The Coca-Cola Co: Have Consumers Lost the Thirst for Coke? (KO)

Coca-Cola is accelerating U.S. refranchising, but needs to ramp-up efforts in emerging markets

First-quarter earnings for The Coca-Cola Co (KO) reveal that consumers are increasingly thirsty … for water.

Here’s proof: Coca-Cola’s net revenues continued its downward trend by decreasing 4% to $10.28 billion during Q1 against the prior-year quarter.

That makes it KO’s fourth consecutive quarter of revenue declines. Those sales figures only came in marginally better than analyst expectations of a 4.4% — or a $470 million decrease — for the first quarter. Indeed, consumers are increasingly opting out of the traditional carbonated drinks that we know (and used to love) Coca-Cola for.

Unit case volume, a measure of the number of liters KO sold, only increased by 2%. And that increase was primarily fueled by the 7% growth that its “still beverages” business saw during the first quarter. Its sparkling beverages portfolio, which contains its soda drinks, saw no growth during the first quarter, compared to the prior-year quarter.

That’s a reflection of how consumers are continuous moving toward healthy drinks. You’d understand this more when you see that KO has been seeing its revenue decline since the beginning of 2013.

What Coca-Cola Plans to Do

That’s one major reason Coca-Cola has been on a mission to become more profitable by streamlining its business. Last September, KO said it has reached preliminary agreements with three of its independent bottlers to sell nine of its U.S. production facilities to them.

This is part of Coca-Cola CEO Muhtar Kent’s plan to reduce Coca-Cola’s annual expense bill by $3 billion.

In essence, above the struggles in its sparkling business, investors should be more concerned about the progress it’s made in divesting its interest in the bottling business. Because the faster KO can do that, the faster we can expect an improvement in the lackluster earnings we’ve been seeing over the last few years.

In its latest earnings, KO said it had re-franchised two-thirds of the U.S. territories it originally acquired from Coca-Cola Enterprises Inc (CCE). And Kent said during the earnings call that the company is on track to refranchise 100% of its North America bottling operations by the end of 2017.

Further, Coca-Cola announced that it has signed a new bottler, while three existing bottlers have signed letters of intent to expand their operations.

It’s a good progress so far. Just to clarify, it makes good business sense for Coca-Cola to refranchise its bottling operations. One thing to remember, though, is that bottling business is a low margin, capital-intensive business — just ask Edward Jones analyst Jack Russo.

By refranchising, KO would be able to more effectively direct its capital to more profitable operations, like its concentrate business, which has higher margins.

Away from North America, though, things are not looking particularly rosy. As with most businesses, expectations for rapid growth should come from emerging markets. For KO, the strategy is to grow volume in emerging markets, while gaining on price in developed markets.

In Eurasia and Africa, KO posted flat unit case volume growth, while it gained 4% on price. In Latin America, unit case volume grew by 1%, while gaining 11% on price.

It was only in Asia Pacific that KO saw a meaningful growth, with unit case volume growing by 5%. However, that came at the expense of pricing.

Bottom Line on KO Stock

Overall, KO isn’t growing sufficiently in the emerging markets. I believe its divestiture efforts, however, have been brilliant. And it’s also good to see it acquire smaller companies in line with its refreshed strategy of building strong brands.

It currently trades at 22 times 2017 earnings and a price-to-FCF of 24. Not particularly great, but I believe those figures are going to look better as the company continues streamlining its operations.

In any case, KO stock is certainly one for those seeking stability.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/ko-coca-cola-stock-earnings/.

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