The Coca-Cola Co (NYSE:KO) stock provides a play for contrarians heading into its fourth-quarter earnings report. Earnings and sales have declined year-over-year in each of the last six quarters, which should keep expectations low. Meanwhile, Wall Street analysts appear to be exiting KO stock en masse.
Morgan Stanley cut Coca-Cola stock to ‘Equal Weight’ in December; Goldman Sachs downgraded KO to ‘Sell’ last month and Wells Fargo followed with its own re-rating to Neutral barely a week later. For investors who like to buy at the point of maximum pessimism, the Coca-Cola earnings report looks like an opportunity.
Of course, KO stock isn’t likely to make a huge gain off of the Coca-Cola earnings report; the stock generally doesn’t move all that much. In fact, the relatively quiet movement in Coca-Cola stock actually has been one reason analysts have turned bearish. Those analysts argue that in a more optimistic market, with broad indexes at all-time highs, KO stock’s “defensive” nature seems less attractive. Thus, investors are “rotating” away from safe, solid names like Coca-Cola and Procter & Gamble Co (NYSE:PG) into higher-risk, higher-reward issues.
Perhaps this is true, but that argument only works as long as broad markets remain at or near their highs. And for Q4, that pessimism seems to leave KO stock well-positioned for gains coming out of its report.
When expectations are low, after all, it’s difficult to disappoint. But the Q4 report also has long-term implications. It will be the first earnings release after the appointment of new CEO James Quincey. Quincey isn’t new to Coca-Cola; he has worked at the company for twenty years. And outgoing CEO Muhtar Kent doesn’t leave until May.
But the Q4 earnings call might give Quincey a chance to detail the company’s plans to deal with consumer shifts away from soda. Those plans may be of more interest to investors in KO stock than the Q4 numbers.
The KO Stock Numbers
Analyst consensus projects KO stock will generate fourth-quarter earnings of $0.38, down a penny year-over-year. Revenue is expected to decline sharply, falling 8.7% year-over-year.
Those estimates aren’t quite as bad as they sound, however. The strong dollar is affecting revenue: it reduced Q3 revenue by 2%, for instance. Coca-Cola also has refranchised bottling operations, which has affected revenue. In the third quarter, for instance, reported revenue was down 7%. But the company’s figure of ‘organic’ revenue — growth excluding divested operations and currency effects — rose 3%.
KO is still targeting over $600 million in productivity savings this year. And KO also has brought in nearly three-quarters of a billion dollars in proceeds from the refranchising proceeds. The cost savings and cash inflow are being used in part to fund new marketing, but also are improving margins.
And if Coca-Cola earnings show further margin improvements, and a surprise earnings beat that shows some bottom-line growth, the narrative here could change. With analysts pricing in a declining business, any sort of growth in Q4 could provide a nice boost to KO stock.
The Coca-Cola Earnings Release: The Story
Numbers aside, investors no doubt are more interested in the company’s long-term strategy. It’s highly unlikely that Coca-Cola will disclose some massive change in its operations, to be sure. The current focus on cost control, and the refranchising efforts, seem likely to persist.
But KO does have some options in terms of strategy. Unlike its chief rival PepsiCo, Inc. (NYSE:PEP), which owns Frito-Lay, Coca-Cola notably no longer has a food business. Coke reportedly considered making an offer for yogurt manufacturer Chobani, and a move to diversify away from beverages could provide a more stable revenue base. The company also owns nearly 17% of Monster Beverage Corporation (NASDAQ:MNST), and could decide to make a play for the rest of that company.
And the mega-merger still sits on the horizon. Many analysts are convinced that Anheuser Busch Inbev NV (ADR) (NYSE:BUD) will eventually make a play for KO stock. The departure of Warren Buffett’s son Howard from the KO board has either fueled or dampened that speculation, depending on the analyst. Howard Buffett’s exit could mean Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) is looking to sell its stake in KO stock. Or it could mean that Warren Buffett and Berkshire are interested in being part of a takeover — and don’t want to face the conflict implied by having a seat on Coca-Cola’s board.
So while there’s reason to see some contrarian optimism toward the report from a fundamental standpoint, the real story out of the KO earnings report will be the story management tells to investors. With a strong balance sheet, a new CEO and a number of M&A options, Coca-Cola has a lot of paths to take. Investors will be listening closely to see if KO management gives any hint as to its direction.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
