Coca-Cola's Surprising Quarter

Coca-Cola's (KO) first-quarter profits come in higher than expected. Harley-Davidson (HOG 4.57%) shares popped 10% on upbeat full-year guidance. Herman Miller (MLKN 1.46%) is buying Knoll (KNL), in a furniture industry merger that sends one stock soaring while the other drops. In this episode of MarketFoolery, Motley Fool analyst Bill Mann analyzes those stories and shares what he's watching this earnings season.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 19, 2021.

Chris Hill: It's Monday, April 19. Welcome to episode 1,999 of MarketFoolery. I'm Chris Hill. With me today, Mr. Bill Mann. Thanks for being here.

Bill Mann: Chris, how are you?

Hill: I'm good. I've got coffee, so I'm good.

Mann: I have mine going, too.

Hill: We've got to deal in the furniture industry. We have surprising news out of Harley-Davidson, but we're going to start today with Big Red. Coca-Cola's first quarter profits came in higher than expected. Organic revenue grew 6%. Coke shares up slightly this morning. I've got to be honest -- this quarter was better than I thought it was going to be for them.

Mann: Well, they reached back to the same levels that they had in terms of overall case volume that they had pre-COVID. So they've rehit those levels, and tell me if this sounds surprising to you, but on a regional basis, their earnings were up, their sales were up 18% in Asia Pacific, 9% Latin America, about 4% in North America, and then minus-8% in Europe and the Middle East, which to me, grafts very closely with how regions are doing responding to COVID-19. So it was a great quarter.

Hill: Yeah. I think it absolutely does pair nicely with what we're seeing in terms of COVID levels. I guess the surprising part to me was North America doing as well as it did, when you think about the away-from-home segment and how important that is for Coca-Cola, and there's still so many -- just think of the last three months. There are so many stadiums, so many concert venues that are just either, if they're not shut down completely, they're operating at a fraction of the normal capacity. That's why I thought this was a pretty good number.

Mann: It was a really good number. Obviously, they are still doing some figuring, and we have not thrown open the doors. Chris, you are forgetting about the massive effect of Coca-Cola Blak, the Coca-Cola and coffee product that they've released.

Hill: Was it massive?

Mann: No, it wasn't massive. It was just incredibly important for us coffee drinkers. Coca-Cola, to its credit, has said, because this is a bellwether company for the exact reason that you're talking about, people are looking at Coca-Cola as having a very good insight into how things are opening. Their CEO, James Quincey, was pretty negative about reopening around the world, and he didn't name countries, but we could guess what they are, that they are going the opposite direction that we would hope in terms of opening, and so that away-from-home segment is going to continue to be impaired. I'm staggered at the quality of this quarter. I'm staggered at it.

Hill: It's one of those things that I think if you're a shareholder, you are maybe trying not to get your hopes up for what could come with further reopening in different regions, because if Coca-Cola can put up these kind of numbers in the environment that we've seen over the last three months, it bodes well for how they could perform as things continue to open up.

Mann: I think that's exactly right.

Hill: Last thing before we move on. In a separate filing, they announced plans to do an IPO. They didn't give an exact date, but it sounds like it's coming in 2022 from Coca-Cola Beverages Africa. This is going to list in Johannesburg and Amsterdam. If you're a current shareholder in the U.S., is this a benefit to you? Is this something you're excited about, or does this not really have any effect on you?

Mann: When they list Coca-Cola, and the Coca-Cola complex, it has a lot of different elements. The bottlers are separately traded companies. There's Coca-Cola Enterprises in the U.S. There's Coca-Cola Icecek, which is in Turkey, which is Turkey, Pakistan, a lot of Iraq. There's Coca-Cola Hellenic. They actually have Coca-Cola bottlers that are public all around the globe. This actually is going to be pretty interesting, but Coca-Cola, you won't see as a shareholder; you won't see money distributed to you. You probably won't see shares distributed to you. To me, this is an interesting listing, because this is one of the last huge potential growth markets for sparkling beverages.

Hill: First-quarter profits for Harley-Davidson were much higher than expected. Revenue came in about as expected, but Harley-Davidson raised guidance for the full fiscal year and shares were up more than 10% today. Speaking of [laughs] surprisingly good quarters, the one-two punch of the numbers they put up and just not being shy about the guidance for the full fiscal year, yeah, I get why this stock is up today.

Mann: No, they put the hammer down. They had 32,000 motorcycles that were sold in North America in the first quarter, which is up 30% over the same quarter last year. Again, probably a little bit of COVID effect in that, but the first quarter of last year was only impaired in March, so probably a pretty good comparison.

The really interesting thing, and I know we've talked about this a lot on the show, is that we think that the biggest risk for Harley-Davidson is the fact that its primary demographic is aging, that it's basically older white dudes, and so Harley-Davidson has essentially doubled down on that core demographic. They're going out with more expensive bikes. They are actually ramping down. They had pretty poor sales in Europe because they're getting rid of some of their less profitable, the Street and the Sportster, the stripped-down models. Their turnaround plan is doubling down on the big, expensive, high-margin touring bikes. In the words of Pepper Brooks, it's a bold strategy. We'll see if it works out for them.

Hill: So I can see this working out.

Mann: I can, too.

Hill: You look at the stock movement today; there are others who believe this work-up. Is this an effective long-term strategy or is this a strategy that you can execute for the next couple of years because you have the combination of people who have been pent up in their homes for a year? In some cases, people have seen their own personal savings rates hockey-stick up and to the right, and so yeah, this works over the next couple of years, but maybe beyond that, they need to revisit.

Mann: It's a really interesting question, Chris, and I think that probably they are retrenching a little bit. Something else is coming down the pike, and the news came out earlier today that Harley was being slapped with a 56% tariff in Europe, so that, probably, they had to see this coming down the pike, and so this probably had something to do with the fact that they are retrenching and moving into the bikes that sell really, really well in the United States.

Harley does have a risk that they will dilute their brand by virtue of going into other areas. I think, probably, that they are in the process of retrenching, centering on the thing that everyone associates with Harley-Davidson with, and then they're going to try and figure out how to make that experience relevant to additional demographics than their core. So I think it's smart. I also think that what they have done till now hasn't worked that well, so they had to retrench.

Hill: Merger Monday is living up to its moniker once again, Herman Miller, the office-furniture maker, is buying Knoll, a furniture and accessories company, for $1.8 billion in cash and stock. Depending on which side of this you're on, you're either thrilled or more than a little disappointed, because shares of Knoll are up more than 30% on this news, while shares of Herman Miller are down more than 11%. I don't remember the last time we had that kind of delta.

Mann: Yeah. Get paid. [laughs] The Knoll shareholders are getting paid. Part of this has to do with the CEO of Knoll. The chairman and the CEO is a man named Andrew Cogan. He's planning on retiring. I think that this is a closeout for them. We do this a lot with companies that we analyze. You look at the age of the managers who you trust and say, "Is it likely that they're going to continue operating?" I think that in this case, it was pretty clear for some period of time that he was looking for an exit strategy. We've got it. I'm not sure that the Herman Miller people are that excited about it. They are touting the deal as being a way to consolidate. They both have very deep Michigan roots. There's a fair amount of consolidation that they are claiming can be done. I think the Herman Miller shareholders are reacting because they are wondering why it is that they are paying for Andrew Cogan's retirement party.

Hill: So this is about the price tag and not necessarily the deal itself because on the surface, absent the price tag, this is a deal that I would look at and go, "OK, that's not crazy to me." Maybe it's just the $1.8 billion.

Mann: I think that's probably it. I haven't seen the details on it. I would love to know how they financed it. It could be that Herman Miller is changing the focus of its balance sheet in a way that makes people nervous. Furniture is a hard, hard business. I'm sure that there is some nervousness that they are wasting capital taking out Knoll at such a high premium.

Hill: Last thing, and then we'll move on. Combined, these are two businesses that have a combined market cap of less than $3 billion. That said, they are both in the same industry. When it comes to regulatory approval, I looked at this and I thought, relatively speaking, these are tiny companies. This will be rubber stamped, no problem. Is that always the case? I don't see anyone talking about this particular deal and saying regulators might not let this one fly. But is it always the case that it has to do with the overall market cap? You just think back to earlier this year, when Visa walked away from the deal with Plaid, and that was over regulatory concerns.

Mann: In this case, they aren't going to have much of an issue. It is always interesting. There was a case probably 15 years ago where two shoe companies were not allowed to merge for antitrust concerns. I thought to myself at the time, I really don't understand what the protection of the consumer for preventing two shoe companies from merging would be. Ultimately, when you think about antitrust, it's not so much the public-company element; it's the protection of the consumer and the market. It really depends, in this case, in how the market is defined. If it's defined strictly as office furniture or modern designed furniture, there could actually be a case. I don't really see those as being markets that you could protect in that way. I don't see that there are really big concerns for these two companies.

Hill: Before we wrap up, we are really at the top of the first inning of earnings season. So many companies left to report. I'm curious if there's anything in particular you're going to be watching this season. Whether it's a company, an industry, a trend, what are you going to be looking for?

Mann: There are two things that I'm really interested in. They both are around the same theme, which is that a year ago, the earnings were first impacted deeply by COVID. You think about the companies that are the ''COVID players" like Zoom, for example, and then you think about the companies that were most deeply impacted by COVID, which should be the strict retailers. It's going to be really interesting to see how they are emerging. We never know, but we really don't know what the economy is going to look like six months from now. We don't know what people's patterns, what their practices are going to be like now. Six months from now in the United States, are we going to be looking back and saying, "Hey, you remember when we used to wear masks? That was crazy!" Or will there be deeper concerns?

So this will be the first quarter in which we have not particularly great comparables from the year before. But we're going to start to see some real information from the companies about how they are thinking about how the next six months to a year will be.

Hill: It really will be fascinating to see what the different puzzle pieces look like in terms of forward guidance.

Again, to go back to Harley-Davidson, it's one company in one industry, and yet they feel good enough about what they see over the next nine months where they were able to come out and say, "Yeah, we're ratcheting up our guidance; here's why; here's what we see." To your point, it will be interesting to see what we get out of the bigger companies, the bigger retailers, the more bellwether type businesses as well.

Mann: We've seen companies like Costco, companies like Walmart and Target have, I don't necessarily want to say sailed through, but they have absolutely consolidated market share during this time. and they have shown themselves in some ways to be Amazon-proof. But it will be really interesting to see if consumer habits shift back to where they were beforehand, or if we have gone through permanent change in how consumers choose to interact with these companies.

Hill: Bill Mann, always great talking to you. Thanks for being here.

Mann: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this addition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.