Despite the early hour, have yourself a Coke (NYSE:KO) tomorrow morning while you're perusing the company's Q4 and full-year 2005 earnings results. Will they make you smile? Let's take a look.

Wall Street Wisdom:

  • General consensus. Eighteen analysts follow Coke, with eight of them according it a buy rating, nine saying hold, and only one sell.
  • Revenues. Despite all the buy ratings, analysts still only expect the company to report a 3% rise in sales tomorrow, to $5.41 billion.
  • Earnings. Profits are believed to have declined year over year in the fourth quarter, down $0.02 to $0.44.

Margin watch:
Coke's gross margins have held pretty steady on average, varying by only 10 basis points over the past year. Operating margins, in contrast, have been sliding for five quarters now, and net margins look pretty wobbly, with no clear trend apparent.

Margins %

6/04

10/04

12/04

4/05

7/05

9/05

Gross

64.1

64.5

65.2

65.2

65.2

65.1

Op.

30.7

31.3

30.6

29.9

29.8

29.7

Net

22.3

21.1

22.1

21.3

21.6

22.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Asset writedowns explain why Coke's net margin has been the weakest of the three profitability gauges. In contrast to 2003, when the company didn't have a single quarter, Coke conducted three writedowns last year, totaling $568 million in charges. So far this year, it has only taken one writedown (in the September quarter). Unless Coke takes another charge tomorrow, I'd therefore expect the rolling net margin to inch up a bit further.

Whatever happens tomorrow with the net margin under GAAP, it's more important to watch Coca-Cola's free cash flow, which usually exceeds accounting profits by a considerable amount. For example, over the past 12 months, accounting (net) profits were $5.2 billion. Cash profits (free cash flow) of $5.8 billion exceeded that number by 12%.

Competitors:
In addition to archrival PepsiCo (NYSE:PEP), Coke also does battle with Cadbury Schweppes (NYSE:CSG) in the supermarket aisles of the world.

Coke is a recommendation of Motley Fool Inside Value . For a 30-day free trial subscription to gain access to more great tips about stocks on the sales rack, click here.

Fool contributor Rich Smith does not own shares of any company named above.