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3 Global Food & Beverage Giants on the Ropes

As earnings proved again, these companies have a lot to overcome

By Dan Burrows, InvestorPlace Feature Writer


McDonald’s (MCD), Yum Brands (YUM) and Coca-Cola (KO) can’t catch a break in 2014. Indeed, all three stocks have tumbled into negative territory for the year-to-date, trailing a roughly 8% gain for the S&P 500.

mcd stock, ko stock, yum stockIn more bad news, the latest news from the sector indicates more pain ahead for MCD, YUM and KO stock.

From weak U.S. sales to a food scandal in China, it seems like everything is conspiring against these food and beverage stocks this year. And in many ways, there’s little they can do about it. As we’ve noted, the same economic forces weighing on Wal-Mart (WMT) are also hurting fast-food and beverage stock — at least those that count on lower-income customers for the bulk of sales.

Indeed, in many ways the recession never really ended for lower-income consumers. Unemployment is down, but much of the decline has been attributable to folks finding work with low wages and few — if any — benefits. Rising gas prices, mandatory health insurance and higher food prices are just some of the forces chipping in to make consumers reluctant to spend their discretionary dollars.

There are plenty of headwinds for MCD, KO and YUM stock — especially when you throw in unfavorable currency exchange, rising competition and the appeal of healthier alternatives to hamburgers, tacos and sugary drinks. Here’s a look at some of the major issues weighing on their shares:

McDonald’s (MCD)

mcd stock, ko stock, yum stockMCD stock fell into negative territory after quarterly profit fell 1%, hurt by weak U.S. sales — again.

MCD stock largely trades on U.S. results because it accounts for 30% of revenue. In the latest quarter, sales at U.S. locations 13 months or older dropped 1.5%.

Adding to the misery, operations in Europe were also weak. And although Asia reported growth, it came up shy of estimates, and will likely suffer in the current quarter because MCD was a customer of a Chinese company that sold expired meat.

But the bottom line is that fewer customers in the U.S. are going to the golden arches — a trend that shows no sign of abating — and that must change for MCD stock to reverse trend. Unfortunately for anyone holding MCD stock, the company admits that won’t happen this year.

Yum Brands (YUM)

mcd stock, ko stock, yum stockYUM stock was having a great year up until about a week ago. Indeed, YUM stock was up 11% for the year-to-date as of July 14. Cut to today, and YUM stock is down almost 1%.

Some of the shellacking of YUM stock is due to the tainted meat scandal in China, but the slide actually began after the company reported quarterly earnings. Yum missed analysts earnings and revenue estimates, according to a survey by Thomson Reuters. Pizza Hut posted a surprise drop in sales at restaurants open at least a year, while sales growth at Taco Bell was shy of estimates. KFC was boosted by strong results in China — but then that’s the rub.

The strong showing in China indicated that Yum was finally past an earlier food scandal that hurt YUM stock. This new tainted meat scandal is a big setback for YUM stock … especially with U.S. sales continuing to show weakness.

Coca-Cola (KO)

mcd stock, ko stock, yum stockKO stock tumbled after quarterly results revealed continuing weakness in key brands, especially in North America. KO was up more than 4% on the year before the Coke earnings release, but now it’s sitting at a slight loss for the year.

KO stock didn’t get any help from earnings that beat Street estimates by a penny per share. Rather, the market focused on revenue, which missed forecasts as demand for Diet Coke remained weak. Sales of juice drinks also fell because KO had to raise prices to make up for rising commodities costs.

Unlike MCD stock or YUM stock, KO stock isn’t troubled as much by the weak recovery. A headwind they all share, however, is  consumers’ preference for healthier alternatives. Diet Coke is suffering because of concerns about artificial sweeteners.

Although net income beat estimates, it still fell more than 3% year-over-year. And revenue will be hard-pressed to remain flat for the full year after the second-quarter miss. The big issue is that soda consumption is in decline, and it’s unclear what KO can do to arrest that.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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