Coca-Cola Enterprises Inc.
/(CCE-NYSE)
/ $37.38*Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.
Reason for Report:1Q13 Earnings Results Update.
Prev. Ed.: Apr 08, 2013; 4Q12 and FY12 Earnings Update (broker material considered till Mar 22)
Brokers’ Recommendation: Neutral: 50.0% (6), Positive: 41.7 % (5), Negative: 8.3% (1) Prev. Ed: (6;5;1)
Brokers’ Target Price: $38.25 (↑$1.17, 10 firms) Brokers’ Avg. Expected Return: 2.3%
*NOTE: Though dated May 29, 2013; share price and brokers’ material are as of May10, 2013.
NOTE: The tables below (Revenues, Margins Earnings per Share, and Balance Sheet) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Coca-Cola Enterprises Inc. (CCE) isone of the world’s largest independent bottlers for Coca-Cola.
Neutral and Negative or equivalent outlook (7/12 analysts):The firms with a neutral outlook appreciate the company’s strong cash position and cost control strategy. They believe that the Business Transformation program will help the company optimize its business in the upcoming quarters. However, the firms prefer to stay on the sidelines as the company reduced its FY13 revenue guidance. Alsothe company is geographically focused on Western Europe, the bearish firms are concerned that the company will need time to overcome hurdles like ahike in French Excise tax and increased competition in Great Britain.
Positive or equivalent outlook (5/12 analysts): The bullish firms appreciate thecompany’s strong brand portfolio. They appreciate that the company did not acquire the German bottling company and instead focused on improving its share repurchase. The firms have faith that the company will be able to overcome the present hurdles and achieve strong growth in the immediate quarters.
May 29, 2013
Overview
Coca-Cola Enterprises Inc. is a leading Western European company, producing, distributing and marketing non-alcoholic beverages. The company operates inBelgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway and Sweden.
In Oct 2010, Coca Cola Enterprises sold its North American operations to TCCC and took over the latter’s bottling operations in Norway and Sweden.Coca-Cola Enterprises thus became a newly registered public company consisting of legacy Coca-Cola Enterprises European bottling operations, as well as the bottling operations in Norway and Sweden acquired from TCCC.
Coca Cola Enterprises is now The Coca-Cola Company’s (TCCC) strategic bottling partner in Western Europe and has a 10-year bottling agreement with the latter for each of its territories that will end on Oct 2, 2020. In addition to this, the companies have entered into a concentrate pricing agreement which extends through Dec 31, 2015.
The analysts identified the following issues as critical to an evaluation of the investment merits of Coca-Cola Enterprises:
Key Positive Arguments / Key Negative ArgumentsThe company commands a strong portfolio of popular brands, enjoys strong consumer acceptance. / Increasing commodity costsconsistently hurtmargins and earnings.
The company generates strong cash flow and Coca-Cola Enterprises is financially well leveraged. / The company is geographically focused in Western Europe and is thus exposed to the economic uncertainty including the debt burdens of some of these countries.
The company is one of the largest Coca-Cola bottlers in the world.The collaboration helps the company to create and develop new brands, market products in an efficient manner and also maximize efficiency. / The company’s top line was hurt by hike in French excise tax which was introduced by French regulatory authorities from Jan 2012 onwards.
The company is diligently trying to control its expenses and is targeting focused reductions across all discretionary cost categories. The resultant savings can be invested in the business to optimize the marketplace opportunities and improve long-term growth.
Coca-Cola Enterprises’ fiscal year references coincide with the calendar year.
More information on the company is available on its website
May 29, 2013
Long-Term Growth
The company believes that it will be able to cope with the slow economic recovery in Europeand deliver profitability in the long term.Over the long run, the company intends to achieve annual revenue growth of 4% to 6%, operating income growth of 6% to 8%, high single-digit growth in terms of annual earnings per common shareand at least 20 basis points (bps) growth inannual return on invested capital (ROIC).
The company also believes that it can attain its long-term objectives by capitalizing on its brand valueand increasing operational efficiencies. The company considers that a balanced growth of volume and price/mix is required to achieve its long-term targets.
Another important growth strategy of the company includes reinvesting in businessto generate growth and maintain existing facilities and operations. As such, the company’s long-term plan includes increase in capital expenditures to the range of 4% to 4.5% of total net sales growth.
The company intends to strengthen its brand portfolio by improving the value of existing brands and increasing its product portfolio. The company also intends to focus on brand building of light core brands like Diet Coke/Coca-Cola Light and Coca-Cola Zero to capture benefits from growing health consciousness among consumers. The company expects steady volume growth in energy, stills and sparkling flavor brands in the long run.
May 29, 2013
Target Price/Valuation
Rating DistributionPositive / 41.7%
Neutral / 50.0%
Negative / 8.3%
Highest Target Price / $43.00↑
Lowest Target Price / $34.00
Avg. Target Price / $38.25↑
No. of Analysts with Target Price/Total / 10/12
Risks associated with the target price primarily include input cost increases,volatile pricing environment and changes in foreign exchange.
Recent Events
CCE Beats 1Q Earnings; Misses Rev – Apr 25, 2013
Coca-Cola Enterprises’ first-quarter 2013 adjusted earnings of $0.39 per share beat the Zacks Consensus Estimate of $0.38 by a penny. Currency translation had an adverse impact of $0.01 per share. Adjusted earnings rose 8.3% year over year driven by operating income growth and lower share count resulting from share repurchases in the quarter.
The company’s right to acquire the German bottling business from The Coca-Cola Company will expire on May 25. However, management has decided not to go ahead with the proposed buyout deal at this moment. This decision enabled Coca-Cola Enterprises to increase its share repurchase goal for the year.
Revenues and Margins
During the quarter, net sales dipped 1.0% to $1.90 billion. Reported revenues missed the Zacks Consensus Estimate of $1.91 billion.
The volume of Sparkling drinks declined about 2%. Still beverages witnessed a modest decline, partially offset by a respective 3.5% and 4.0% volume growth in Coca-Cola Zero and energy drinks.
Adjusted operating income increased 3.5% to $180 million due to lower operating expenses reflecting the impact of one fewer selling day and the benefits of ongoing expense control and timing.
Fiscal 2013 Outlook
Although the company increased its prior guidance for fiscal 2013 earnings to reflect higher share repurchase and it reduced its expectation for revenues. The company continues to expect currency neutral adjusted earnings growth in the range 11%—12%, up from 10% as guided earlier. The target looks encouraging, considering it is higher than the company’s long-term target of highsingle-digit growth.
At the current rates, currency translation is expected to reduce full-year earnings per share by approximately 1% to 2% in contrast to a 2% to 3% benefit expected earlier.
Revenues
Coca-Cola Enterprises reported revenues of $1.90billion in 1Q13, down 1% y/y both on a currency neutral basis(excluding the impact of French excise tax) and a reported basis.The Zacks Digest average is in line with thecompany results.
The company’s overall results in the quarter were hurt by several challenges such as cold and wet weather, overall soft macroeconomic conditions, steep price competition in Great Britain and difficult beverage market conditions in France due to increase in French excise tax (FET).
The hike in French excise tax was introduced by French regulatory authorities from Jan 2012 onwards. The increased excise tax was levied on beverages with added sweeteners, which is applicable to almost all drinks that the company sells in France. The company intends to pass on these costs to consumers in the form of higher retail prices for its products.
Coca-Cola Enterprises’ net pricing per case increased 2.0% in the quarter. Cost of goods per case increased 3.0%, on the back of increased cost of sweetener and package mix-shifts.
Volumes (bottle and cans) declined 1.5% in the quarter, which is a sequential improvement over prior quarter decline of mid single-digit. The volume decline was due to a dip in the sales of sparkling beverages in continental Europe, partially offset by the volume increase in Great Britain. As such, volumes declined 3.0% in continental Europe but improved 1.0% in Great Britain. Brands which performed well include Coca-Cola Zero, Monster and Capri-Sun, whereas sales of Coca-Cola Classic and Diet Coke/Coca-Cola light declined in the quarter.
Provided below is a summary of total revenue, as compiled by the Zacks Digest:
Revenue ($M) / 1Q12A / 4Q12A / 2012A / 1Q13A / 2Q13E / 2013E / 2014E / 2015ETotal Revenue / $1,868.0 / $1,916.0 / $8,062.0 / $1,850.0 / $2,262.2 / $8,256.6↓ / $8,562.3↓ / $8,845.7↓
Digest High / $1,868.0 / $1,916.0 / $8,062.0 / $1,850.0 / $2,295.0 / $8,296.4↓ / $8,695.1↓ / $9,046.4↓
Digest Low / $1,868.0 / $1,916.0 / $8,062.0 / $1,850.0 / $2,238.7 / $8,220.0 ↓ / $8,384.0↓ / $8,678.0↓
Year-over-Year Growth / 1.3% / 1.2% / -2.7% / -1.0% / 2.5% / 2.4%↓ / 3.7%↓ / 3.3%↓
Outlook
The company expects FY13 net sales to grow in the low to mid single-digits range less than the previous expectation of a midsingle-digit increase)on the back of declining volume and the weak macroeconomic conditions.
Most firms are concerned about lowering of the revenue guidance witnessed by the company for the past few quarters.
Please refer to the Zacks Research Digest spreadsheet on CCE for specific revenue estimates.
Margins
Gross profit was $634 million in 1Q13, down 3.4% y/y. Gross margin contracted due to hike in commodity costs, particularly sweetener and restrictive pricing due to tough market conditions.The Zacks Digest average gross profits were in line with the company results.Adjusted selling, delivery and administrative expenses in 1Q13were $460 million, down 4.0% y/y, on the back of cost controls initiatives and decline in volume.
Adjusted operating income was $180 million in 1Q13,up 2.5% y/y,on the back of lowerselling, delivery and administrative expenses.The Zacks Digest average operating incomewas in line withthe company results.
Norway Business Optimization Program
In early 2012, the company initiated a restructuring project in Norway in order to achieve operational efficiency. The program is expected to incur $60 million in capital expenditure and about $60 million in non-recurring restructuring charges in fiscal 2013. The project includes a transition to a moreeffective distribution system.
Business Transformation Program
In the third quarter of 2012, The company has announced a program in order to increase operational efficiency and maintain sustainable growth in the long term. The program involves commercial restructuring to shift to an improved and efficient consumer service model.The program aims to improve the effectiveness of its go-to- market strategies and sales and marketing organization, back office functions and to better align its operating structure with the challenging and changing marketplace. The plan is expected to result in approximately $100 million in ongoing benefits by 2015 against one-time restructuring charges of $200 million through 2014. The program is also expected to result in workforce reduction. The resultant savings can be invested in the business to optimize the marketplace opportunities and improve long-term growth.
A couple of firms appreciate the Business Transformation Program adopted by the company and believe that the company will benefit from the program over the long term.
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 1Q12A / 4Q12A / 2012A / 1Q13A / 2Q13E / 2013E / 2014E / 2015EGross / 35.0% / 34.8% / 36.0% / 34.6% / 36.8% / 35.8%↑ / 35.8%↑ / 36.2%↑
Operating / 9.4% / 10.9% / 12.6% / 9.7% / 14.3% / 12.8%↑ / 13.0%↑ / 13.3%↑
Pre-Tax / 8.2% / 9.5% / 11.5% / 8.3% / 13.2% / 11.5%↑ / 11.7%↑ / 12.0%↑
Net / 6.0% / 6.8% / 8.4% / 6.0% / 9.6% / 8.4%↑ / 8.5%↑ / 8.7%↑
Outlook
The company expects its FY13 operating income to grow in the mid single-digit range year-over-year. However, gross margin is expected to decline as the increase in net pricing per case growth is expected to be offset by higher cost of sales per case. Management expects a moderately favorable commodity cost environmentfor the remainder of the year.Effective tax rate is expectedto be in the range of 26% to 28%.
Please refer to the Zacks Research Digest spreadsheet on CCE for specific margin estimates.
Earnings per Share
Coca-Cola Enterprises reported EPS of $0.39 in 1Q13, up8.3% y/y,driven byan increase in operating income and lower share count resulting from significant share repurchases in the quarter.
Provided below is a summary of EPS, as compiled by Zacks Digest:
EPS / 1Q12A / 4Q12A / 2012A / 1Q13A / 2Q13E / 2013E / 2014E / 2015EDigest High / $0.36 / $0.45 / $2.26 / $0.39 / $0.79 / $2.53↓ / $2.88↓ / $3.22↓
Digest Low / $0.36 / $0.45 / $2.25 / $0.39 / $0.76 / $2.46 / $2.71↓ / $2.95↓
Digest Avg. / $0.36 / $0.45 / $2.26 / $0.39 / $0.77 / $2.50↓ / $2.82↓ / $3.12↓
Digest YoY growth / 9.1% / 24.0% / 3.5% / 8.1% / 5.4% / 10.5%↓ / 12.8%↑ / 10.8%↓
Acquisition of German bottling Business
Coca-Cola Enterprises’ right to acquire German bottling business from The Coca-Cola Company expired on May 25.
Share Repurchase
Coca-Cola Enterprises began its third share repurchase program worth $1.5 billion in Jan 2013. The company expects to repurchase shares worth at least $1 billion during 2013, up from the prior expectation of $500 million.
Outlook
For fiscal 2013, the company continues to expect currency neutral adjusted earnings growth in the range 11%—12%, up from 10% as guided earlier,on the back of increased share repurchase. The company expects 2013 earnings growth to exceedthe long term target of high single digit growth. The company expects currency translations to drag 2013 earnings per share by 1% to 2%.
Most firms are optimistic about the hike in earnings guidance, on the back of increased share repurchase expectation. They believe that not acquiring German bottling business and increasing cash returned to the shareholders will benefit the company.
Please refer to the Zacks Research Digest spreadsheet on CCE for more extensive EPS figures.
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Research AnalystLead Analyst
QCA / Sarmistha Roy Chowdhury
Kinjel Shah
Kinjel Shah
Copy Editor / Kamalika Pramanik
Content Ed. / Kinjel Shah
Last done by / Sarmistha Roy Chowdhury
Reason for Update / 1Q13