The Coca-Cola Company (KO) reports Q2 earnings on July 17th. The Street expects:
- Revenue: $13.02 billion
- EPS: $1.19
- Q3 revenue guide: $12.58 billion
In Q1, Coca-Cola reported better-than-expected revenue of $11.1 billion and EPS of $0.89 that easily beat the consensus estimate of $0.87. Eurasia and Africa recorded 9% growth in case volume, despite tough comps. Specifically, India's volume growth was up 20%, driven by sparkling beverage and brand Coca-Cola products.
Europe only achieved 1% volume growth with Spain, Germany and Central and Southern Europe showing robust growth, while Northwest Europe and the Nordic regions showed a decline in volume due to increasing competition and unfavorable weather. North and Latin America both saw solid low and mid-single digit growth, while the Pacific segment saw volume growth of 8%, led by Thailand (+24%), China (+9%) and Philippines (+6%).
Heading into the earnings, investors can expect some negative FX headwind and lower volume growth. Beyond Q2, Coca-Cola will likely engage in M&A to expand its portfolio.
Despite accounting for a small percentage of sales, oversea market has a greater impact on Coca-Cola's operating profit. For example, sales from Europe and Latin America account for only low-double digit percentage of Coca-Cola's overall revenue, but account for the mid-high 20% of KO's overall operating profit. A slight swing in sale from these regions can have a big impact on Coca-Cola's profit. I note that the Brazilian real's recent weakness (down 10% over the past three months) will negatively affect Coca-Cola's interest income along with lower interest rate.
While Germany posted a decent volume growth in Q1, the snow in late April does not bode well for soft drink demand. Last quarter, Germany's volume growth was 3% and could slow down to 2-2.5% due to the unfavorable weather and continued macro weakness in Europe.
Finally, management has indicated that Coca-Cola is looking for acquisition opportunities that can fill the gap in the ready-to-drink segment after KO dissolved its partnership with Nestea in January. Coca-Cola currently has Gold Peak, which specializes in a variety of ready-to-drink tea, and Fuze, which specializes in fruit juices.
However, Arizona would be a better candidate to fill the gap because the company's 51 different tea and juice products are more robust than Coca-Cola's current offerings and KO could leverage its global distribution channel to push Arizona's brand in emerging markets, such as China and India, where people generally prefer tea over Coca-Cola's traditional soft drink products.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
