Coca Cola's (KO) guidance calls for earnings per share in a range of $2.18 to $2.24, which is in alignment with most analysts' forecasts. Included in these figures is the negative impact upon currency conversions with a decline in earnings for a full year of about 10%. Sales are expected to grow by a modest single digit range (without currency conversion figures) with its best growth in its emerging markets of Brazil, India, Russia and China at 4%. This is mediocre long term news for the company in a challenging environment. The company may be a good long term investment as a growth fund but I would raise a red flag about investing in the stock right now as it looks like some challenges lay ahead for the company.
Reasons Why Coke Is a Good Long Term Investment
Coke is a strong international company with global recognition in four major markets including Coke, Diet Coke, Sprite, and Fanta. The company has always shown keen business sense and marketing. The interest it now has in the emerging markets of India, Russia and China is being fueled by the high-growth nature of these countries. The developed world contributes about 43% of Coke's market presently. 37% comes from developing regions and 20% from emerging regions. By the end of this decade, two thirds of Coke's business is expected to come from the latter two regions.
Not only has the company been planning and projecting future growth, but it is also streamlining its cost structure with the intent of boosting profits. It just completed a four year program with cost savings of $500 million per year and just launched another four year initiative last winter designed to save the company about $550 million annualized. The savings will be used to build brands and offset higher commodity costs to put a fire under longer term profitability.
The company has done well and will continue to do so, but presently it faces headwinds I believe may cause it to pull back for a season. Even though it has a high level of consumer acceptance, right now it is facing its own challenges like many global corporations.
Challenging Headwinds May Question an Entry Point into the Stock
Raw materials, ingredients, or packaging materials, such as aluminum, sweetener, PET (plastic), fuel and other cost items are continuing to rise and this is hurting margins. In France, the new "excise tax" on beverages with added sweetener will impact sales and cost the company 4%. If the company passes this cost on to consumers (which it intends to do), the present economic environment may cause negative repercussions with losses in market share to competitors. PepsiCo Inc. has been more aggressive in its ad campaigns and Coke needs to keep up. If these challenges aren't enough, a slow economic recovery, strained consumer discretionary spending, changing consumer preferences, and increasing health consciousness are also creating headwinds.
The company is always thought of as a good investment, but timing an entry point would be a wise move at this point. The management team continues to streamline but headwinds may keep the stock bearish for a season and investors should time a good entry point based on the stock's movement.
After reaching a peak in early August, Coca Cola has been on a bearish trend. Even though the trend is only 5 weeks long, it looks like the middle band on the Bollinger Bands has become its resistance level so far. I would like to see the stock bounce off the band one more time before my observations would conclude this is true. If it is, that means a strong bearish trend is in place. At the same time, when I look at the RSI indicator, I want to see it bounce off the "50" band when it peaks. This gives me a strong support that the strength of the stock is not moving into bullish territory. So through all my observations I am seeing a bearish pattern developing and I am waiting to see if it is strong or not.
The Options Play
The stock is presently trading at 37.65 and I would make the first play on my bearish income strategy in the money as I believe the headwinds for the stock will continue to take it down for a season.
- Buy a November put with a strike of '38.75' (priced at $1.59)
- Sell a November put with a strike of '37.50' (priced at $0.90)
- Net Debit to Start: $0.69
- Maximum Profit: $0.56
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Currency exchange could keep profits minimal.
- Commodity costs higher and margins lower.
- Passing this cost on to consumers could backfire on the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.