What Coca-Cola Investors Should Watch in Q2

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Investors are weighing several strategies management can deploy into the second quarter, as the stock outperforms a broader market sell-off Tuesday. Coca-Cola’s first quarter results were better than expected, but a rough second quarter looms. 

The stock teetered between up and down by less than 1% in both directions Tuesday, as the S&P 500 fell 3%. 

Coke’s earnings per share for Q1 came in at 51 cents, beating estimates of 44 cents, as revenue fell only 1% to $8.6 billion. Analysts were looking for $8.3 billion. Coca-Cola  (KO) - Get Report saw severely declining sales in restaurants and away-from-home locations, which was offset by strong results in grocery stores as consumers stocked up for most of the quarter, as shelter-in-place orders remained. 

The company kept its adjusted operating margin growth by over 2 percentage points to 30%, even after it said in late March that some fixed operating would drag on earnings. Earnings per share grew year-over-year. 

The stock is down roughly 15% in 2020, as investors have priced in a rough second quarter ahead, translating into earnings estimates for the full year that have fallen by roughly 12%. And the stock is trading at a slightly lower multiple of earnings, as it has a slightly higher debt burden than peers like PepsiCo  (PEP) - Get Report and 2021 profit figures remain in question. 

All in, investors didn’t seem overly concerned for now. 

But management didn’t shy away from pointing out that Q2 will see a “material” impact from lockdowns caused by Coronavirus. The company said from the start of April, global sales volumes are down 25%, as roughly half of revenue comes from away-from-home locations. Management didn’t forecast quarterly or yearly results, an outcome expected by the market at this point. 

But analysts have already modeled in a Q2 earnings decline of 12%, which the stock has reflected. The second quarter includes all of April, which encompasses the totality of the lockdown period so far. 

Analysts have pointed out that the company can pivot to creating packages conducive to online sales at restaurants and grocery stores. Management will try to tight rope costs like selling, general and administrative, which it said was its largest fixed cost pressuring profits. Of course, if lockdowns ease in May to the extent the market is anticipating, Q2 results may take care of themselves. 

Investors are hoping for evidence of a trajectory back towards normal earnings results for a stock that has underperformed the market in 2020. 

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