Earnings preview: Will new biz model help Coca-Cola beat currency woes in Q2?

The overall performance of Coca-Cola (NYSE: KO) has been negatively impacted by macroeconomic headwinds for some time, including unfavorable foreign exchange rates. The beverage giant is likely to offer a mixed bag when it publishes second-quarter results on Tuesday before the opening bell.

Coca-Cola’s overreliance on the international market for revenue generation, compared to PepsiCo, makes it vulnerable to fluctuations in the global economy, which is currently witnessing signs of a slowdown.

The lackluster outlook issued by the management recently, predicting flat earnings for the current fiscal year, shows the softness in foreign markets like Europe and China and currency-related headwinds will persist in the coming months.

New Biz Model

Thus, the market is closely watching the company’s shift from traditional carbonated drinks to new areas through strategic deals such as the recent acquisition of European coffee giant Costa. With more such deals in the pipeline, the diversification efforts have already started yielding results.

Related: Coca-Cola Q1 2019 Earnings Conference Call Transcript

The change in the business model is very important for the company considering the weakening sales of soda-based drinks as customers continue to switch to healthier alternatives. Other experiments, such as the launch of sugar-free and specially-flavored versions of Coke, have been well-received by customers, with sales growing in double digits.

Estimate

The consensus estimate for the company’s second-quarter earnings is $0.62 per share, a tad higher than $0.61 per share reported in the comparable period of last year. The outlook for revenue is quite upbeat, with analysts predicting a 10% year-over-year increase to $9.79 billion.

Past Performance

In the first quarter, adjusted earnings moved up 2% annually to 48 cents per share, surpassing Wall Street’s forecast. The bottom-line benefitted from a 5% increase in revenues to $8 billion. While being cautious in its outlook, the management said second-quarter results will be negatively impacted by costs related to acquisitions and divestitures. The estimated impact of negative currency movements on revenues is 4-5%.

Also see: Pepsico Q1 2019 Earnings Conference Call Transcript

Earlier this month, rival beverage maker PepsiCo (PEP) reported a 2% increase in revenues to $16.4 billion for its most recent quarter. Meanwhile, adjusted earnings dropped to $1.54 per share due to lower margins.

Coca-Cola’s stock surged to a record high at the beginning of the month, after gaining about 16% in the preceding three months. Since last year, it moved up 15% but continues to lag behind the S&P 500 index.

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