The Coca-Cola Company



|The Coca-Cola Company |(KO-NYSE) |$43.21* |

Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: News & 4Q17 Earnings Update; Mar 8, 2018

Brokers’ Recommendations: Neutral: 60% (9 firms); Positive: 40% (6); Negative: 0% (0); Prev. Ed.: 9; 6; 0

Brokers’ Target Price: $48.93 (↓ $0.76 from the last edition; 14 firms) Brokers’ Avg. Expected Return: 13.2%

*Note: Though dated May 10, 2018, share price and brokers’ material are as of Apr 30, 2018.

Note: The tables below for Revenues, Margins and Earnings per Share contain fewer brokers’ material than the brokers’ material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Coca-Cola, the world’s largest beverage maker, markets more than 500 non-alcoholic beverage brands, both sparkling and still. The company markets four of the world's top five non-alcoholic sparkling beverage brands, including Coke, Diet Coke, Sprite and Fanta, and is slowly expanding its portfolio of non-carbonated drinks as well.

Of the 15 firms covering the stock, nine provided neutral ratings, six assigned positive ratings, while no firm held a negative stance.

Neutral or equivalent outlook (9/15 firms): Though Coca-Cola’s cost saving initiatives, solid financials and accelerated bottler refranchising are encouraging, a few firms prefer to remain neutral until sustained sales acceleration can be seen. Emerging market volatility/slowdown, challenging global demand environment– due to concerns regarding decline in the consumption of carbonated soft drinks – and significant currency headwinds keep these firms on the sidelines. Further, weak growth in Latin America and Mexico pose concerns.

Positive or equivalent (6/15 firms): Overall, the bullish firms believe that Coca-Cola is well positioned for future growth despite significant global macro headwinds. Some firms believe that changes like North American re-franchising and investments in new/innovative revenue platforms can drive long-term profits. Moreover, improving revenues in emerging and developing markets driven by solid price/mix growth encourage these firms. Additionally, completion of refranchising in the United States, China, Japan and Africa should also help the company see future growth.

May 10, 2018

Overview

The firms have identified the following issues as critical to an evaluation of the investment merits of Coca-Cola:

|Key Positive Arguments |Key Negative Arguments |

|Coca-Cola’s wide portfolio of more than 500 sparkling and still beverages has |Changing consumer preferences, increasing health consciousness, rising |

|allowed it to consistently gain volume and value share in the beverage market.|obesity concerns, possible new taxes on sugar-sweetened beverages and |

|Through one of the largest distribution systems worldwide, Coca-Cola’s |growing regulatory pressures are affecting the sales of CSD category |

|products reach consumers in more than 200 countries, giving it a huge |beverages. |

|competitive advantage. | |

|Coca-Cola possesses one of the largest distribution networks in the world, |Volatile macroeconomic environment can make sales acceleration difficult.|

|which gives it a huge competitive advantage. |The company is still facing difficult conditions in certain |

| |developing/emerging markets, notably Latin America and Brazil. Although |

| |improvement in key markets like India, Argentina and Brazil was noticed |

| |in the second half of 2017 and first quarter of 2018, firms wait for |

| |better visibility. |

|Coca-Cola has a strong presence in the developing and emerging markets of |The company’s North American sparkling beverage business has been |

|Latin America, India, Russia and China, thus benefiting from the significant |delivering sluggish results due to CSD category headwinds. Cross-category|

|growth opportunities that these countries offer. |competition and growing health and wellness consciousness are hurting |

| |demand for CSDs.  |

|Coca-Cola’s aggressive cost-cutting and strategic initiatives led to the | |

|improved results. In April 2017, the company increased its productivity | |

|savings target to $3.8 billion from $3 billion. Coca-Cola aims to achieve the | |

|target by 2019. | |

|Coca-Cola’s transformative North American re-franchising initiatives should | |

|improve margins and returns, and lead to superior growth, despite hurting | |

|sales/profits in the near term. | |

|Coca-Cola boasts a solid cash position, which can be used to return value to | |

|its shareholders through higher dividends and regular share buybacks as well | |

|as for reinvesting in the business. | |

Headquartered in Atlanta, GA, The Coca-Cola Company (KO) is the largest global producer and marketer of beverages. Coca-Cola commands a portfolio of more than 500 sparkling (carbonated) as well as still (non-carbonated) beverages like water, enhanced water, juices and juice drinks, ready-to-drink tea and coffee, and energy and sports drinks. Popular sparkling beverage brands include Coke, Diet Coke, Fanta and Sprite while still beverage brands include Minute Maid and Powerade. Most of the company’s beverages are manufactured, sold and distributed by independent bottling partners.

Coca-Cola currently reports operating results under the following segments — Europe, Middle East and Africa (20.8% of 2017 the total revenues); Latin America (11.4%); North America (30%); Asia Pacific (14.6%); Bottling Investments (29.9%); and Corporate (0.4%). Intersegment eliminations were $2.5 billion in the quarter. Among these, the first five are at times referred to as "operating groups" or "groups". Meanwhile, intersegment revenues were $42 million for Europe, Middle East & Africa, $73 million for Latin America, $1,986 million for North America, $409 million for Asia Pacific and $81 million for Bottling Investments.

Additional information is available at Coca-Cola’s website: .

Note: Coca-Cola’s fiscal year coincides with the calendar year.

May 10, 2018

Long-Term Growth

Coca-Cola is pursuing investments in newer revenue platforms to boost long-term sales and profits. In 2017, the beverage giant made an important addition to its portfolio beyond sparkling soft drinks with the acquisition of Topo Chico premium sparkling mineral water brand in the United States. Also, it entered the fast-growing U.S. ready-to-drink coffee category and closed the proposed acquisition of AdeS soy-based beverage business in 2017. It also shifted two of its leading U.S. brands — Honest and smartwater — into multiple international markets.

Importantly, Coca-Cola launched Coca-Cola Zero Sugar in 20 markets, with a reformulated product, evolved marketing, new packaging and upgraded execution. Also, the company registered positive results owing to the brand, growing revenue in double digits, including a meaningful acceleration in Coca-Cola Zero Sugar strength in the United States since its launch in the third quarter of 2017.

Additionally, the company’s global ready-to-drink tea category represents $60 billion in retail value and is projected to continue growing solidly as consumers seek for more natural beverage choices. Coca-Cola’s tea portfolio expanded over the past several years mainly on the strength of its brands like FUZE TEA, Ayataka and Gold Peak, as well as strong local and regional brands such as Honest Tea. At the end of 2017, FUZE TEA was available in nearly 50 countries. In the first quarter of 2018, the company launched FUZE TEA in Europe.

Early in 2018, Coca-Cola ventured into the liquor space with the plan to introduce an alcoholic drink in Japan. The cola giant launched its first ever alcoholic drink — Chu-Hi — made with a distilled Japanese beverage (shocho), sparkling water and flavoring.

The company chose Japan to experiment its first ever alcoholic drink as the market is ‘incredibly dynamic, fiercely competitive and rooted in innovation.’ Consumers here are always open to product variations. Coca-Cola on an average launches 100 new products per year in Japan.

Coca-Cola has been undertaking various productivity initiatives to streamline its cost structure. In Apr 2017, the company further increased its productivity savings target to $3.8 billion from $3 billion. Coca-Cola aims to achieve the target by 2019 from the initiatives implemented under this program. The company aims to achieve almost $5 billion in savings from 2008 through 2019, banking on productivity and reinvestment programs.

The program focuses 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.

Coca-Cola has a commanding presence in the developing and emerging markets of Latin America, India, Russia and China, encouraged by growth opportunities that these countries provide. Coca-Cola remains very optimistic about its Indian operations Coca-Cola is highly optimistic about its Indian operations, in which it owns four of the top five sparkling brands as well as the top juice brands.

Firms are encouraged by Coca-Cola’s ability to accelerate growth and shareholder returns, driven by continued share gains, an improving macro environment, and Coca-Cola’s cultural shifts and strategic priorities. Further, they are encouraged by the company’s cost reduction priorities which should drive operating margin expansion to 35%+ by 2020 as well as focus on increasing cash flow conversion.

May 10, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |40.0%↔ |

|Neutral |60.0%↔ |

|Negative |0.0%↔ |

|Avg. Target Price |$48.93 ↓ |

|Digest High |$52.00↔ |

|Digest Low |$44.00 ↓ |

|No. of Analysts with Target Price/Total |14/15 |

The risks to achieving the target price include prolonged slowdown in core markets like China and Europe, further foreign exchange volatility, higher commodity costs and weakening consumer spending.

Recent Events

On Apr 24, 2018, Coca-Cola reported first-quarter 2018 results. Comparable earnings were 47 cents per share, improving 8% from the year-ago profit level of 43 cents, helped by the ongoing productivity efforts. Revenues of $7.63 billion in the quarter, however, declined 16% year over year due to the negative impact of structural items, marking the 12th consecutive quarterly fall.

On Feb 22, 2018, Coca-Cola Company announced that the company ventures into the liquor space with the plan to introduce an alcoholic drink in Japan. The cola giant launched its first ever alcoholic drink — Chu-Hi — made with a distilled Japanese beverage (shocho), sparkling water and flavoring.

Revenues

Revenues of $7.63 billion in the quarter surpassed the Zacks Consensus Estimate of $7.43 billion.

However, net revenues declined 16% from the prior-year quarter due to the negative impact of structural items, marking the 12th consecutive quarterly decline.

Acquisitions/divestitures and structural items had 26% negative impact on revenues. The structural changes primarily include the impact of bottler refranchising efforts.

The Zacks Digest revenues were in line with the company’s results.

Provided below is a summary of revenues as compiled by Zacks Digest:

|Total Revenue |1Q17A |

|($ in Million) | |

|Copy Editor |Shremoyee Mandal |

|Content Ed. | |

|Lead Analyst |Shrabana Mukherjee |

|QCA |Shrabana Mukherjee |

|Reason for Update |1Q18 Earnings |

-----------------------

May 10, 2018

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download