Coca Cola Stock Gains After Q3 Earnings Beat

  • Coca Cola stock is up 2.5% after delivering an EPS beat.
  • Global volume increased by 3% which shows revenues will rise accordingly once the dollar weakens.
  • The diet coke brand continues to fall but its decline is being offset by good growth in the "coke zero" brand.
  • Still drinks continue to be strong with packaged water growing by 11%. Expect new products in the still range shortly from increased cash due to cost cutting efforts.
  • The company expects to return up to $2.5 billion in share buybacks this year. We are presently at $1.3 billion.

Coca Cola (NYSE:KO) results came out mixed with a small beat on EPS ($0.51 compared to the expected $0.5) but miss on revenue with actual sales coming in at $11.4 billion compared to the $11.6 billion expected. Coca Cola stock has gained around 2.5% since the earnings came out and is currently trading at $43.24.

Declining Numbers

Operating income came in at $2.37 billion compared to $2.7 billion from Q3 2014. Coca Cola earnings and revenues were also lower than the second quarter of this year but when you delve into the numbers, it becomes apparent that this company is not in all that bad shape especially when you consider the strong dollar which is affecting US multinationals having sizable international revenues. Coke had almost 60% of its net revenues come from international sales in fiscal 2014 so I'm not surprised the revenues are down compared to Q3-2014 when the dollar was much weaker. Let's go through the numbers and discuss why I still think Coca Cola stock should be an anchor in your portfolio.

Strong Currency Headwind

Firstly, even though revenues came in below expectations, the company reported a 3% rise in global volume. This was due to the company reporting organic revenue growth in every operating group except the Asian pacific. The organic revenue growth metric here is key. Many bearish analysts are pointing to the poor income trends (which are poor in dollars). I'm convinced that once the dollar reverts to its mean which should be around (1:25 - 1:3 to 1 euro), we will really see the results of this volume growth reflected on revenues and earnings.

Beyond Soda

Furthermore although carbonated drink companies are finding things difficult in the US, the "coke" brand is growing globally with 8% growth rates recorded in "Coke Zero" offsetting the established declining trend in "diet coke". I have mentioned this in a previous article here that per capita consumption of Coke is still relatively low in emerging markets and we saw this trend continue to play out in this quarter despite the stagnation in the Asian Pacific region.

The company continues to grow its "still" division with medium single digit growth recorded in ready to drink tea and sports drinks. Packaged water grew by 11%, which illustrates why the company is becoming more diversified and moving slowly in faster growing segments. We have already seen this recently with the company investing in Suja Life LLC (orange juice company). Furthermore the company's stake in Monster (energy drinks) and Keurig Green Mountain inc (coffee and cold drinks) will definitely bear results if the still drinks trend continues to grow.

Cost Cutting

The company also reported that year to date cash from operation climbed to $8.4 billion (up 5%) which was primarily due to efficient money management which should please shareholders. Furthermore the existing $3 billion annual cost cutting plan is definitely helping the company become more liquid. It has already paid out $1.3 billion in share buybacks this year but $2 to $2.5 billion is the number the company is stating that it will pay out by year end.

The ongoing divestitures of its bottling business is also going to play a major part in its cost cutting initiatives. The company found out the hard way that bottling operations was stifling margin growth. The company has already penciled in the sale of nine US production facilities which should net the company a further $380 million. The resultant savings will be used for both investing and rewarding shareholders.

So how do you play this as an investor? Income investors love stocks such as Coca Cola because it consistently raises its dividend (53 year record), issues multiple share buyback programs and basically the stock doesn't move. Why is a stagnant stock good for income you might ask? Well option sellers can collect premium every month against this stock (on the put side or call side) as the risk of being assigned is quite small due to the stability of the stock. This company was trading flat for the year before the earnings came out, which shows the huge stability this stock has.

Coca Cola Stock Has An Upside Potential

To sum up Coca Cola stock wont shoot from these levels but I'm convinced it will continue to grind out results year after year and in the process reward shareholders. Currently it has a perception problem in the west regarding its carbonated side (70%+ of the business) and a currency issue. As a result its overall revenues are falling slightly but its organic growth is actually increasing. Investors need to be aware of this when doing their fundamental analysis on the company.

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  • I do not have any business relationship with the companies mentioned in this post.
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