Coca-Cola: Q4 Earnings Could Show Sales Growth, Proving Turnaround On Track

Coca-Cola (NYSE:KO) (NYSE:KO)—both the company and its consumer staple stock—rarely gets a thumbs down from investors. Whatever moves the soft drink giant's management makes to revive growth, the company's shares get rewarded.

KO Weekly 1- Year Chart

For example, in August when the Atlanta-based company announced its $5 billion acquisition of British chain, Costa Coffee, many analysts questioned the high premium the company paid for the coffee chain. The deal was part of Coca-Cola's effort to expand revenue by diversifying away from sugary beverages toward premium, faster-growing categories.

Critics of the deal questioned Coke's ability to make the transformation work when smaller brands in the coffee market were gaining the most market share. But despite these doubts, shares of KO still outperformed peers and the broader market over the past year. The stock, which closed yesterday at $49.66, is up almost 20% over the last 12 months, significantly outperforming the S&P 500 Consumer Staples index which declined 3% over the same period.

Coca-Cola's next big test comes on Thursday when the beverage maker announces fourth-quarter earnings. The consensus expectation calls for $0.43 a share profit, up from $0.39 a share a year ago. Sales are forecast to fall 6.4% to $7.03 billion for the same period.

Rebound in Diet Cola Demand

In Q3, the soft drink giant benefited from a rebound in diet cola demand; consumers turned back to the zero-calorie drinks they once spurned. The company’s global soda volume grew 2% from the same quarter a year ago, led by rising sales of Diet Coke and Coke Zero Sugar.

We expect a similar performance in the fourth quarter, given the strength of the company’s brands which are helping in its turnaround strategy. Coca-Cola's many smart moves during the past few years have put the company ahead of peers.

Last year, it completed the divestment of its bottling operations in the U.S., effectively outsourcing a broad variety of shipping and logistics tasks. That move should help Coke at a time when costs in these areas are escalating, crimping profit growth at many companies.

On the product side, its zero sugar drinks have helped revive sales in North America where the company saw double-digit growth for Coca-Cola Zero Sugar and Powerade Zero, as well as strong growth in premium water brands such as Topo Chico and smartwater.

We believe these moves keep Coca-Cola well on track to satisfy changing consumer needs, while opening many new growth avenues, especially after its acquisition of Costa. The U.K. chain has 3,800 stores globally, offering Coke a retail presence in China as well as other parts of Asia, the Middle East, Africa and Europe. It also provides a hedge against slowing soda sales.

Bottom Line

Despite its current challenges, Coke remains a solid dividend stock for long-term investors, with a yield of 3.14% and a quarterly payout of $0.39. The company has now increased its dividend for 56 years in a row.

As if the recent management moves and reliable dividend weren't enough confirmation of the strength of the company and its shares, Coca-Cola owns 21 brands which generate $1 billion or more in annual sales — that's out of a staggering 500 global brands. We believe Coke is a good defensive play, especially when the risks to growth stocks have increased and investors are playing it safe.