quick and measurable fixes for large companies such as Coca-Cola, its management isn’t oblivious to the fact that the company will need long-term growth to thrive or even survive over the long-term. Look for updates from the management about growth initiatives that could help it grow over the long-term.
Year-to-date still beverage volume increased 4% YoY, as per the last quarterly earnings announcement, versus 1% for sparkling beverages. I look for growth of still beverage volume to outpace sparkling beverages for the full year 2015. In an effort to compete with Starbucks' Evolution Fresh juice line, Coca-Cola invested in Suja, which its management calls a “high growth organic juice company”. Also, Coca-Cola acquired a protein drink business in China, and invested in Chi Ltd. a value added dairy and juice products company in Nigeria, both of which should aid growth in the long term.
Coca-Cola feels that people will purchase soft drinks in smaller packages. Coca-Cola's management cited an example of how a parent doesn’t want to completely deny their children the pleasure of a soda. They seem to remain open to the possibility of giving their children small bottles occasionally. Interestingly, at the Morgan Stanley Global Consumer & Retail Conference, the management recently hinted to the investment community that it may want to de-emphasize volume as a measure of success for the company due to its strategy surrounding smaller packages. This implies that pricing will play a significant role in the growth of Coca-Cola’s top and bottom lines.
Impact Of Sour Economic Sentiment
If Coca-Cola doesn’t meet estimates, you might find that management blaming its woes on a slowing global economy. China’s GDP grew at its slowest rate in 25 years, according to CNBC. Coca-Cola's management anticipates that a slowdown in global growth will hamper growth in disposable incomes more than anticipated. This could put a dampener on Coca-Cola’s growth in revenue and earnings per share growth.
Coca-Cola's Free Cash Flows
At this point I must say that I own and will continue to own Coca-Cola shares due to the company’s commitment to expanding free cash flows and returning capital to shareholders. So far this year, Coca-Cola’s free cash flows expanded 4% year-over-year due to the prudent use of working capital. The company has now increased its dividends for 53 consecutive years. I fully expect Coca-Cola to boost its dividends again this year. So far this year, Coca-Cola paid out 64% of its free cash flow in dividends. This is a little high but not entirely unexpected for a mature company such as Coca-Cola. Currently, Coca-Cola pays its shareholders $1.32 per share per year, translating to a 3% dividend yield annually.
As a mature company, Coca-Cola will derive most of its long-term growth from raising prices and cost cutting. Selling soft drinks in small bottles could serve the dual purpose of quietly incorporating price increases on an ounce by ounce basis while also catering to the consumer who still wants a soda but in lower doses. Finally, Coca-Cola may not beat earnings, but it still deserves a long-term spot in your portfolio, especially if you value dividends.