Coke (KO) Down 1.6% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Coca-Cola (KO). Shares have lost about 1.6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Coke due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Coca-Cola's Earnings & Revenues Surpass Q1 Estimates

Coca-Cola reported better-than-expected top and bottom-line results for first-quarter 2022. Despite the uncertain operating environment, results have benefited from strategic transformation.

Comparable earnings of 64 cents per share beat the Zacks Consensus Estimate of 58 cents and rose 16% from the year-ago period’s level. However, unfavorable currency translations hurt earnings by 8 points. Comparable currency-neutral earnings per share rose 24%.

Revenues of $10,491 million surpassed the Zacks Consensus Estimate of $9,912 million and improved 16% year over year. Organic revenues rose 18% from the prior-year quarter’s level. Coca-Cola’s top line benefited from an improved price/mix and an increase in concentrate sales.

In the reported quarter, Coca-Cola gained a global value share in total non-alcoholic ready-to-drink beverages. Coca-Cola benefited from underlying share gains in both at-home and away-from-home channels.

Volume and Pricing

In the reported quarter, concentrate sales advanced 11% year over year, while the price/mix rose 7%. Price/mix benefited from pricing actions in the marketplace coupled with a favorable channel and package mix, owing to the lapping of last year’s pandemic-led disruptions. The metric also gained from a positive segment mix. Concentrate sales were 3 points ahead of the unit case volume, driven by the positive impacts of the timing of concentrate shipments, partly offset by the adverse impacts of one less day.

Coca-Cola’s total unit case volume grew 8% in the first quarter, backed by strength across all operating segments, investments in marketplace and the cycling of last year’s pandemic-led impacts. Growth was mainly led by improved trends in the developing and emerging markets, particularly in India and Brazil. Growth in developed markets was driven by the United States, the U.K. and Mexico.

Coming to category cluster performance, in the reported quarter, volume benefited from growth in trademark Coca-Cola; sparkling flavors; the nutrition, juice, dairy and plant-based beverages; and hydration, sports, coffee and tea categories.

Sparkling soft drinks’ unit case volume improved 7% year over year, driven by robust gains across all geographic operating segments. Trademark Coca-Cola volumes were up 6% year over year on solid gains in all regions. The sparkling flavors category improved 7% on growth in Europe, Middle East & Africa, and Latin America.

Volume for nutrition, juice, dairy and plant-based beverages was up 12%. The category primarily gained from fairlife in the United States, Minute Maid Pulpy in China and Maaza in India.

The hydration, sports, coffee and tea category grew 10% in the first quarter. Coca-Cola witnessed 8% growth in hydration on growth across Latin America, and Europe, Middle East & Africa. Sports drinks rose 22% due to a solid performance by BODYARMOR in the United States. Tea volume increased 8%, driven by gains in Brazil, Japan and Mexico. The coffee business witnessed 27% growth on the cycling impacts of the Costa retail outlets in the U.K in the prior year and the expansion of Costa coffee.

Segmental Details

Revenues rose 13% for EMEA, 34% for Latin America, 22% for North America, 1% for the Asia Pacific, 28% for Global Ventures and 8% for Bottling Investments.

Organic revenues improved 22% in EMEA, 39% in Latin America, 14% in North America, 5% in the Asia Pacific, 34% in Global Ventures and 12% in Bottling Investments.

Margins

Adjusted comparable operating income rose 24% year over year on the back of solid organic revenue growth across all segments, including gains from the timing of concentrate shipments in certain segments, which was partly offset by higher marketing investments. In dollar terms, comparable operating income rose 25% year over year, including currency headwinds to the tune of 6 points.

Adjusted comparable operating margin expanded 40 bps to 31.4%, driven by robust top-line growth, somewhat offset by higher marketing investments, the impact of the BODYARMOR acquisition and currency headwinds.

Financial Details

During first-quarter 2022, the company’s adjusted free cash flow of $400 million, with $620 million in cash flow from operations. Going ahead into 2022, it is expected to generate an adjusted free cash flow of $10.5 billion, with cash flow from operations of $12 billion. Capital expenditure is likely to be $1.5 billion.

Guidance

Coca-Cola, on Mar 8, 2022, suspended its business due to the conflict in Ukraine. As a result, it expects a 1% impact on unit case volume along with a 1-2% impact on revenues and operating income. Adjusted earnings are likely to be affected by 4 cents.

However, management retained its 2022 view. KO anticipates organic revenue growth of 7-8%. Revenues are likely to be impacted by a 2-3% currency headwind and a 3% positive impact of acquisition.

Management expects a mid-single-digit commodity price inflation. Adjusted comparable currency neutral bottom line is estimated to rise 8-10%, with year-over-year adjusted comparable bottom-line growth of 5-6%. This includes a currency headwind of 3-4%.

For second-quarter 2022, comparable revenues are expected to be impacted by a 4% currency headwind and a 3% positive impact of acquisition. The adjusted comparable bottom line is estimated to include a currency headwind of 4%.

Business Developments

In the quarter, KO launched the next chapter of the Real Magic platform, namely Magic Weekends campaign for Trademark Coca-Cola. As part of this, the company is collaborating with food service aggregators across all nine of its operating units, with increased focus on Coca-Cola Zero Sugar. The campaign was launched in the North America market with DoorDash as the delivery partner. The move will help optimize consumers’ digital experience via consumer engagement at point-of-sale.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Coke has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Coke has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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