Coke's Fundamentals Intact Despite Near-Term Pain, Analysts Say

(Bloomberg) -- Coca-Cola Co. analysts weighed in on its quarterly results after the stock plunged Thursday by the most in more than a decade. Earnings are expected to remain depressed over the near term due to currency pressures, rising commodity costs and higher taxes, which may keep shares range-bound. More optimistically, analysts are confident in the underlying trends and say they’re impressed with Coke’s organic sales growth rates outperforming those of consumer packaged goods (CPG) peers.

Here’s what Wall Street sell-siders are telling clients:

Citi, Wendy Nicholson

  • Downgrades to neutral from buy, price target $50 from $56, on view of muted near-term EPS growth due to higher commodity costs, foreign exchange, and higher tax rates
  • KO continues to report and guide for strong organic sales and operating margin growth due to “strong market share performance owing to successful innovation and robust reinvestment spending as well as sharp discipline on productivity initiatives”
  • “Many of KO’s important markets and categories are healthy and growing” and at rates that are “better than we see at many other CPG companies”
  • But Coke has reported EPS of $2.00 plus or minus 10 cents for the last eight years, with strong underlying growth offset by dilution from refranchising activities and currency headwinds

Wells Fargo, Bonnie Herzog

  • Most concerning and surprising was “the wide delta between KO’s FY19 FX-neutral op income growth guidance of +10-11% and its EPS growth guidance of -1% to +1% (implying EPS of $2.06-$2.10)”
  • KO’s past strategies of over-earning on FX hedges looks to have now caught up with it
  • Given “muted” EPS forecast, Herzog asks: “Is KO still truly a ‘growth’ company and will long-term investors (after years of structural headwinds from refranchising) tolerate yet another year of muted EPS growth"
  • While “incrementally more cautious” near term, KO’s organic sales growth profile “is still an outlier in a growth strapped Staples sector, and we’re confident that KO can grow EPS +HSD in 2020 (absent significant FX-headwinds)”; keeps outperform, price target $50 from $55

Bernstein, Ali Dibadj

  • “Messy outlook hits stock hard, though core business seems healthy; patience required”
  • “Given the violent stock movement, a degree of what we think is sandbagging, and the operational performance still being among the strongest in consumer staples, we think this is a buying opportunity” although expects just a “small upward” stock move short term, potentially aided by CAGNY next week
  • Full recovery will take time as management “attempts to regain credibility over the course of the year”; rates outperform, price target $50 from $53

Deutsche Bank, Stephen Powers

  • While surprised by the guidance, and disappointed by the level of FCF conversion projected in FY19, thinks the magnitude of the move Thursday was unwarranted due to:
    • The entire miss on EPS vs DB’s estimate was driven by FX hedging and the delay in FCF realization is likely only temporary —- although looking for further confirmation of that at CAGNY next week
  • Rates buy, price target $52 from $53

RBC, Nik Modi

  • Currency headwinds continue to weigh on results, with full year guidance reflecting 600-700 bps of FX headwind to comparable operating income
  • Management will be able to grow USD earnings given sales and cost levers, despite FX/macro pressures
  • Initial flat 2019 EPS guide was “appropriately conservative” and stock should benefit from upwards revisions through the year
  • Even though KO’s year organic growth forecast of 4% is at low end of its long-term range, it compares to CPG peer’s forward organic growth guidance of 2%
  • Rates outperform, price target $56; “long-term, underlying strategy is working”

Morgan Stanley, Dara Mohsenian

  • “Underlying fundamentals remain solid,” with 4% organic sales growth and high-single digit FX-neutral 2019 adjusted operating profit growth
  • Views organic sales growth of ~4% in 4Q and similar FY19 guidance “as solid and at the high-end of CPG peers,” but “disappointed that Coke is not able to offset more of the 2019 EPS pressure from FX, given commentary a couple years ago that the company is focused on driving EPS growth even in the face of unfavorable FX”
  • After Thursday’s sell-off, maintains equalweight rating out of a belief that KO’s valuation “reflects solid fundamentals, offset by lower visibility post the weak Q4 results/2019 guidance”; price target $48 from $51

Jefferies, Kevin Grundy

  • “Increasingly viewed as a ‘safe haven’ of late in a volatile market, investors had welcomed KO’s increasingly ‘cleaner’ reporting and solid EPS delivery in recent quarters; however, ill-flagged operating margin weakness (partially structural) in 4Q and dire FX/non-operating headwinds in ’19 introduce a level of unwelcome near-term uncertainty”
  • Rates hold, price target $46 from $49

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