Coke's Earnings to See Boost from Acquisitions

BOSTON (TheStreet Ratings) -- Coca-Cola (KO) is scheduled to report second-quarter earnings before the market open on Tuesday, with a big jump in sales expected by Wall Street thanks to a recent acquisition.

Analysts are expecting the soft drink leader to report earnings per share of $1.16, compared with $1.02 a year earlier. Revenue is estimated to increase 42% to $12.4 billion from $8.7 billion based on the inclusion of results from its recent acquisition of Coca Cola Enterprises. Improved pricing and continued volume growth in Latin America, Asia and Eastern Europe should help the bottom line in the second quarter.

The following is taken from a first-quarter report published by TheStreet Ratings, an independent-research unit of TheStreet that uses a quantitative model to evaluate stocks.

The net income growth in the first quarter exceeded that of the Beverages industry average, but is less than that of the S&P 500. The net income increased by 17.7% when compared to the same quarter one year prior, going from $1.6 billion to $1.9 billion.

We rate Coca-Cola a "buy." This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. Our model maintains a price target of $87 on shares of Coke, indicating the potential for 28% upside from current levels.

>>For upcoming earnings and estimates, see our Earnings Calendar.

The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, notable return on equity, compelling growth in net income and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Beverages industry and the overall market, Coca Cola's return on equity significantly exceeds that of both the industry average and the S&P 500.

Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 29% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, Coke should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.

From a valuation perspective, Coke's price-to-earnings ratio indicates a discount compared to an average of 17.60 for the Beverages industry and a discount compared to the S&P 500 average of 16.21. For additional comparison, its price-to-book ratio of 4.82 indicates a significant premium versus the S&P 500 average of 2.18 and a discount versus the industry average of 5.09. The current price-to-sales ratio is well above the S&P 500 average and above the industry average, indicating a premium.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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