The Coca-Cola Company (KO - Free Coca-Cola Stock Report) continues to deliver lackluster results. With the release of March-quarter numbers, the beverage giant has now reported eight consecutive quarters of negative earnings comparisons. In this case, share net declined 4%, to $0.43, coming in a penny below our estimate.
On the top line, revenues fell 11%, to $9.1 billion, with most of the decline being driven by structural changes, particularly the refranchising of various bottling operations. Absent these transactions, sales were off about 1%, with two fewer selling days, the shift in the Easter holiday (into the second quarter), and a slight headwind from foreign currency offsetting favorable price and mix changes. The price and mix improvement partly reflects a shift in emphasis at Coke from volume growth to revenue growth. (Notably, unit case volume was unchanged from the prior-year period.)
Meanwhile, structural changes and a strong dollar are also muddling the profit picture. Adjusted for these items, though, pretax profits rose 2%, helped along by gains in North America and the Asia-Pacific region. Notably, operating margin expanded significantly, driven by the benefits of pricing and productivity initiatives, as well as the absence of lower-margin bottling businesses.
Looking ahead, we are making no changes to our earnings outlook for 2017 and 2018. For the current year, share net will likely slip 3%, to $1.85. This includes pretax headwinds of roughly 3% and 5%, respectively, from currency translation and structural changes, such as refranchising. These factors will likely spill over into next year, but probably with a slightly more modest drag, overall. On this basis, a tentative bottom-line recovery should be able to commence, with 2018 earnings edging ahead 3%, to $1.90.
Investors have been slow to embrace the changes under way at Coke. The stock has been a sluggish performer so far in 2017, lagging noticeably behind the shares of rival Pepsi. That said, this equity is still worthy of consideration for conservative accounts. It carries our Highest rank (1) for Safety and its yield of roughly 3.5% is more than 100 basis point higher than the Value Line median.
About the Company: The Coca-Cola Company is the world's leading marketer of ready-to-serve, nonalcoholic beverages. On any given day, 1.7 billion individual servings of the company's brands are consumed by people around the globe. The Atlanta-based company currently has more than 500 wholly owned and licensed brands, including 15 that generate $1 billion or more in annual sales.
