Quick Thoughts – KO
KO this morning reported Q1 EPS of $0.44 per share, consistent with consensus estimates, a result that we expect will be sufficient to move the shares higher given just how bad we see the sentiment on the name currently.
Global volume of +2% exceeded consensus estimates, as did revenues (just slightly).
- Europe was a negative standout with volumes down 4% in the quarter, whereas the strength versus consensus came from Asia Pacific and Latin America.
We doubt that this morning’s results represent meaningful upward pressure on current consensus estimates, but we would argue that expectations were that ’14 consensus was still too high (perhaps by as much as 2-3%)
We also note that volume comparisons ease as we move through ’14, so there is potentially a tailwind on optics for the balance of the current fiscal year.
We would stop short of calling KO cheap on an absolute basis, but sentiment is clearly more negative on the name when compared to the balance of consumer staples companies and it was an underperformer in 2013 (and 2014 looks to be an investment year). Its historical premium versus its staples peer group has been eroded, with KO now trading 1.0 standard deviations below its two-year historical average P/E versus peers and 0.8 standard deviations on an EV/EBITDA basis.
Ultimately, it’s about what is discounted in the name and the optionality afforded investors at current levels – with the premium eroded, it appears to us that investors are getting an inexpensive look at a one of the premier global consumer brand franchises on the planet that, at a minimum, has some chance of returning to levels of global level growth seen in the not too distant past.
We continue to like the risk/reward on KO as we move through ’14, particularly in light of the fact that our sector positioning (staples versus discretionary) remains more defensive and sentiment on the name is mixed, at best – thematically, our view is similar to our opinion on PM – we like buying “broken” global consumer franchises with negative sentiment and favorable risk/reward profiles.