What Coca-Cola and McDonald's Recent Earnings Reveal About the Health of Their Businesses
What Coca-Cola and
McDonald’s Recent Earnings
Reveal About the Health of
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
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 Coke’s 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 Coke’s 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 year’s end.
• Volume growth lifted gross margins to 61.7% from 60.9% a
year ago, according to data from Morningstar.
Margins should improve
• Coke’s management said it
expects operating income
growth to be stronger in the
second half of the year.
• Additionally, Coke’s chief
financial officer said investors
should expect some margin
expansion in the quarters
ahead as the company locks
in significant cost savings.
A strong balance sheet
• In addition to the points made on the previous
slides, investors shouldn’t overlook Coca-Cola’s
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 Coke’s shareholders.
• Thanks to its stellar financial position, Coke is on
track to repurchase $800 million shares this year.
Earnings: McDonald’s 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
• McDonald’s 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 McDonald’s
fundamentals are still intact.
• The company’s 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.
• McDonald’s balance sheet still looks good with low
• As one of the most recognizable brands in the
world, McDonald’s continues to generate strong
Investing in its business at the ground level
• Despite recent setbacks,
McDonald’s continues to
heavily invest in its business.
• McDonald’s opened 461 new
restaurants in the second
• 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: McDonald’s
Unfortunately, margins will remain crimped
• Unlike Coke, McDonald’s management was less
optimistic about margins in the back half of the
• Peter Bensen, McDonald’s 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 McDonald’s 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. McDonald’s, on the other hand, could
continue to suffer in the near-term as it struggles
with shrinking margins and increased costs.
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