Coca-Cola Earnings Preview

| About: The Coca-Cola (KO)

Coca-Cola reports earnings per share for its second quarter on Tuesday July 17 before the market open. Use this link to access Coke's earnings conference call, which is scheduled for 9:30 AM EDT. Use this link to access Coca-Cola's EPS release, which will be available on its website as well. We may follow up on this preview with our brief synopsis and review of the company's EPS release to help you quickly understand its relevance.

Analysts' Expectations:

Yahoo Finance employs the reputable services of Thomson Financial for analysts' estimate information. Based on their survey of 14 analysts, the Street view is detailed here for the company.

Analysts' Estimates

Q2 2012

FY 2012 (Dec.)










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We employ several data points in our effort to best understand operating trends at publicly traded companies. One useful first-look statistic is the consensus EPS estimate trend. Over the course of the last 7 days, the consensus EPS estimate for the company's current quarter has been steady. Over the course of the last 30 days, the consensus EPS estimate for the company's current quarter has been steady. Over the course of the last 90 days, the consensus EPS estimate for the company's current quarter has declined 2 cents from $1.21 per share.

Recent EPS History

The recent EPS reporting history of a company may prove relevant in forecasting how it might perform in the current period. However, we think the direction of variance could just as likely be above expectations as it could fall short of expectations. For instance, if a company has fallen short of expectations recently, its next result will depend on the importance of the company's response versus the degree of ongoing damage its operations might bear to the negative catalyst. Counter to that example, Coca-Cola's positive reporting history follows.

EPS Record

June 2011

Sept 2011

Dec 2011

Mar 2011

Actual EPS





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Significant Recent News:

Stock Performance:

Three Month Chart Against SPDR S&P 500 (NYSEARCA:SPY)

Chart forThe Coca-Cola Company

Last 5 Days Against SPDR S&P 500 :

Chart forThe Coca-Cola Company

Our Synopsis:

Coca-Cola shares have underperformed the S&P 500 over the last several trading sessions, perhaps indicating trepidation of shareholders and traders ahead of the company's EPS release. However, that concern may only be due to the company's relative outperformance of the market over recent months (a sell the news scenario).

The three-month chart shows the company's outperformance of the broader market since its last earnings release. At least a portion of that strength seems to me to be tied to the company's resilient operations against economic issue. KO's beta coefficient supports that view, as it sits under 1.0 at 0.53 (based on Google Finance) or 0.43 based on Yahoo Finance. Therefore, KO should serve as a hedge against domestic economic issue.

The company's recent earnings history paints a picture of consistent outperformance against expectations. Those expectations have, however, been reined in over the last 90 days. That data says to me that the company's EPS are likely in position to once again outperform against the consensus, and at least meet expectations. However, because of its track record of doing so, this might not impact the stock on the report day. Therefore, there is likely more downside risk than upside opportunity tied to the release itself, given its recent move and current valuation.

Over the course of the last several weeks, the company has had two significant news events. Shareholders approved management's decision to split KO shares 2-for-1. New shares will be distributed around August 10th to shareholders of record on July 27. Stock splits are generally a positive for shareholder value, and in this case, may open up KO shares to more retail investors seeking an economic hedge. The interest of institutions should be unaffected by the split, and the impact of new retail interest may prove negligible. But, I still view the move as a wise one.

The company's other news was of its new investment of $3 billion towards its long-term growth goals in India. That brings its investment in India to $5 billion by 2020. I wanted to comment about this release in weeks past, in order to offer my support of it as a wise endeavor. The company has a track record of strong growth in India already and offers two of the nation's top beverage brands. Thus, I see its increased investment due to its understood benefit. Therefore, I am comfortable that it is not a "throwing good money after bad money" situation. There are many intrinsic opportunities for Coca-Cola in India, which I may discuss in a future report.

Valuation & Recommendation:

Coke's valuation has been enriched by its most recent move higher. I believe that move has been driven by its latest two initiatives and on increased investor demand for economic hedge. I calculate a P/E ratio of 18X my EPS estimate for the next 12 months of $4.26, which is simply the average of the consensus EPS estimates for 2012 and 2013. Matched against growth for the next year, which is estimated at 9.3% by analysts, the stock compares richly. Also, KO's trailing 12-month P/E ratio of 20.4X sits above the company's five-year average P/E of 18.7X. In fact, it's just short of the company's five-year average high P/E ratio of 20.8X for the last five-years. Though, it's cheaper than the company's high P/E of the last five-years, which was 26.3X. Coca-Cola's P/E ratio is also more expensive than its close competitors, PepsiCo (NYSE:PEP), with trailing P/E of 17.4X, Nestle SA (OTCPK:NSRGY) at 19.9X and Dr. Pepper Snapple Group (NYSE:DPS) at 16X. Monster Beverage (NASDAQ:MNST) is more expensive at 44X, but it also offers faster growth.

Based on this information, I would refrain from new purchase ahead of the earnings report, which poses more risk than opportunity at this valuation in my view. However, I would suggest long-term shareholders of KO maintain their positions of this stalwart economic hedge, which could anchor returns and preserve capital over coming months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.