Coca-Cola Enterprises Fizzes Up

When it comes to making good on promises, one fundamental rule applies: better late than never.

After a tough 2008, Coca-Cola Enterprises (NYSE:CCE) is finally seeing some signs of recovery. The company reported second-quarter earnings of $0.64 per share, coming in well ahead of analyst EPS estimates of $0.51. Even though revenue fell from last year's levels, the company used an effective pricing strategy to squeeze more from less, widening its gross margins by more than three percentage points.

Hampered franchise
That's a welcome change for investors. Two years ago, Coca-Cola Enterprises told its shareholders that 2008 would be a year of growth and prosperity for the world's largest seller, bottler, and distributor of everyone's favorite non-alcoholic beverages. But hopeful investors were left hanging out to dry as Coca-Cola's (NYSE:KO) distribution arm suffered from high commodity prices, a bad economy, and a massive franchise impairment charge that left it with a huge loss despite year-over-year revenue growth.

Coca-Cola Enterprises treats its franchise license intangible assets like goodwill; instead of amortizing them, it tests them for impairment at least annually. A falling stock price, tighter credit, and pension plan funding issues led the company to take a total of $7.6 billion in pre-tax noncash writedowns last year.

Is the worst over?
The question now, though, is whether the company can build on its relatively good results. Pepsi Bottling Group (NYSE:PBG) also had a great second quarter, but private-label beverage-makers like Cott (NYSE:COT) see tough times ahead in the competitor-saturated market.

At first glance, current valuations don't seem unreasonable. With a forward earnings multiple of about 13, Coca-Cola Enterprises trades roughly in line with competitors like Pepsi Bottling, Dr. Pepper Snapple Group (NYSE:DPS), and Hansen Natural (NASDAQ:HANS).

But problems such as difficulties in locking in prices of ingredients and other raw materials with suppliers aren't likely to go away anytime soon. And unless volume starts rebounding soon, Coca-Cola Enterprises will be a sitting duck. While the Coke brand carries plenty of consumer loyalty, raising prices won't work forever. Until the company figures out its next move, I wouldn't bet the farm on Coca-Cola Enterprises delivering on its promises for the foreseeable future.

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