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The Coca-Cola Company (KO) Updates its Guidance for Q2

The Coca-Cola Company KO recently updated its guidance for second quarter 2016.

Following the completion of the Coca-Cola European Partners Plc CCE merger on May 28, Coca Cola anticipates greater negative impact of acquisitions/divestures on sales and profits.

Coca-Cola European Partners emerged out of the merger of three of Coca-Cola’s European bottlers — Coca-Cola Enterprises, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG (German bottler).

Acquisitions/divestitures and structural items are expected to hurt revenues by 5%-6% compared with 2%–3% expected previously and income before taxes by 4%-5% compared with 3% previously.

Coca-Cola has been divesting and merging bottling operations in many international markets since 2014 to revamp its bottling system and drive margins. Coca-Cola has an agreement with beer and beverage company, SABMiller, and partner Gutsche Family Investments, to merge their bottling operations in Southern and East Africa and form the largest Coca-Cola bottling entity in Africa. Coca-Cola will have an 11% stake in the new African bottler. In China, it has agreed to refranchise the company-owned bottling operations to its existing partners, COFCO and Swire.

In the U.S, Coca-Cola is aggressively pursuing its beverage partnership model under which it plans to refranchise 100% of its company-owned North American bottling territories by the end of 2017, as well as sell 39 cold-fill production facilities.

The refranchising efforts, though hurting sales/profits in the near term, will result in higher operating margins, lower capital spending, and improved return on invested capital over the long term.

Stocks worth considering in the beverage industry include Primo Water Corporation PRMW and Compania Cervecerias Unidas S.A. CCU, both sporting a Zacks Rank #1 (Strong Buy).  

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