Will Currency Headwinds Hit Coca-Cola's (KO) Q1 Earnings? - Analyst Blog

The Coca-Cola Company KO is set to report first-quarter 2015 results on Apr 22, before the market opens. Last quarter, the company delivered a positive earnings surprise of 4.76%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Management expects the economic environment in 2015 to be more volatile than 2014. While the macro environment is expected to improve in the U.S., management expects deflation environment in Europe and continued softness in many emerging and developing markets.

Moreover, the recent decline in several emerging market currencies versus a stronger dollar is expected to result in significant currency headwinds this year.

Foreign exchange is expected to hurt first-quarter sales by 6% and profit before tax by 8%. Structural changes and the Venezuelan pricing provision are expected to hurt first-quarter sales by 2% and profit before tax by 3%.

Nevertheless, Coca-Cola expects 2015 to be a “transition year” — a time to start implementing changes to create a new operating model. It has aggressive cost-cutting and strategic initiatives in place to drive faster growth in 2015.

In Oct 2014, Coca-Cola unveiled strategic actions to increase profit and started implementing these actions. Other than aggressively cutting costs, the plan includes targeting brand and growth investments as well as aligning incentive plans. The company is also refranchising the majority of its company-owned North American bottling territories to create a more efficient system. It closed several transaction in 2014 and plans to complete 2/3rd of the refranchising by 2017-end which should improve margins and drive growth. Moreover, Coca-Cola has made equity investments in Keurig Green Mountain, Inc. GMCR and Monster Beverage Corporation to enhance growth in key categories.

Management, however, warned that the initiatives will take time to deliver the desired results amid challenging global macro conditions.

Earnings Whispers

Our proven model does not conclusively show that Coca-Cola is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is -2.33% as the Most Accurate estimate stands at 42 cents and the Zacks Consensus Estimate stand at 43 cents.

Zacks Rank: Coca-Cola’s Zacks Rank #3 (Hold)increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are:

Treehouse Foods, Inc. THS, with an Earnings ESP of +1.72% and a Zacks Rank #3.

The Hain Celestial Group, Inc. HAIN, with an Earnings ESP of +2.22% and a Zacks Rank #3.

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COCA COLA CO (KO): Free Stock Analysis Report
 
HAIN CELESTIAL (HAIN): Free Stock Analysis Report
 
KEURIG GREEN MT (GMCR): Free Stock Analysis Report
 
TREEHOUSE FOODS (THS): Free Stock Analysis Report
 
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