Coca-Cola No Longer A Sell At SocGen, But Why?

• The Coca-Cola Co (NYSE: KO) shares have appreciated 4.29 percent over the past one month, to a high of $43.365 on February 9.
• Andrew Holland of Societe Generale has upgraded the rating on the company from Sell to Hold, while raising the price target from $37 to $44.
• On February 9, the company announced that it would accelerate refranchising and now aims to complete the process by 2017 from the earlier 2020 target.

Analyst Andrew Holland mentioned that the Coca-Cola Co also confirmed that “its $3 billion productivity savings programme is unaffected by the early completion, having found an additional $500 million of procurement savings in the retained business. It will also refranchise its company-owned bottling business in China.”

This means that by the end of 2017, only 3 percent of Coca-Cola’s global volume would be company-bottled.

The company’s U.S. business generated organic sales growth of 4 percent in 2015, which Holland said was the best since 2012, driven by higher marketing spend.

Related Link: Earnings Preview: Coke V. Pepsi

Holland believes the impact of accelerated refranchising on the P&L would be dilutive yet positive for margins, once it was completed.

“Based on current FX rates, Coke’s guidance for the FX impact in 2016 is a sales headwind of 4 percent and a 9 percent headwind on pre-tax profit. If the US dollar continues to weaken, it will help overseas profits on translation,” according to the Societe Generale report.

The EPS estimate for 2016 has been reduced by 6 percent. Holland believes that the timing of various deals that are likely to occur during the refranchising process would have a significant impact on EPS growth.

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