The Coco Cola Company (KO, Financial), slated to release its second quarter results on Tuesday, July 22, saw its shares surge 0.7% on Friday. This portrays the positive sentiments of the shareholders ahead of the earnings announcement. The beverage giant should benefit from the rising demand of still beverages and increasing consumption rate in developing economies. The company’s organic drink portfolio is expected to be the key revenue driver of the company.
But there are a couple of headwinds as well, which could have a bearing on the company’s quarterly figures. Despite this, can Coca Cola’s earnings result beat market expectations? Let’s check out what to expect from the beverage behemoth in the second quarter.
What to Expect?
A team at JP Morgan estimates that the company should report better numbers in the second quarter compared with the first quarter figures. Coca Cola has performed better after witnessing depressive numbers in the first quarter. According to average analyst estimate, revenue for the quarter should hover around $12.83 billion. For the current year, analysts expect the company to record around $47 billion in revenue. Analysts predict earnings per share (EPS) to remain unchanged at $0.63 compared with a year-ago quarter.
The company expects to see growth in the sales of natural fruit juice, ready-to-drink-tea, and juice drinks. Changing tastes and preference of consumers and increasing health awareness has shifted the demand from carbonated drinks to healthy drinks. In addition the company had also undertaken marketing initiatives to make the maximum of the FIFA World Cup Season in Brazil.
As carbonated drinks continue to be a drag on the company’s results, Coca Cola might be depending on other segments to fuel revenue growth. Coca Cola’s natural brands including Gold Peak and Honest Tea, and Glaceau Smartwater are the key drivers in developed economies. In the past year, the company’s juice and juice drinks brand Simply experienced a growth of 7% in the U.S. This brand is expected to attract greater volume and pull revenue figures in the domestic market.
The Headwinds
While the situation has improved for the American major, things are still patchy. Though operations regarding deconsolidating of bottling in Brazil and Philippines happened in the last fiscal year, it’s still having an implication. Moreover, unfavorable currency gains would also have a bearing on Coca Cola’s results.
It should also be noted that nearly 75% of Coca Cola’s revenue is generated from the carbonated soft drink business, which is seeing a declining trend owing to health problems, rising obesity, and diabetes. In 2013, the company saw a massive fall in the sales of carbonated drinks in the developed markets of North America and Europe which had an impact on its revenue growth. However, results were positive in the other operating markets. So it’s quite evident that developed markets are increasingly becoming health conscious while there’s still hope for growth in the growing or developing economies.
On a positive note, the downward trend should be more than taken care of by the organic improvements and significant demand from the emerging markets. Also, to boost sales in the U.S. and U.K. markets, Coca Cola has plans to launch naturally sweetened, low calorie health beverages to attract developed market consumers.
Parting thoughts
In the past quarters, we have seen the growing importance of emerging markets to help in future growth. However the crucial role of matured markets such as North America and Europe should not be undermined, given their contribution in total revenue. Will volumes bounce back, remain unchanged, or get worse this quarter? Stay tuned to get the numbers in the earnings call.
