KO – Coke (KO) Up 0.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Coca-Cola (KO Free Report) . Shares have added about 0.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Coke due for a pullback? 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 Tops Q2 Earnings & Sales Estimates, Raises View

Coca-Cola has delivered second-quarter 2021 results, wherein earnings and sales beat the Zacks Consensus Estimate and improved year over year. Comparable earnings of 68 cents per share beat the Zacks Consensus Estimate of 57 cents and improved 61% from the year-ago period. Favorable currency translations aided earnings by 5%. Comparable currency-neutral earnings per share rose 55%.

Revenues of $10,129 million surpassed the Zacks Consensus Estimate of $9,490 million and improved 42% year over year. Organic revenues rose 37% from the prior-year quarter. The company’s top line benefited from improved price/mix and an increase in concentrate sales. Revenues gained from the ongoing recovery in markets where the pandemic-led disruptions are subsiding. The results also reflected benefits from cycling of revenue declines witnessed in the prior-year quarter.

In the reported quarter, the company gained global value share in total non-alcoholic ready-to-drink (“NARTD”) beverages. Coca-Cola benefited from underlying share gains in both at-home and away-from-home channels. The company’s value share in total NARTD beverages has improved from the 2019 level.

Volume and Pricing

In the reported quarter, concentrate sales were up 26%, while price/mix rose 11%. However, currency tailwinds aided the company’s top line by 5%.

Price/mix benefited from favorable channel and package mix due to the lapping of last year’s pandemic-led disruptions as well as positive segment mix in Global Ventures and Bottling Investments. Concentrate sales were 9 points ahead of unit case volume, as the company lapped the period of rationalized stock levels in the prior-year quarter. Concentrate sales also benefited from the timing of shipments this year.

Coca-Cola’s total unit case volume grew 18% in the second quarter and was in line with the 2019 levels, backed by recovery across markets due to the subsiding of the pandemic-led uncertainties as well as the lapping of last year’s pandemic-led impacts. The company witnessed strength in both developed, and developing and emerging markets, driven by recovery. Both markets recorded double-digit volume growth in the quarter. It witnessed robust volume gains across China, Brazil and Nigeria, with volumes exceeding the 2019 levels. Meanwhile, the company continued to witness soft volume trends in India due to the ongoing impacts of the pandemic.

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 14% (compared with 4% growth in the prior quarter), driven by robust gains in the United States, India and Brazil. Trademark Coca-Cola volumes were up 12% (compared with a 4% increase in the last reported quarter) on strong gains in Europe, Middle East & Africa, and Latin America. Moreover, the sparkling flavors category improved 18% on growth in Trademark Sprite and Trademark Fanta.

Volume for nutrition, juice, dairy and plant-based beverages was up 25%. The category primarily gained from growth in Minute Maid Pulpy in China, Mazaa in India, and Minute Maid and fairlife in North America.

Hydration, sports, coffee and tea category grew 25% in the second quarter. The company witnessed 12% growth in hydration on double-digit growth across all geographies. Sports drinks rose 35%, owing to gains in Powerade in North America. Tea volume accelerated 18% on growth witnessed in the United States, Japan and Brazil. The coffee business witnessed 78% growth on the reopening of the Costa retail outlets in the U.K. as the pandemic-led restrictions ease.

Segmental Details

Revenues rose 67% for EMEA, 41% for Latin America, 28% for North America, 27% for the Asia Pacific, 139% for Global Ventures and 38% for Bottling Investments segments.

Organic revenues improved 61% in EMEA, 39% in Latin America, 28% in North America, 27% in the Asia Pacific, 117% in Global Ventures and 29% in Bottling Investments.

Margins

Comparable currency-neutral operating income rose 46% year over year, driven by robust organic sales growth across all segments, offset by significantly higher marketing expenses compared with the prior year. In dollar terms, comparable operating income rose 48.9% to $3,209 million. Comparable operating margin expanded 170 basis points to 31.7%.

Guidance

Though uncertainties related to the coronavirus pandemic remain, the company raised its organic revenue and comparable earnings per share (EPS) growth guidance for 2021. It now estimates organic revenue growth of 12-14% for 2021 compared with high-single-digit growth mentioned earlier. It now estimates comparable EPS growth of 13-15% year over year versus a growth rate of high-single to low-double digits stated earlier. The company delivered comparable EPS of $1.95 in 2020.

Comparable net revenues are anticipated to be aided by a 1-2% currency tailwind, based on current rates and hedge positions. The company expects an underlying effective tax rate of 19.1% for 2021.

Comparable EPS is expected to include currency tailwinds of 2-3% compared with the previously mentioned 3-4% currency tailwinds.

The company now estimates generating free cash flow of at least $9 billion for 2021, with operating cash flow of at least $10.5 billion and capital expenditure of $1.5 billion. Earlier, it predicted free cash flow of at least $8.5 billion and operating cash flow of at least $10 billion.

For third-quarter 2021, it anticipates comparable net revenues to include currency tailwinds of 2% and comparable EPS to be aided by favorable currency movements of 3-4%, both based on current rates and hedge positions.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Coke has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.