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HSBC downgrade exposes chinks in Coca-Cola’s business strategy

Still struggling to recover from the impact of the selloff that followed last month’s quarterly report, shares of Coca-Cola (KO) suffered a modest loss Tuesday after HSBC Securities lowered its rating on the company.

The analyst is of the view that the soft drink giant faces multiple headwinds, especially for the operations of its bottling partners, even as it seeks to revive the faltering sales. The brokerage slashed its rating on the company to hold from buy and lowered the price target to $50 from $64.

While expressing optimism about the company’s growth initiatives and cost-reduction efforts, the analyst warned its profit-sharing arrangement with bottlers could weigh down on profitability in the long term as the system is not relevant in the present market scenario.

The brokerage slashed its rating on the company to hold from buy and cut the price target to $50 from $64

HSBC sees “new and unresolved old problems” creating hurdles for the company going forward. It also pointed out the non-viability of the low-margin brands, which is found less appealing by an increasing number of bottling partners. On the other hand, brands having the potential to yield good returns fail to achieve sufficient growth momentum.

According to the research firm, most bottlers are already under pressure due to the dwindling margins, which has dissuaded many from expanding into new markets. In the coming months, their fortunes could be dragged further by the higher taxes and stricter regulations proposed by the authorities. In the past, some Coke bottlers had gone out of business as their efforts to remain profitable failed. The analyst’s concerns are in line with the flat guidance issued by the company recently.

Also read: Coca-Cola stock gains on dividend hike

While downgrading the stock, the analyst also cast doubt over the internal hiring system followed by the management to fill key posts, which is unlikely to take the company from lethargy and complacency to an era of efficiency and growth.

Of late, investors have been shunning Coca-Cola – which had stayed resilient to last year’s unfavorable market conditions – amid the growing bearish sentiment among market watchers.

Coca-Cola’s shares suffered the biggest intra-day loss in recent times after the company reported unimpressive fourth-quarter results mid-February. The stock, which slipped about 2% since the beginning of the year, traded lower throughout Tuesday’s regular session.

 

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