I was Right Being a Coca-Cola Bear

On February 19, I wrote a piece on The Coca-Cola Company (NYSE:KO) in which I urged investors and traders to “Lock in Profits with Put Options.” Shares of Coca-Cola were trading around $37.50 per share when I wrote that post before they climbed as high as $42 per share in the following months. However, 4 months later, Coca-Cola has released its second quarter and year-to-date 2014 results.

In this piece, I intend to reexamine the arguments from my February piece in light of the company’s result in order to confirm or refute my bearish thesis on the stock. I will also give new insights for trading KO options at the end of the piece.

Bearish Argument 1: Global Diversification as Strength/Weakness

In my February article on Coca-Cola, I opined that Coca-Cola might be able to dampen the effect of volume decline in North America with solid growth in Pacific, Eurasia and Africa. On the other hand, I posited that the global diversification could become a weakness if currency fluctuations consistently work against Coca-Cola.

The quote below from the earnings results explains how currency fluctuations have impacted Coca-Cola’s result in the second quarter and year-to-date results:

The currency headwind was lower than the outlook we provided last quarter primarily due to the new provision in Venezuela that decreased our bolivar-denominated revenue and operating income. The net result of the provision was an unfavorable impact of approximately 1 cent on comparable EPS in the quarter, which was partially offset by the impact of slight improvements in certain other currencies compared to our previous expectations. Items impacting comparability reduced second quarter 2014 reported operating income by $156 million and reduced second quarter 2013 reported operating income by $175 million.”

Bearish Argument 2: Growth Not Likely to Return to the Americas

In February, I opined that the days of carbonated drinks might be ending especially in the United States because of increase in health-consciousness and change in consumer tastes from sugary carbonated drinks to healthier alternatives.

However, Coca-Cola did record growth in the second quarter results because the company was able to leverage its sponsorship of the FIFA world cup to increase global sales. Coca-Cola reported worldwide volume growth of 3% for the second quarter and 2% in the year-to-date.

Mixed Results Suggests Bearish Tendency

Coca-Cola delivered mixed second quarter results in which earnings beat the analysts’ estimate while revenues lagged analyst expectations. The company reports earnings of $0.64 per share to beat analysts’ EPS estimate of $0.63. The company reports revenue of $12.57B to lag the $12.75B that was reported in the same quarter last year and to miss the analyst expectation of $12.85B.

 

The mixed results show that Coca-Cola was able to beat earnings expectations because of it was able to leverage its brand during Easter and the World Cup as opposed to any real improvement in business fundamentals. The fact that the stock declined 2.85% even after beating earnings estimates suggests that investors were not fooled into thinking that the stock has reached a turning point.

How to Trade KO Options

In February, I opined that I will most likely buy the KO Jan 2015 37.500 put (KO150117P00037500) to lock in my position against the potential headwinds of 2014. I have seen the company’s performance in the top and bottom lines and I am buying the puts now in full anticipation of a bearish detour.

Photo: FUNKYAH via photopin cc

— Daily Option Alerts

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