Coca-Cola (KO) is scheduled to report results of its fiscal third quarter before the market open on Thursday, October 22, with a conference call scheduled for 8:30 am ET. What to watch for:
1. COMMENTARY AND GUIDANCE: When Coca-Cola reported its second quarter results on July 21, the company said it saw "promising signs" the worst was over in regards the COVID-19 pandemic, adding that the second waves of COVID-19 pandemic don't look as bad as the first wave. The company said it saw Q3 comparable net revenue including a 3%-4% currency headwind based on the current rates and including the impact of hedged positions, adding that Q3 comparable operating income is expected to include a 7%-8% currency headwind based on the current rates and including the impact of hedged positions.
2. STRATEGIC REORGANIZATION: On August 28, Coca-Cola announced "strategic steps to reorganize and better enable the Coca-Cola system to pursue its Beverages for Life strategy, with a portfolio of drinks that are positioned to capture growth in a fast-changing marketplace." The company added that it would "create new operating units focused on regional and local execution that will work closely with five marketing category leadership teams that span the globe to rapidly scale ideas." The company's nine new operating units will help streamline the organization by replacing current business units and groups. The company's current model includes 17 business units that sit under four geographical segments, plus Global Ventures and Bottling Investments. Moving forward, the operational side of the business will consist of nine operating units that will sit under four geographical segments, along with Global Ventures and Bottling Investments. The company's operating leaders will report to President and Chief Operating Officer Brian Smith.
3. PRODUCT STREAMLINING: Also on August 28, Coca-Cola announced it would conduct a portfolio rationalization process, in an effort to create a "tailored collection of global, regional and local brands with the potential for greater growth." To drive these initiatives and support the operating units, the company is reinforcing and deepening its leadership in five global categories with the strongest consumer opportunities: Coca-Cola, Sparkling Flavors, Hydration, Sports, Coffee and Tea Nutrition, Juice, Milk and Plant, Emerging Categories.
When Coca-Cola reported its Q2 earnings, the company said it would be shifting towards fewer but bigger brands, and exiting zombie brands. Since then, the company has reportedly discontinued Tab, Odwalla juice, and Zico coconut water, in addition to many others. The Wall Street Journal's Jennifer Maloney noted that Coca-Cola said it planned to slash its 500 brands by more than half. Additional products that will be retired this year include Diet Coke Feisty Cherry, Sprite Lymonade, and Coke Life, a lower-calorie version of Coke sweetened with stevia that the company began rolling out in 2013, as well as Northern Neck Ginger Ale, Delaware Punch and Mendota Springs seltzer, Maloney added.
4. MORGAN STANLEY UPGRADE: On July 22, one day after Coca-Cola reported Q2 earnings, Morgan Stanley analyst Dara Mohsenian upgraded the stock to Overweight from Equal Weight with a price target of $54, up from $52. The stock's recent underperformance and "outsized valuation discount" compared to peers has become too pronounced, leaving shares with a "compelling valuation," Mohsenian said. While previously of the view that the market was materially underestimating COVID-19 risk given Coke's large eating/dining-out exposure, Mohsenian said he now believes the market appears to have more than accounted for short and longer-term COVID risk factors and sees Q2 as the bottom.
On August 17, Mohsenian addressed pushbacks to his July 22 upgrade of Coca-Cola to Overweight, as he sees a compelling valuation with the market now appearing to have more than accounted for short-/longer-term COVID risk factors. While Mohsenian acknowledged that some of the concerns have validity, the analyst's point with the upgrade was that Coca-Cola's ~20% stock underperformance vs. mega-cap peers since COVID concerns ramped up seemed overdone in the context of the market seemingly looking past COVID concerns with the S&P 500 near all-time highs, despite acknowledged greater pressure on the company's away-from home business near term.
