Tuesday, October 29, 2013

How Will Coca-Cola Stock Act After Latest Earnings?

With shares of Coca-Cola (NYSE:KO) trading around $40, is KO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Coca-Cola is a beverage company that engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. Its sparkling beverages include carbonated energy drinks, carbonated waters, and flavored waters. The company''s still beverages comprise nonalcoholic beverages, including noncarbonated waters, flavored and enhanced waters, noncarbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. Coca-Cola Company sells its products primarily under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Del Valle, Ayataka, and I Lohas brand names.

Consumers around the world love the products offered by Coca-Cola, and enjoy them almost on a daily basis. Through its brands, Coca-Cola is able to reach a wide consumer base in just about every corner of the world. Those consumers will continue to enjoy its products for many years. On Tuesday morning, Coca-Cola reported disappointing second quarter earnings, blaming the drop on slow sales in Europe. The company has tried raising prices to cope, but economic troubles in Europe and Latin America are having a negative affect on Coca-Cola’s bottom line.

T = Technicals on the Stock Chart are Mixed

Coca-Cola stock has been exploding higher over the last several years. The stock is now trading at price levels not seen since 1998. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Coca-Cola is trading between its key averages, which signal neutral price action in the near-term.

KO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Coca-Cola options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Coca-Cola Options

17.83%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates, and what that means for Coca-Cola’s stock.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on Coca-Cola’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Coca-Cola look like, and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

3.28%

-12.36%

13.92%

4.17%

Revenue Growth (Y-O-Y)

-2.57%

-0.92%

3.76%

0.75%

Earnings Reaction

-1.41%*

5.68%

-2.71%

-0.60%

Coca-Cola has seen rising earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have not been too happy with Coca-Cola’s recent earnings announcements.

* As of this writing

P = Weak Relative Performance Versus Peers and Sector

How has Coca-Cola stock done relative to its peers, Pepsi (NYSE:PEP), Dr. Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and the overall sector?

Coca-Cola

Pepsi

Dr. Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

10.70%

22.75%

7.29%

14.97%

12.71%

Coca-Cola has been a poor relative performer, year-to-date.

Conclusion

Coca-Cola is an iconic company that provides beverage products through its recognized brands to consumers and companies in just about every country worldwide. But a recent slowdown in Latin American and European sales has negatively affected the company in the latest quarter.  The stock has been on a bullish run over the last several years, and is now trading at prices not seen since 1998. Over the last four quarters, earnings have been rising, while revenue figures have been mixed, which has resulted in disappointed reactions to the firm’s most recent earnings report. Relative to its peers and sector, Coca-Cola has been a weak year-to-date performer. WAIT AND SEE what Coca-Cola does this coming quarter.

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