Shares of Coca-Cola and McDonald’s both took a hit this week after reporting dismal earnings. However, the results highlight key developments at their respective businesses.
Text of What Coca-Cola and McDonald's Recent Earnings Reveal About the Health of Their Businesses
What Coca-Cola and McDonalds Recent Earnings Reveal About the
Health of Their Businesses
Earnings: Coke Misses the mark Analysts were looking for
second-quarter earnings of $0.63 per share. Wall Street hoped for
revenue of $12.8 billion. Coke delivered EPS of $0.58, on revenue
of $12.5 billion in the quarter. Coke missed on both the top and
bottom lines. Source: Coca-Cola Company.
Reasons not to worry despite, declining revenue A deeper look
reveals that year-over-year revenue declines were primarily caused
by currency setbacks and structural changes within the company,
rather than problems with the business fundamentals. These
structural changes related to Cokes refranchised bottling
operations should deliver increased value for the company down the
road. Coke gained market share in international markets, with
sparkling volume and Coca-Cola volume accelerated in North America,
Eurasia and Africa, Europe and Asia Pacific in the quarter. 9%
volume growth in China was also encouraging.
More positives from Cokes earnings The company returned $1.3
billion in cash to its shareholders in the second quarter.
Management plans to repurchase between $2.5 and $3 billion by years
end. Volume growth lifted gross margins to 61.7% from 60.9% a year
ago, according to data from Morningstar.
Margins should improve Cokes management said it expects
operating income growth to be stronger in the second half of the
year. Additionally, Cokes chief financial officer said investors
should expect some margin expansion in the quarters ahead as the
company locks in significant cost savings. Source: Coca-Cola.
A strong balance sheet In addition to the points made on the
previous slides, investors shouldnt overlook Coca-Colas strong
balance sheet. Coke currently boasts a debt to equity ratio of 1,
which means that debt holders only have 1 times more claim on
assets than Cokes shareholders. Thanks to its stellar financial
position, Coke is on track to repurchase $800 million shares this
Earnings: McDonalds also missed the mark Analysts were looking
for EPS of $1.44 in the second quarter. Wall Street was expecting
revenue of $7.29 billion in the period. McDonalds posted a profit
of $1.40 per share, on revenue of $7.1 billion in the period.
Earnings increased 1% but missed analysts estimates.
Missed earnings are only part of the picture A deeper look
reveals that many of McDonalds fundamentals are still intact. The
companys profit margins continued to expand in the quarter, with
operating margins of 30.5%, though management expects margins to be
crimped in the quarters ahead. McDonalds balance sheet still looks
good with low debt. As one of the most recognizable brands in the
world, McDonalds continues to generate strong cash flow.
Investing in its business at the ground level Despite recent
setbacks, McDonalds continues to heavily invest in its business.
McDonalds opened 461 new restaurants in the second quarter. The
fast-food giant now plans to open 1,500 to 1,600 new stores and
re-image over 1,000 existing locations in 2014. Source:
Unfortunately, margins will remain crimped Unlike Coke,
McDonalds management was less optimistic about margins in the back
half of the year. Peter Bensen, McDonalds CFO said, we expect
continued pressure on consolidated company operated margins in the
second half. Higher labor costs in the U.S. should also pressure
margins in the quarters to come.
What it all means Shares of both Coca-Cola and McDonalds
suffered after their respective earnings reports this week.
However, Coke looks better positioned for a rebound in the quarters
to come thanks to steadily improving margins and meaningful share
buybacks that should create shareholder value going forward.
McDonalds, on the other hand, could continue to suffer in the
near-term as it struggles with shrinking margins and increased
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