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Coca-Cola: Earnings Appear
to be Breaking out of a Protracted Lull

Once again, Ian Gendler shines the spotlight on The Coca-Cola Company (KO) in Market Focus, Value Line’s open-access newsletter providing unbiased insights on investments, the markets and the global economy.

“KO a Dow-30 component and the world's largest beverage enterprise. The Georgia-based corporation produces and markets over 500 nonalcoholic beverage brands through a network of company-owned and independent bottlers/distributors, wholesalers, and retailers. It employs approximately 61,000 individuals and has a market capitalization that exceeds $195 billion.

Coca-Cola is looking to make a splash in a hot market. In August, the company agreed to buy Costa Limited from Whitbread plc for $5.1 billion. Costa is the leading coffee company in the United Kingdom and has a growing presence in China and many other markets. Currently, Costa generates the majority of revenues from its chain of roughly 3,800 coffee shops. Coke, though, has emphasized that it views the acquisition not as an entry into retail, but as a platform for growth in the broader, fast-growing coffee category. The addition would likely boost the top line by about $1.7 billion and be slightly accretive to earnings (excluding any items related to purchase accounting) in the first year. The transaction, though, won't be factored into our sales and earnings presentation until its completion, which figures to take place in the first half of 2019.

Earnings appear to be breaking out of a protracted lull. The top line continues to be weighed down by last year's refranchising transactions across the company's bottling system. Still, the beverage giant looks to be making solid progress on many other key operating metrics. Organic revenues, for instance, rose 5% in the first half of 2018. Pricing and mix contributed about 2% to this growth, while global volumes advanced 3%, the strongest pace in five years. Meanwhile, aided by ongoing productivity initiatives, underlying operating income has been pushing ahead at a high single-digit clip, and this trend seems likely to continue over the rest of this year. In all, we look for share net to rise 9%-11% in 2018, the company's first positive comparison since 2013, and another 6%-8% next year.

This stock is best suited for conservative investors. It carries our Highest rank (1) for Safety™, while also offering a dividend yield that is roughly 150 basis point higher than the Value Line median. Too, assuming earnings resume a more respectable growth trajectory to 2021-2023, this equity ought to deliver long-term total returns that are competitive with other blue chips.

Editor’s Note: Ian Gendler, is Executive Director, Value Line Research, 551 Fifth Ave., FL 3, New York, NY 10176.

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