Coca-Cola Enterprises: Earnings Preview

| About: Coca-Cola Enterprises (CCE)

Coca-Cola Enterprises Inc. (NYSE:CCE), the world's largest marketer, producer and distributor of Coca-Cola products and the anchor bottler for North America and Western Europe, is slated to release its second-quarter fiscal 2010 results on Wednesday, July 28. The Zacks Consensus Estimate for the company is 69 cents a share.

First Quarter Recap

Coca-Cola Enterprises reported its first-quarter 2010 results of 27 cents per share. Earnings were higher than the Zacks Consensus Estimate of 22 cents per share.

In North America, revenues fell 5.5% due to a 2.5% volume decline and 2.0% decrease in net pricing per case, reflecting the mixed impact of slower sales of still beverages and single-serve packages.

European revenues grew 8.0%, driven by a 1.5% growth in volumes and 2.5% benefit from net pricing per case.

Cost of sales plummeted 4.0% in the quarter to $3,047.0 million, which helped offset the negative effect of sales decline on gross profit. Gross profit improved 2.5% to $1,921.0 million compared with $1,877.0 million in the prior-year quarter. However, selling, general and administrative showed a modest increase of 0.5% in the quarter to $1,647.0 million versus $1,636.0 million in the prior-year quarter. The increase in gross profit aided operating income growth of 13.7% year over year to $274.0 million.

Cash and cash equivalents for the quarter under review came in at $972.0 million compared with $1,036.0 million in the prior-year quarter. The company ended the quarter with shareholders’ equity of $948.0 million compared with $859 million in the year-ago quarter.


The company expects the operating income to increase in the high single-digit range in full year 2010, driven by a mid single-digit growth in both Europe and North America and a reduction in corporate operating expenses. In addition, revenues are expected to increase at a low single-digit rate, driven by a mid single-digit growth in Europe and flat-to-low, single-digit decline in North America revenues.

Coca-Cola Enterprises had earlier expected to beat 2009 earnings per share of $1.60 by 10% on a comparable basis, excluding any foreign currency fluctuation. However, after its solid performance in the first quarter and constructive trends in the second quarter, the company has increased its earnings per share guidance by 10% to 12% from 2009 to $1.76−$1.79 for fiscal 2010.

The company also expects strong free cash flow of approximately $850 million and capital expenditures of approximately $1 billion.

The board also confirmed its plans to repurchase up to $1.0 billion of its common stock within the following 18 months, and pay an expected annual dividend of 50 cents per share.

Agreement of Analysts

Only two analysts moved their estimate in an upward direction over the last 30 days. This implies that most of the analysts are neutral on the outlook and do not foresee any upward catalyst or downward pressure on the result. For the third quarter, none of the analysts have changed their estimate. For fiscal 2010 and 2011, 4 out of 11 and 10 analysts, respectively, moved their estimates in the upward direction. No downward movement was witnessed for the fiscal years.

Analysts remain optimistic on the company, attributable to somewhat improved outlook for Europe and in line expectations in North America.

Magnitude of Estimate Revisions

None of the analysts has budged the estimate for the next two quarters. However, fiscal 2010 and 2011 portray positive sentiment from the analysts with an upward revision of 1 cent in estimate.

Earnings Surprise

With respect to earnings surprises over the trailing four quarters, Coca-Cola has oscillated greatly from approximately 4.8% to 31.4%. The average earnings surprise was a positive 17.4%. This implies that the company has surpassed the Zacks Consensus Estimate by 17.4% over the said period.

Our Recommendation

The company is under severe stress to maintain profitability as it faces intense competition from its rivals.

The closure of the deal with The Coca-Cola Company (NYSE:KO), which includes the sell-off of Coca-Cola Enterprises’ entire North American business, will lead to 100% sales exposure of the company in Europe. This increases the currency risk for the company as the European currency appears to be highly volatile.

Coca-Cola Enterprises continues to face rising costs of raw materials (packaging). The cost of goods sold has increased 2.5% on an average over the past five years. A continuation of this trend is likely to exert significant pressure on the company’s margins and profitability, moving forward.

Coca-Cola Enterprises’ balance sheet is highly leveraged, with a long-term debt of $7.8 billion and debt-to-capitalization ratio of 89.2% at the end of the first quarter. The high debt levels adversely affect the company’s financial flexibility and ability to pursue acquisitions or expand operations organically.

Coca Cola Enterprise’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Our long-term recommendation for the stock remains ‘Underperform’.