Coca-Cola's Earnings Results Sent Its Shares Lower, Is This a Buying Opportunity?

The Coca-Cola Company (NYSE: KO  ) , the largest beverage manufacturer and distributor in the world and the company behind more than 500 brands, just announced its earnings results for the second quarter and its stock responded by making a move lower. Let's break down the results and the expectations for the second half of the year to determine if this decline is our opportunity to initiate long-term positions or if this is a warning sign to stay away from the stock today.

Source: Wikimedia Commons

Mixing it up in the second quarter
Coca-Cola released its second-quarter report before the market opened on July 22 and the results were mixed compared to the consensus estimates; here's a breakdown:

Metric Reported Expected Year Ago
Earnings Per Share $0.64 $0.63 $0.63
Revenue $12.57 billion $12.85 billion $12.75 billion

Source: Estimize

Earnings per share increased 1.6% and revenue decreased 1.4% year-over-year, driven by a global unit case volume increase of 3% that was led by 3% growth in Coca-Cola's international segment. Sparkling beverage volume increased 2% globally and it reported 1% increases for Coca-Cola branded products both globally and in North America, but North American volumes remained unchanged from the year-ago period.

Source: Coca-Cola

Coca-Cola's gross profit remained unchanged year-over-year at $7.76 billion and its operating profit fell slightly, decreasing 2.3% to $3.17 billion; in relation, the company's gross margin expanded 80 basis points to 61.7% and its operating margin contracted 20 basis points to 25.2%. The expansion of the gross margin resulted from cost of goods sold declining 3.4% and the contraction of the operating margin resulted from a 1.5% increase in total operating expenses.

Most impressively, Coca-Cola reported $3.40 billion in cash provided by operations and $581 million in capital expenditures, which resulted in $2.82 billion in free cash flow. The company used this free cash flow and the $9.13 billion in cash and cash equivalents it had to begin the quarter to repurchase approximately $587 million worth of its common stock and maintain its quarterly dividend of $0.305 per share, which it will pay out on October 1. In total, Coca-Cola repurchased approximately $1.3 billion worth of its common stock in the first half, which puts it on pace to reach its goal of $2.5 billion-$3 billion for the full year.

In summary, it was a decent quarter for Coca-Cola, but the market reacted by sending its shares about 3% lower to begin the next trading session. At first glance, this looks like a long-term buying opportunity, but before we draw this conclusion, let's see the growth expectations for the company in the second half...

Source: Coca-Cola

What should you expect going forward?
In the report, Coca-Cola did not provide earnings per share or revenue forecasts for the second half, so we will use the current consensus estimates to see what kind of growth we can expect; here's an overview:

Third Quarter:

Metric Q3 Expected Q3 Year Ago
Earnings Per Share $0.54 $0.53
Revenue $12.39 billion $12.03 billion

Source: Estimize

Fourth Quarter:

Metric Q4 Expected Q4 Year Ago
Earnings Per Share $0.47 $0.46
Revenue $11.39 billion $11.04 billion

Source: Estimize

As you can see, analysts expect Coca-Cola to grow its earnings per share and revenue by 1.9% and 3%, respectively, in the third quarter and 2.2% and 3.2%, respectively, in the fourth quarter. This would be a positive shift for the company's revenue, which declined in both the first and second quarters, and would result in slight earnings-per-share growth overall. Investors will want to keep in mind that Coca-Cola reported over $11.6 billion in cash and cash equivalents at the end of the second quarter and it generates billions of dollars in free cash flow each quarter, so it will likely utilize this cash to accelerate repurchases while maintaining its healthy dividend.

Source: Coca-Cola's Facebook

The Foolish bottom line -- Should we buy the decline?
Coca-Cola is home to some of the most popular beverage brands in the world and this was shown in the company's global volume growth in the second quarter; however, its revenue results fell short of expectations and this caused its shares to fall about 3% lower.

I believe this is an opportunity for long-term investors to initiate positions or add to existing ones, as Coke's stock trades at just 18.3 times forward earnings estimates and has a bountiful 3% dividend, which the company has raised for 52 consecutive years. Take a closer look and see if there's a spot in your portfolio for the king of carbonated beverages, Coca-Cola.

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