One Problem With Coca-Cola's Strong Earnings Report

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Coca-Cola  (KO) - Get Report shares were rising on an earnings beat and an encouraging demand trend going forward, but big health and economic uncertainties loom ahead. 

Shares rose more than 3% to $47.7. 

Sales at Coke’s away-from-home channels, which represent about 50% of revenue, such as restaurants, were hammered as lockdowns were in place for much of the quarter. Still, the company met revenue estimates and managed costs enough to beat earnings expectations. 

Here were the results against Wall Street expectations:

  • Revenue:$7.2B v. $7.2B (actual: -26% year-over-year)
  • Operating Margin: 27.7% (actual: -22 basis points year-over-year) 
  • Earnings Per Share: 42 cents v. 40 cents (-33%)

The company said effective cost management supported the operating margin, which of course contracted. 

CEO James Quincy had some good news on a forward-looking basis for investors. "We believe the second quarter will prove to be the most challenging of the year; however, we still have work to do as we drive our pursuit of 'Beverages for Life' and meet evolving consumer needs,” Quincy said on the earnings release.

 The company also said unit case volumes declined 25% year-over-year in April, but only 10% June, as away-from-home channels improved, while at-home channels were solid. The company said the easing of lockdowns was the key factor driving the positive trend. 

Still, the company said it isn’t issuing guidance because of all of the uncertainties ahead. "While the company believes the second quarter will be the most severely impacted quarter of the year, given the ongoing uncertainty surrounding the coronavirus pandemic and levels of lockdown, the ultimate impact on full year 2020 results is unknown. The company's balance sheet remains strong, and the company is confident in its liquidity position as it continues to navigate through the crisis," the company said in the earnings release. 

More lockdowns or paused reopenings cold blunt the positive trend to end Q2. 

With these uncertainties and Coke now trading at a full valuation — about 23 times 2021 earnings per shares estimates — investors may be careful ahead. Positively, Coke is a largely defensive stock with a 3.4% dividend yield and barely any risk to the dividend payment. 

Pepsi  (PEP) - Get Report recently posted a solid quarter, as away-from-home sales were decimated by lockdowns, but its food and snacks business, which Coca-Cola largely lacks, saw Pepsi through, as grocery-related items saw a sales surge. Nonetheless, Coke was able to beat estimates in a challenged quarter. 

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