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Coca-Cola (KO) Marketing Initiatives Solid, Fx Woes Stay

We issued an updated research report on Atlanta, GA-based beverage giant The Coca-Cola Company KO.

Coca-Cola shares have struggled this year, with the stock losing over 4% year to date due to several ongoing macro as well as structural issues. Although the cola giant is performing well in several markets, severe macroeconomic challenges in certain international markets and the stronger U.S. dollar are impacting results.

Emerging markets have become increasingly volatile due to fluctuating currencies and other structural issues. Slower economic growth in many developing/emerging markets, notably Brazil, Russia and China has lowered the demand for commodities. Deterioration in key emerging markets is decelerating personal consumption expenditures as well as industry growth, which in turn, is hurting the demand for the company’s products. In Venezuela, exchange restrictions and other conditions are hurting business in the country.

Weakening demand in certain large emerging and developing markets like China, Brazil and Argentina has hurt Coca-Cola’s sales in the first nine months of 2016.

Along with that, the company’s North American sparkling beverage business has been delivering sluggish results due to CSD or carbonated-soft drinks category headwinds. Cross-category competition and growing health and wellness consciousness — consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns — are hurting demand for CSDs. The challenges in the CSD category have been felt by all major soft drink makers — Coke, PepsiCo Inc. PEP and Dr Pepper Snapple Group, Inc. DPS — leading to lower volumes and weak sales.

Notwithstanding, Coca-Cola reported better-than-expected results in the third quarter of 2016, courtesy of higher prices for sodas and strong demand for water and sports drinks in North America. The company has witnessed improved margins on higher pricing and smaller packaging in developed markets, amid slowing sales.

Persistent weakness in some emerging markets like Brazil, Argentina and Venezuela is hurting sales. However, this was offset by strong performance of U.S., Japan and Western Europe owing to innovation and marketing efforts.

Gross margins expanded 40 basis points (bps) year over year driven by positive pricing, productivity gains and lower commodity costs.

Overall, Coca-Cola’s increased marketing investments are driving volume growth in stable markets like North America. However, weak sparkling beverage volumes as well as currency and structural headwinds pose threats. Meanwhile, the company has been struggling in recent years owing to the global macro-economic headwinds and shifting consumer preferences.

Coca-Cola currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A Key Pick

A better-ranked beverage stocks is Coca-Cola Amatil Limited CCLAY.

For Coca-Cola Amatil, full-year 2016 earnings growth is expected at 10.8% and the stock carries a Zanks Rank #2 (Buy).

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COCA COLA CO (KO): Free Stock Analysis Report
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PEPSICO INC (PEP): Free Stock Analysis Report
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