The Biggest Threat to Coca-Cola Earnings

Coca-Cola (NYSE: KO  ) is scheduled to release its quarterly earnings report tomorrow, and the soft-drink giant is a prime example of how the slowdown in the global economy has affected prospects for multinational companies that have relied on going beyond their home countries to find profit opportunities. Even though most of the stocks in the Dow Jones Industrials (DJINDICES: ^DJI  ) have a multinational component, Coca-Cola in particular has benefited from the worldwide reach of its top-ranked brand: Well more than half its revenue and nearly three-quarters of its profit come from outside North America.

Lately, though, Coca-Cola's growth in its international markets has slowed as Europe has suffered economic headwinds and growth rates in emerging-market areas like Latin America and the Pacific region have slowed. Are the good times over for the company? Let's take an early look at what's been happening with Coca-Cola over the past quarter and what we're likely to see in its quarterly report.

Stats on Coca-Cola

Analyst EPS Estimate

$0.63

Change From Year-Ago EPS

3.3%

Revenue Estimate

$12.97 billion

Change From Year-Ago Revenue

(0.9%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Coca-Cola earnings stay fizzy or fall flat this quarter?
In recent months, analysts have been a little bit pessimistic about Coca-Cola's earnings prospects, cutting $0.02 per share off their June-quarter estimates and a penny per share from their full-year 2013 and 2014 consensus earnings figures. The stock has seen similarly unenthusiastic performance, with shares up less than 1% since early April.

Lately, Coca-Cola has been having a serious growth problem. In its previous quarter, the company saw revenue decline by about 1%, and although it managed to beat earnings and sales expectations, earnings per share didn't provide any year-over-year growth, even when adjusting for unusual items. International volume growth of 5% sounds reasonably strong, especially given larger gains of 8% to 18% in areas like Thailand, India, and Russia. But China was weak, and with the continued pressure on the Chinese economy, those difficulties might persist for quite a while.

In order to bolster growth, Coke has made a number of innovative moves. Its Freestyle fountain machine has started to gain in popularity, as restaurant chains including Burger King (NYSE: BKW  ) have signed on to put machines in their stores. Burger King will implement the mix-and-match soda machines in its company-owned locations, likely hoping to benefit from their novelty factor, as many of Burger King's restaurants give customers direct access to fountain drinks. Coca-Cola could also use the machines as an environmentally friendly rebuttal to SodaStream (NASDAQ: SODA  ) and its attacks on the drink giant, as Freestyle doesn't require bottling and therefore has the same advantages as SodaStream's home carbonators. SodaStream's campaigns have been fairly effective in highlighting the value of its own product, although it's a stretch to blame Coca-Cola's struggles on the carbonator-maker. Meanwhile, in its efforts to help make its product more available even in areas without electricity, Coca-Cola started an initiative to provide small solar-power kits to kiosk owners in Kenya.

Coca-Cola is also fighting against health concerns about its products. It joined PepsiCo (NYSE: PEP  ) in offering a lower-calorie soft drink with a combination of regular and non-caloric sweeteners. With the help of CEO Indra Nooyi, Pepsi has done a good job of leading the health-conscious fight, with its snacks division also seeking ways to improve on the healthfulness of its products. Coke responded in May, announcing its global anti-obesity campaign that will combine low-calorie drinks with program sponsorships to encourage physical activity.

In the Coca-Cola earnings report, be sure to watch for signs of how the company is dealing with the macroeconomic stresses it faces across the world. With dollar strength potentially weighing on its earnings, look past those figures at volume growth and other important considerations to figure out whether Coca-Cola can get its earnings growing quickly enough to justify its somewhat rich valuation.

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