Coca-Cola Stock Displays Solid Momentum: Will It Sustain?
Zacks Investment Research | Jun 25, 2019 06:51AM ET
The Coca-Cola Company (NYSE:KO) has been resilient in a tough industry, owing to the effective execution of strategies to evolve as a consumer-centric total beverage company. Innovation and investment in core categories and brands have been the key focus area for the company, which led to the expansion of retail value share. Further, it is gaining from its ongoing productivity efforts and disciplined growth strategies along with robust performance across segments.
These traits altogether bolstered the company’s quarterly performances as evident from a robust surprise trend. First-quarter 2019 marked its seventh positive earnings surprise in the last eight quarters and the seventh straight sales beat.
Notably, the stock has gained 19.8% in the past year, outperforming the industry ’s growth of 5.8%. Moreover, this Zacks Rank #3 (Hold) company’s impressive long-term earnings growth rate of nearly 7% indicates that the stock’s momentum is likely to continue.
Factors Aiding Growth
Coca-Cola has been a clear beneficiary of the actions undertaken over the years to improve productivity, including innovation and investing in core categories and brands. This mantra extends to all business aspects, ranging from massive categories like hot beverages to emerging ones like Kombucha. Constant innovation of brands is the key to the company’s sustained growth.
For example, over the past three years, innovation at the Coke brand has helped Coca-Cola to accelerate global retail value growth every year, reaching 6% growth in 2018. However, the company’s innovation strategy is not focused on the Coke brand alone. Recently, its leading Innocent juice brand in Europe expanded in plant-based beverages. Additionally, the Simply product, within the Challenger brand, launched a new line of smoothies.
Additionally, Coca-Cola continually maintains relevance for the Coke brand through updates to the flagship product and its many variants. Recent momentum at this brand is attributed to the success of Coke Zero Sugar over time, with more growth potential ahead. Notably, the Coke Zero Sugar delivered double-digit growth globally for the sixth straight time in first-quarter 2019. The company’s sparkling portfolio benefited the momentum in Coke Zero Sugar and other flavor innovations like Orange Vanilla Coke and Orange Vanilla Coke Zero Sugar.
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Bringing innovation for Coke to the next level, the company tested Coca-Cola coffee in several Asia markets in 2018. Encouraged by the test results, it now plans to launch Coke coffee in more than 25 markets around the world by the end of 2019. Additionally, it is testing Coke Energy — another variant of Coke — with more energy-boosting characteristics and new taste.
Furthermore, the company is on track with its productivity and reinvestment program that focuses on initiatives like restructuring the global supply chain, investing in technology to streamline operations, implementing a zero-based budgeting program, headcount reductions and driving increased efficiency in direct marketing investments. Savings from the program are being used to fund marketing programs and innovation to re-accelerate top-line growth, margin expansion and returns on capital.
Coca-Cola aims to achieve the productivity savings target of $3.8 billion by 2019 from the initiatives implemented under this program since its beginning. The company is on track to achieve almost $5 billion in savings from 2008 through 2019, on productivity and reinvestment programs. As of the end of 2018, it had about $600 million remaining in growth productivity savings to be captured in 2019.
Hurdles
Despite witnessing robust growth, Coca-Cola’s sales and earnings for first-quarter 2019 continued to be hurt by adverse currency rates. Moreover, the company estimates currency headwinds to persist and impact results in the second quarter and 2019. It expects unfavorable currency to affect revenues by 3-4% and comparable operating income by 6-7% in 2019. Meanwhile, currency headwinds are likely to hurt comparable net revenues by 4-5% and comparable operating income by 7% in second-quarter 2019.
Moreover, the company’s outlook for 2019 remains drab compared with the prior year. The estimated organic sales growth of nearly 4% for 2019 suggests a slowdown from 5% organic sales growth witnessed in 2018. Further, the company expects comparable earnings to be between down 1% and up 1%, whereas it recorded $2.08 in 2018.
Bottom Line
Coca-Cola has been oscillating between long-term positives and near-term hurdles. Additionally, we believe that it is poised to gain from the recent lift of tariffs on steel and aluminum imports from Canada and Mexico. This should ease cost pressures on the company to some extent. On that note, we would suggest holding on to the stock for the long term.
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PrpsiCo Inc. (NASDAQ:PEP) has a long-term earnings growth rate of nearly 7%. The stock presently carries a Zacks Rank #2 (Buy). You can see Zacks Investment Research
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