Coke Accelerates Refranchising to Return to Growth Path

Coke Accelerates Refranchising to Return to Growth Path

The world’s largest soft-drink company, Coca-Cola (NYSE: KO), reported lower than anticipated fiscal 2017 first-quarter earnings. Higher than anticipated refranchising expenses took a toll on the earnings. The Q1 revenue was above analysts’ expectations. However, on y-o-y basis, the company reported a decline in 1Q17 revenue. It was the eighth successive quarter of revenue decline. Still, the stock of Coke continues to stay near $43 levels. As explained below, the company is taking necessary steps to return back to a growth path. Thus, we expect the stock to remain neutral with bullish bias.

The food and beverage company reported fiscal 2017 first-quarter revenues of $9.12 billion, down 11% from $10.28 billion in the first-quarter of fiscal 2016. The 1Q17 net income declined 20% to $1.18 billion, or $0.27 per share, from $1.48 billion, or $0.34 per share, in 1Q16. Excluding transaction gains, and restructuring charges, the net income in the recent quarter was $1.88 billion, or $0.43 per share, down from $1.99 billion, or $0.45 per share, in the same period of 2016.

According to Thomson Reuters, on average, analysts had expected earnings of $0.44 per share on revenues of $8.87 billion.

The company stated that franchise restructuring was mainly responsible for about 10% drop in total revenues. Coca-Cola has been divesting most of its low-margin bottling business to trim costs as the demand for carbonated drinks is on a decline in North America.

The restructuring program is expected to generate an incremental $800 million in annual savings by 2019. That would take the total savings accomplished through the six-year program to $3.8 billion.

Total sales volume in the March quarter remained flat, compared to the corresponding quarter of 2016. The adjusted consolidated gross margins were 61.3%, up 20 basis points on y-o-y basis. Positive pricing and productivity gains contributed to the increase in gross margins. However, it was partially offset by currency headwinds.

The company now expects FY17 adjusted EPS to fall between 1% and 3% from $1.91 per share earned in 2016. Previously, Coke was expecting the earnings to decline from 1% to 4% in 2017. Once the franchising is completed, Coke is expected to deliver tremendous growth in earnings. Considering the growth prospects, earlier in April, Credit Suisse had upgraded Coca-Cola’s rating to “outperform”, from “neutral” rating issued earlier. Thus, fundamentally, we do not foresee any change in the current bullishness in the stock.

The stock is trading above its 50-day moving average. Additionally, the level of 43.40 acts as a support for the stock. The ascending accumulation indicator reveals an increase in the momentum. So, we can expect the stock to reach the next resistance level of 45.

Coca-Cola - Technical Analysis - 18th May 2017

To capitalise on the predicted uptrend, we are considering investing in a high or above binary option trade. A date around May 26th is likely to be chosen for the option’s expiry. We believe it would be advantageous if the option is bought when the stock of Coke trades near $43 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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