Shares of beverage giant The Coca-Cola Company KO have been struggling to keep up with the major market indices this year, as it battles some key headwinds plaguing the soft drink industry. The company lost around 1% year to date and 6.5% in the last six months.
The top-line underperformance of Coca-Cola in the first half of 2016 was quite noticeable. In fact, investors are quite alarmed by the company’s full-year revenue growth guidance reduction to 3% from the 4–5% range as persistent weakness in some emerging markets like China, Russia and Brazil continued to be a major drag.
Weakening demand in certain large emerging and developing markets like China, Brazil and Argentina hurt Coca-Cola’s sales in the first half of 2016. Management also expects the macroeconomic environment to remain volatile through the rest of 2016. While the macro environment is improving in the U.S., management anticipates challenges to persist in many key emerging/developing markets like Brazil and China in the second half of 2016.
Again, Coca-Cola’s North American sparkling beverage business has been delivering sluggish results due to carbonated soft drinks or CSD category headwinds. Cross-category competition and growing health and wellness consciousness are hurting demand for CSDs.
The challenges in the CSD category have been also felt by all major soft drink makers — Coke, Pepsico, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS — leading to lower volumes and weak sales.
Meanwhile, over the past 60 days, the Zacks Consensus Estimate has decreased almost 2% for 2016 earnings, adding to the company’s woes. Moreover, for 2016, earnings and sales are projected to decline nearly 5% and 6.2%, respectively, raising questions over this Zacks Rank #4 (Sell) company’s prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Again, the stock has a VGM Style Score of ‘D’. Notably, our research shows that stocks with VGM Scores of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or Zacks Rank 2 (Buy) make solid investment choices.
Will the Headwinds Fizzle Out?
Like investors, we are worried about the recent performance of this beverage giant. However, as the debates shift from near-term concerns to long-term gains, Coca-Cola offers great opportunities for investors.
This blue chip stock with a $182.7 billion market cap boasts a solid dividend yield of 3.3%, much higher than the S&P 500’s average of 1.74%. The company is focused on initiatives like restructuring the global supply chain including optimization of the manufacturing footprint in North America, investing in technology to streamline operations, implementing a zero-based budgeting program, headcount reductions and driving increased efficiency in direct marketing investments. The resultant savings are being used to fund marketing programs and innovation to re-accelerate top-line growth, margin expansion and returns on capital.
This is evident from the first-half operating margin performance that improved 180 basis points year over year as positive pricing, favorable segment mix, productivity gains and lower commodity costs were offset by currency and structural headwinds.
Again, in many international markets, Coca-Cola has been divesting and merging many bottling operations since 2014 to revamp its bottling system, improve margins and drive growth. Three of its European bottlers — Coca-Cola Enterprises, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG (German bottler) — merged to form a new West European bottler named Coca-Cola European Partners, Inc. CCE this May.
In the near term, we acknowledge that emerging market volatility and muted volume trends for carbonated beverages pose threats to Coca-Cola. That said, far from a stale legacy brand, the company is focused on improving operational efficiency, keeping in mind the volatile consumer trends, thereby creating enough shareholders value.
Nevertheless, we maintain our optimism on this stock given its accelerated re-franchising efforts as well as cost reduction initiatives.
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